It’s Time for a Mid-Year Tax Checkup

August may be prime time for vacation, but it’s also the perfect time for small businesses to do a mid-year tax checkup.

Potential tax hikes are on the horizon for 2013, which means it’s especially important to identify money-saving methods before year’s end. Small businesses that use cash basis accounting, for example, could consider accelerating collections into this year to avoid potentially paying higher taxes next year. If you use accrual basis accounting, you might consider progress billing to divide invoices into multiple parts.

Evaluating where your business stands, including whether you are running at a profit or a loss, helps you to better manage cash flow and allows you to do accurate projections for the rest of the year. With careful planning now entrepreneurs will be better prepared to take advantage of tax-reducing strategies when it’s time to file.

Track deductible expenses
It’s critical to keep organized records and review your books regularly throughout the year. An experienced CPA or accounting software, such as QuickBooks, can help you keep track of your income and expenditures and properly categorize deductible expenses.

Retirement plans
Companies that expect to report a profit for 2012 should consider creating or funding retirement plans. Employer contributions to retirement plans are usually tax-deductible, and you may even get a tax credit for starting a plan. Anything from a SIMPLE IRA to a more robust defined benefit plan is a win-win for business owners and employees.

Deferring income and accelerating expenses
If you’re thinking about purchasing new equipment or making other capital investments next year, you may want to consider accelerating those expenses into this year to reap the tax benefits now. Making revenue deferrals into next year can also reduce your taxes for 2012.

Charitable contributions
Donating property or goods or making cash contributions to non-profit organizations enables businesses to reduce their tax liability while doing good for the community – another easy win-win.

Section 179
Companies should determine if they qualify for a Section 179 deduction that allows them to deduct the full expense of capital investments in the current year rather than depreciate the cost over time. It’s important to figure that into your decisions about whether to make significant capital outlays this year.

The current deduction limit for purchases of tangible personal property (e.g. equipment, furniture, fixtures and certain software) is $139,000 for 2012. The Senate Finance Committee recently approved an increase to $500,000, however, without full Congressional approval, the amount will go back down to $25,000 next year as scheduled.

To qualify for this provision, businesses must report taxable income (not a loss) for 2012, and the total amount of fixed asset purchases must be below the threshold of $560,000.

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