Last-minute 2008 Checklist of Business Tax Reduction Techniques

Many business owners follow a year-end tax planning ritual. Accelerate deductions. Defer income. Invest in new equipment, and so on.

The crazy financial market we've experienced in 2008 and the anticipated tax law changes, however, probably mean that a new set of tricks needs to be considered, as discussed in the following paragraphs.

Intentional Net Operating Loss

Here's a silver lining on the dark recession clouds we all see on the horizon: You may want to intentionally create a net operating loss in your business for 2008.

For example, a homebuilder might aggressively sell inventory even though at a loss. Or an entrepreneur might pull the plug on one of his or her struggling ventures.

The reason you'd intentionally trigger a large net operating loss for 2008 is that the loss might not only wipe out your taxable income for 2008, but it could be carried back two years and wipe out income in 2006 and then in 2007.

In some business categories--like homebuilding--this net operating loss carry-back means you get to net the losses from a really bad year (like 2008) with the profits from a really good year (like 2006).

Note: Net operating losses can also be carried forward twenty years. But if the economy looks to be weak in 2009 and 2010, a carry-back may make more sense and produce immediate cash tax refunds.

Plan for Big Equipment Purchases -- But Next Year

Most business owners know that they can purchase equipment late in the year and then use the Sec. 179 election to deduct the equipment's cost.

In 2007, for example, a profitable business could expense up to $128,000 of equipment. And in 2008 and 2009, a profitable business can expense up to $250,000 of equipment purchases.

But this well-worn idea needs to be refined a bit now... Why? Income tax rates may be higher in 2009 than they are in 2008. An Obama administration, for example, has said it will increase taxes on "high income taxpayers," a group that surely includes successful small business owners.

Mostly a tax increase is bad news, of course. But a likely tax rate increase also means that you may be able to save a tidy sum by delaying a big capital expenditure until the first week of January.

For example, if marginal rates rise by five percent, delaying a big equipment purchase by a few days or few weeks could save as much as $12,500 in taxes.

And I should make a related point: You probably would not have to actually delay making the purchase. You don't start depreciating equipment until you place the asset into service. You could, therefore, buy in December to get a good deal and then place the asset into service on January 1.

Look at the 401(k) Option Again--Especially for 2009 and Beyond

A final quick point: Many of the proposed Obama tax increases don't kick in until an individual makes $200,000 or until a family makes $250,000 a year. But at that point, the kick is pretty noticeable.

Accordingly, business owners probably want to make sure they're maximizing tax deferral tools like 401(k)s. A fifty-something married entrepreneur with a working spouse can throw $40,000 to $50,000 a year into 401(k) accounts. That contribution would not only save $15,000 to $20,000 in federal and statement income taxes each year. But the contribution would push some taxpayers below the Obama pain threshold.

As an added benefit, boosting your pension fund contributions would be a constructive way to deal with the recent declines in the stock market. You'd begin to build larger balances simply through saving more.

Last-minute 2008 Checklist of Business Tax Reduction Techniques

Intentional Net Operating Loss

Plan for Big Equipment Purchases -- But Next Year

Look at the 401(k) Option Again--Especially for 2009 and Beyond

Related Topics:

Tools for Saving Taxes