Each year at this time, I offer my year-end tax strategies to help small businesses lower their taxes.
A few easy steps now — before Dec. 31 — can reduce your tax bill significantly when it comes time to pay Uncle Sam.
However, this year with the impending fiscal cliff and the likelihood of tax-code changes, I would need a crystal ball to offer exact advice on lowering your tax bill. Unfortunately, I can't see into Congress members' minds — who can? — and you can't wait.
Nevertheless, to help you in year-end tax planning, I'm going to make some educated guesses about what's going to happen tax-wise that would affect small business:
1. Bush-era tax cuts are set to expire, and income tax rates are scheduled to rise for all Americans.
I don't think Congress will let that happen, and income-tax rates won't go up on those making less than $200,000 or 250,000 a year.
2. I do think tax rates will rise for those making more than $250,000 to $500,000 in taxable income — profits after all expenses and deductions.
3. Payroll taxes on the self-employed and employees will rise. A self-employed business owner will pay 12.4% instead of 10.4% into Social Security .
4. Tax benefits for buying equipment will be reduced. The current bonus 50% depreciation on qualified business equipment purchases will expire and not be renewed.
The $125,000 expensing allowance may go down.
5. The capital gains tax rate and the estate tax may increase slightly.
If I'm right, what does that mean for your small-business tax strategy right now?
First, remember the most important rule of tax planning: always make decisions based on what's good for your business, not just because of taxes.
Yes, you may get a tax deduction for buying an expensive piece of equipment now. But if you don't need the equipment, it's still an unnecessary expense and ties up your cash.
So what should you do now in December to reduce your taxes given the likelihood of changes in 2013:
• Accelerate income. In normal years, the typical advice is to delay income and increase expenses at year's end.
But you might want to turn this upside down this year. If you're doing very well, you'll likely pay higher taxes on income in 2013.
If you're self-employed, you'll pay higher Social Security taxes. But if you make less than $200,000 and do not pay Social Security taxes, you should do what you can to lower your income and increase expenses in this calendar year.
• Purchase any necessary new equipment. This year, you can expense or write off, instead of depreciate, up to $125,000 of qualified business equipment.
Moreover, you get an extra 50% bonus depreciation for buying new, rather than used, equipment. This includes qualified business vehicles, such as trucks and vans. It's unlikely you'll have such generous benefits in 2013. You have to place the equipment in service by Dec. 31, so check this out fast.
• Set up a qualified retirement account if you don't already have one. Increase your contribution if you do.
Many entrepreneurs neglect to put money away for retirement, relying on their businesses to take care of them in their golden years. Whether you're 30 or 50, it's important to have a retirement account, and you'll save on taxes.
Many plans have to be set up by Dec. 31 even though you don't have to put money in them until April 15.
• Make charitable contributions. Others need your help, and you can use the tax deduction.
Congress may reduce the tax benefits of charitable giving, so 2012 is a good time to give.
My recommendations assume the following:
You run your business on a pass-through basis. Profits or losses pass through the company to your personal tax return if your company is organized as an "S" corporation or a limited liability company, better known as an LLC. You operate on a cash basis, rather than an accrual basis. So your income and expenses are tax events as they happen. Your fiscal year is the calendar year.
With all the changes, it's particularly important to consult your accountant this year and discuss what's right for your business.
But don't delay. Dec. 31 is right around the corner.
Rhonda Abrams is president of The Planning Shop and publisher of books for entrepreneurs. Her most recent book is Entrepreneurship: A Real-World Approach . Register for Rhonda's free newsletter at PlanningShop.com . See an index of Abrams' columns here . Twitter: @RhondaAbrams . Facebook: facebook.com/RhondaAbramsSmallBusiness . Copyright Rhonda Abrams 2012.