Here are some ideas as 2006 dwindles to a close. Keep in mind, it's best to consult an accountant, as there are exceptions to every strategy. Much will depend on whether your small business uses the cash-basis or accrual-method of accounting. Also, many small businesses are S corporations or limited liability companies (LLCs), meaning income and losses are reported on the owners' personal tax returns.
Buy some equipment
One way to reduce your taxable business income is to take advantage of obtainable deductions. A tax rule known as Section 179 allows companies to deduct up to $108,000 for assets that are used in their business and that are bought and used in that year. To take advantage, think about equipment purchasing that you may have been putting off, such as a new computer. But, if you plan to claim this deduction, you need to be using the item for business at least 50% of the time. If, for example, 55% of the time spent on your new computer is for personal pursuits, you can't use Section 179 to write off the cost of that asset. Still, you may be able to depreciate over a few years the cost of an asset used both for business and personal purposes, but be sure to document how you use the item. Note also that not all assets are enclosed in this rule. For instance, you can't use Section 179 to write off real estate. And, you can only use a Section 179 deduction to the extent that you have business income (that is, you can't use it to generate a loss).
For cars, you are limited to a first-year depreciation of $3,060, but you can deduct up to $25,000 for some SUVs.
Pay bills now and get paid later
Most Schedule C filers use a cash-basis system that means they have to pay their expenses prior to year-end for them to be deductible. Consider paying as many of your business expenses as you can to take full advantage of the deduction for business expenses. Don't forget health-insurance premiums, because medical insurance premiums and long-term-care premiums are 100% deductible for self-employed individuals. Also, if possible, try to defer income. If you can stand the effect on your cash flow, things that you might usually bill for in December, you wait and bill in January, or you bill them so late in December that you would not expect to be paid until January.
Put in order your records
Now is the best time to get your receipts and other business records in order. If you're taking a deduction for a business purchase, such as a car or computer, organize your records regarding your business use of that item. For the car, for example, you are supposed to keep a log, a written log is what the IRS really wants to see, including the dates you drove the car, mileage driven and destinations. Your good records may save you money in the end.
Behave like you've already been notified, don't wait till the notice comes in and then try to put together all of your records, mainly the records that relate to your expenses. You want to make sure that the expenses you have are properly reflected.
Don't get blindsided
One reason new business-owners need to prepare for a tax hit: Social Security taxes. For people who are really just starting out, remember that basically the net income that you're going to report on that Schedule C is going to be treated as self-employment income and subject to the self-employment tax. That is, you'll likely face Social Security tax on the first $94,200 of wages in 2006 (that figure increases every year, rising to $97,500 in 2007).
Set up a qualified retirement plan before Dec. 31, and make deductible contributions to it for 2006.
If you want to maximize your contributions, remember you have to maximize your employees' too. Don't have the cash to fund it now? Think about a Simplified Employee Pension Plan, as funding can be delayed until the company's extended tax-return date.
Adjust owners' wages for tax benefit.
Salary decisions are tricky, and some owners wait until the end of the year to see what share of the profits to take. Generally, if you're an S Corporation, you want to take as little in compensation as possible, and if you're a C Corporation, you want to take as much as possible. (That's because tax consequences are different, depending on the company's legal structure.) But beware: Wages that are too high or too low may attract unwelcome attention from the Internal Revenue Service.