Last-minute tax tips for the self-employed
You may want to buy office equipment, set up a retirement plan or pay next year's health insurance premiums before Dec. 31.
This post is by Mary Beth Franklin, senior editor of Kiplinger's Personal Finance.
Whether you launched a new business this year or you’re an experienced entrepreneur, being your own boss comes with a whole new set of tax issues -- and plenty of opportunities to trim your tax bill. In most cases, you have to spend money before the end of the year to claim a deduction on your 2010 tax return. And the tax breaks apply whether you are a full-time business owner or operate a sideline enterprise.
Upgrade your office. You may deduct the cost of equipment you buy for your business before year-end, such as a computer, software, shredder, filing cabinets and furniture. And you have two ways to claim a deduction: all at once (known as first-year expensing), or gradually over the life of the property, as fixed by law, by claiming depreciation deductions.
Small businesses, including sole proprietorships, are permitted to expense up to $500,000 of new business equipment, computers and furniture purchased in 2010, twice the 2009 limit. So if you purchased a new computer for $2,500 in 2010, you could deduct the full $2,500 on your 2010 tax return.
This immediate write-off can reduce your taxable income substantially, but, says Barbara Weltman, a lawyer and nationally recognized expert in taxation of small businesses, your business must be profitable to benefit.
"If it’s not been a good year for you, it's not a good year to choose expensing to write off your business investment," says Weltman, author of J.K. Lasser’s Small Business Taxes 2011 (Wiley, $19.95). The total first-year expensing deduction cannot exceed your taxable income, which includes not only the net income for your business, but also wages earned by you if you moonlight or by your spouse if you file a joint return. However, you can carry forward unused deductions to the following year.
If your income is down, you may be better off choosing the depreciation method, which allows you to spread your deduction over multiple years when your income -- and tax rate -- may be higher. And for 2010 only, there is a special bonus depreciation allowance that allows you to deduct half of the cost of the asset right away and the other half through regular depreciation. You can claim bonus depreciation even if your business is not profitable, which could boost your net operating loss and possibly result in a tax refund. But you had better hurry: Bonus depreciation ends after this year.
Buy a business vehicle. The maximum first-year write-off for new cars purchased for business use in 2010 is $11,060, more than three times the amount that will be allowed for cars purchased next year. The limit is even higher for new SUVs weighing more than 6,000 pounds (fully loaded); you may expense up to $25,000 of the cost of a new SUV put in use in 2010, and half of the remaining cost is eligible for bonus depreciation.
Stock up on office supplies. Go on a year-end buying spree and stock up on printer paper, printer ink cartridges and office stationery. It’s all deductible on your 2010 return.
Prepay your health-insurance premium. For 2010 only, self-employed persons are able to deduct their health-insurance premiums for themselves and their family members (and long-term-care insurance premiums, too) as a business expense that reduces their 15.3% self-employment tax. You may pay premiums up to 12 months in advance, says Weltman.
Set up a retirement plan. Self-employed business owners may stash away more money in tax-deferred retirement plans than rank-and-file workers. In 2010, you can contribute up to $49,000 to a SEP IRA or a solo 401(k) plan. If you’re 50 or older, you may contribute an extra $5,500 in catch-up contributions to a solo 401(k) plan (but not a SEP). Although you don’t have to fund your 401(k) until you file your 2010 tax return (including any extensions), you must establish a plan by December 31 to be able to deduct your contributions on your 2010 return. You may set up and fund a SEP as late as your tax-return filing date, which is April 18, 2011, for 2010 returns.
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