TAX-SAVING MOVES TO THINK OF 
BEFORE THE END OF 1996

DEDUCTIONS Whether your business is new or mature, large or small, your very best tax savings come from your business operating expenses. I’ll discuss timing techniques below. What I’m talking about here is actually finding all the deductions you are already entitled to!

Often, when starting their business, crafters are be focusing more on growing sales than on saving tax dollars. As a result you could be overlooking some expenditures you have been assuming are not deductible as business expenses. Now is a good time to review your 1996 personal expenditures to see if some of them meet the requirement of being "ordinary and necessary business expenses". They may be small, but wouldn’t they add up? Even if you’re in the lowest tax bracket (15%), the Self-Employment Tax adds another 15.3% to make every $100 business expense worth over $30 reduction in your tax bill!

Look down the following list and ask yourself: Are you making these expenditures? Are you recording them as business expenses?

1. Telephone - In or out of state long distance calls may have been made on your personal telephone to business related contacts. If you are only claiming your business line, you may be missing some calls. Review your personal phone bills for possible business calls.

2. Cash Expenditures - Some people just don’t like to ask for receipts at the toll booth or leave them in their pocket to go through the laundry. Parking meters and pay phones don’t even give receipts. Most will just say, "Oh well, it wouldn’t add up to much." That’s not always true, especially if you do a lot of traveling. IRS only requires us to keep receipts for such expenses if they are over $75 now.

It will be worth your while to sit down with your 1996 appointment book and take a trip down memory lane. Create a listing of all your trips this year and write down your best estimate of the cost of tolls, parking, pay phone calls, and incidental travel expenses for each of them. Be careful not to double count items that you have already recorded.

3. Publications - Consider whether any of the books and magazines you purchased during the year benefited your business. Are you renewing subscriptions because any are potentially useful in your work? If so, add in this year’s cost.

4. Education - The cost of workshops may be deductible even though they are not directly related to your craft making. Many personal growth type programs are very beneficial for business owners in developing their leadership skills, communications, writing abilities, computer literacy, and creativity. Have you overlooked any of these that really did have a benefit to your business?

5. Mileage - You have probably figured out the business mileage for your major trips, but have you missed any local mileage? Remember, it is for a business purpose that you make a trip to the bank to make your deposit, go to the Post Office to get stamps or ship an order, go to your accountant for a year-end tax planning session or to have your return done, take your car to the garage. There are many other local trips that may be completely legitimate, even if you combined the trip with some personal shopping. How much more mileage can you come up with?

This is a great way to discover additional tax-saving deductions. Now, make it permanent. Take the time now, before the new year begins, to work out a way to capture these same deductions as they happen during 1997.

TIMING The first step in year-end tax planning is to get a sense of whether this year, 1996, is going to be a higher or lower income year than the next, 1997. To do this, summarize your 1996 year-to-date income and expenses to guesstimate what your 1996 profit will be. Then think about what you are expecting for 1997. If the difference will be significant, the wisdom will be to try to shift deductions into the higher year and shift income into the lower year.

On the other hand, if you don’t expect much difference between the years, you will want to take more deductions in the current year and put off additional income until the next year. On April 15, 1997 you will notice the benefit of taking the deductions early and you won’t have to pay the tax on your additional January income until April 15, 1998!

For example, if you had a banner year in 1996 or had some unusual large income to report, such as a capital gain, and you don’t expect 1997 to show higher income, here are some things you could do. If you are on the accrual method and reporting your income for goods when they are shipped rather than when you are paid, it won’t do any good to delay sending the bill. You will need to delay the shipment until January. Might you have some orders that are not so time-sensitive once the holidays are over? Cash basis businesses can use the technique of sending off their invoice just before December 31st. If your customers mail your payment on December 31st, they can claim the payment in 1996 (assuming it is a business deduction for them!) and you don’t have to report the income until 1997.

On the expense side, consider what expenses can be paid in December instead of in January. It’s a great time to replenish office supplies after the busy season. Pay all of your bills for operating expenses, even if you have to put them on a credit card temporarily. A credit card charge counts as having been paid in the year you sign the charge. Pay now for your continuing education and conference registrations and renew your subscriptions that will be up for renewal soon.

SAVE FOR YOURSELF Plan now to have enough money saved by April 15, 1997, to put the maximum deductible amount into your retirement plans. If you know what your profit will be, you can calculate approximately what your retirement plan contribution can be. Go ahead and put about 75% of this amount into the plan early so it can start earning tax-deferred interest or dividends. You will need to wait until the tax return is complete to bring it up to the maximum allowable contribution, though.

Remember, if you are using a SEP (Simplified Employee Plan) or a Keogh (Small Business Retirement Plan) you are considered an "active participant in a retirement plan" for any year money is actually put into the plan. So, if you made a contribution to a SEP in 1996 for your 1995 SEP contribution, you may not be able to also deduct a full IRA contribution for 1996. Be sure to check into this before making your 1996 IRA contributions.

On the other hand, if you’ve only been using IRA’s up to now and want to start a SEP for 1996, you may be in a position to "have your cake and eat it too"! If you wait until 1997 to open your SEP account, you won’t be considered an "active participant" for 1996 and your 1996 IRA contributions won’t be limited. This move is a little bit tricky, so you will want to work with your tax professional on this one.

Finally, if you have had good enough cash flow to maximize your SEP deductions in the past, you may be ready to increase your retirement plan contributions. This can be done by opening a Keogh Money Purchase Plan for 1996. A Keogh plan is more complex than a SEP so get some help with this one, too, but it can give you the ability to put an extra 10% of your profit into a tax-deferred retirement account. The immediate concern with the Keogh is that you must open the account and establish the plan before December 31, 1996, in order to take the additional deduction on your 1996 tax return.