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Taxes are a reality, but there is nothing that says you have to overpay your taxes. In these difficult times retention of cash in your business is particularly important. Taking advantage of available provisions of federal tax law can help preserve your cash flow, allowing you to retain working capital.
In the Small Business Jobs Act of 2010, federal tax law was modified to keep some popular tax breaks and also created a few new opportunities. Here are six things you can do now* to help reduce your tax bill and improve your business cash flow.
1. Section 179 Expensing
For 2010, a business can write off up to $500,000 of the cost of qualifying business equipment purchases, including purchased software. You should evaluate your company’s equipment needs, acquire the needed equipment and place it into service before year end to qualify. Even used equipment obtained by the business is eligible for this deduction. A new twist to the law is that up to $250,000 of qualified real property costs are also eligible for deduction under Section 179, a change from past law, which denied this treatment to real property costs.
2. Bonus Depreciation
Bonus depreciation was also extended under the act, retroactively to the beginning of the year. This opportunity originally expired at the end of 2009. This provision allows a 50% larger deduction in 2010 for property placed in service this year.
3. Start Up Business Expenses
If you started a new business in 2010, you can deduct up to $10,000 of qualified start-up expenditures. Prior law only allowed deduction for $5,000 of these costs. Check with your tax adviser to see if you are eligible for this deduction.
4. Special Health Care Provision for 2010
If you are self-employed and pay for your own health insurance, then this provision will help you save money. For 2010 you are allowed to deduct health insurance premiums from the calculation of your self-employment taxes (your health insurance premiums are already a deduction for purposes of your income tax).
5. Energy Related Credits
If your business generates energy from renewable resources, purchased fuel cells, solar or wind energy devices or was built using energy efficient construction techniques and parts, it may be eligible for tax credits. Tax credits have the advantage of reducing your tax bill dollar for dollar. Be sure to tell your tax preparer about any energy technologies you employed during the year to capture the full credit for which you may be eligible.
6. Prepay Certain Expenses
A cash-based business can prepay up to eleven months of bills such as rent, equipment leasing, consulting expense or other recurring known expenses and deduct them in the current year.
By discussing these strategies with your tax advisor and then fully utilizing them, you will reduce your tax burden and improve your cash flow. Make sure you provide the documentation necessary to support the deduction and check your returns to make sure you received the benefits.
* This article was written prior to any outcome of the political wrestling match currently underway in Washington, D.C. concerning extension of the “Bush tax cuts” and the looming increase in rates for 2011. All rates are set to increase, however the top income tax rate will increase from 35% to 39.6% in 2011 and the long term capital gains rate will double from 10% to 20% absent any action by Congress and the White House.