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Business
Strategies
 Every $1,000 worth of deductible expenses trims $270
off your income tax bill if you're in the 27% bracket
and can knock off an extra $153.00 if you're subject
to the self-employment tax. Bills for qualifying expenses
you pay before year-end are deductible on the current
year's return; those you hold off on until the new year
are deductible the following year.
Buying business property at year-end can prove either
an advantage or disadvantage. First, the plus side. The
law generally allows you to claim six months' worth of
the depreciation in the year you put the property into
service, regardless of how late in the year you make
the purchase. Even if you buy on the last day of the
year, you can earn a substantial depreciation write-off.
This midyear convention works against you, of course,
if you buy your business property early in the year.
Even if you buy in January, for example, you still get
only half a year's worth of depreciation for the first
year of ownership.
Now, the potential problem. You can trip yourself up
if you buy too much business property at year-end. If
the cost of assets put into service during the final
three months of the year exceeds 40% of the total cost
of business property put into service during the year,
the half-year convention is replaced by a midquarter
convention. That means depreciation is calculated as
though each asset was put into service in the middle
of the calendar quarter during which it was first used.
A year-end purchase would earn just six weeks' worth
of depreciation, then, instead of six months. However,
triggering the midquarter convention rule would also
boost write-offs for property put in service early in
the year: Assets placed in service during the first quarter
would earn 10 1/2 months' worth of depreciation rather
than six months'.
Expensing
This is the provision of the tax law that lets you write
off immediately up to $100,000 of otherwise depreciable
property put into service in 2003. If you choose expensing,
you don't have to bother with the midyear or the midquarter
convention. Regardless of how late in the year you put
the property into service, you can deduct the full cost
of up to $100,000 of qualifying items.
Consider how that can boost your deduction. Say you
buy $10,000 of business property with a five-year tax
life. Under the midyear convention, your first-year depreciation deduction
would be a healthy $2,000. Choose expensing, though,
and you can write off the entire purchase price on the
current year's return. Expensing generally won't let
you deduct $20,000 of the business cost of a car all
at once, however, regardless of how much the car costs.
Even under the liberalized "luxury car" rules
okayed in the aftermath of the September 11 terrorist
attacks, in the biggest first-year auto write-off for
a business vehicle purchased in 2002 and 2003 is $7,660.
(An exception to the luxury car rules allows you to use
expensing if your new business vehicle weighs more than
6,000 pounds. For a car, that's 6,000 pounds empty--so
you can forget it; but for a sports utility vehicle,
it's 6,000 pounds including the maximum for passengers
and cargo, so many SUVs can qualify.)
Social
Security
Successful efforts to trim your taxable business income
can produce double savings. In addition to cutting your
income tax bill for the year, you may also save on Social
Security taxes. Self-employment income is subject to
a 15.3% Social Security tax. The full tax applies to
the first $84,900 of earnings from salary, wages and
net self-employment income in 2002. (Kiplinger estimates
that the figure will increase to $87,300 in 2003.) Every
$1,000 of extra business deductions can save
$153 in Social Security taxes, as well as saving on income
taxes.
Hobby
Expenses
If your endeavor shows a profit in at least three years
out of every five, the law assumes you're trying to make
money. Fail the three-of-five-year test, however, and
it is assumed the activity is a hobby. Unless you can
prove otherwise, your deductions are limited to the amount
of income you report. You can't claim a loss.
Your year-end planning needs to consider both where
you stand on the profit-or-loss front and how you're
doing on the three-out-of-five-year test. If you need
to show a profit this year to avoid having your activity
branded a hobby, your strategy may be the opposite of
that outlined above. You may want to press for collection
of any income you're due and put off paying expenses
or buying new equipment until the new year.
Income
Deferral
The
theory here is simple: Income you don't receive until
after midnight on New Year's Eve isn't taxed until
the following year. Even if you'll be in the same tax
bracket, you win by putting off the tax bill by an entire
year.
It's tough
for employees to postpone wage and salary income. You
can't ask your employer to hang on to your December
paycheck until January; nor do you push income into
the next year by not cashing your check until then.
Income is taxable in the year it is "constructively
received.'' Basically, that means the year you could
have had the money if you wanted it.
Assume, for example, that in December your boss offers
you a choice of receiving a Christmas bonus in December
or the following January. Regardless of which you choose,
the IRS will expect you to report and pay tax on the
income with your return for the year the offer was made.
If standard practice in your company is to pay year-end
bonuses the following year, however, the income would
be taxed in the year you get the check.
If you are self-employed or do free-lance or consulting
work in addition to a job, you have more leeway, assuming
you use the cash basis of accounting. Delaying billings
until late December, for example, can assure you that
you won't receive payment until the next year. If you
are pressing for payment on an overdue account, it might
make sense to give your tardy client a breather. Business
considerations certainly come first. But if it's unlikely
you have anything to lose by holding off on collections,
doing so can push some taxable income into the following
year.
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