We've all heard the cliché quote about death and taxes. But for the small business owner (which defines many mortgage company owners), getting ready to do their taxes (and we can skip the cliché about render unto Caesar as well) is something that falls to the bottom of the list as the year ends.
That is because taxes are something we typically wait until the last minute to do. But no matter if you (or your accountant) fill out the forms in January, February, March or April, before 2011 ends is when preparations need to start.
BMO Harris Bank has a list of tips for small business owners can use to reduce their amount of income tax payable.
• Do a financial check-up: A small business specialist, accountant, and investment advisor can help small business owners make sure they have a clear understanding of their current financial situation, BMO Harris said. These professionals can also help develop or adjust existing plans based on new needs or changing circumstances.
• Defer income: Depending on a number of factors (such as future tax rates, projected profit or loss for 2011, cash flow), small business owners may be able to reduce the current taxes they will be paying by deferring some of the income they expect to receive in December, into January 2012.
• Gather business receipts and increase expenses: BMO Harris advises to maximize income tax deductions by ensuring all allowable receipts for business-related expenses are itemized. Over the course of a year, those receipts for the little things can add up. Consult the guidelines available from the Internal Revenue Service, or speak to a professional tax advisor about eligible business expenses.
Business owners can also increase some expenditures now on things they will need early in 2012, in order to maximize 2011 deductions, such as accelerating the purchase of new equipment or other depreciable assets before the end of the year.
• Set-up a new simplified employee pension plan, and make the maximum contribution to an individual retirement account: For unincorporated small business owners, income earned by the business becomes personal income when filing taxes. BMO Harris said many small business owners fail to take full advantage of the best income tax deduction available—the SEP.
SEP contributions are deducted from annual income, thereby lowering income tax payable at the individual's marginal tax rate. Now is a great time to set up a new SEP or make a contribution to an existing plan for 2011 to benefit from the tax-deferred growth right away. Making an SEP contribution does not typically preclude you from also making a contribution to an IRA.
Depending on your particular tax situation, a contribution to a traditional or Roth IRA may also be deductible. Even if you don't qualify for the tax deduction, the earnings will remain tax deferred until withdrawn. Be sure to consult with your tax advisor to determine the best retirement plan for your particular situation, said BMO Harris.
