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Whether you are a corporation, sole proprietor, partnership or a student these tips will give you some ideas on credits and deductions for tax year 2006. There are various circumstances and individual needs that you may need to consider before December 31. I have reviewed various business consultant's advice, CPA firms and tax advice from the IRS. Many of these adjustments will save you money and others will simply not cost you more money. Financial advice is individual, these tips are something to consider and then discuss with your financial adviser. Student Tax Credit-The Hope Credit: This is a new one on the books. If you are a student you may be entitled to a tax credit. It is called the Hope Credit and it is usually taken in the first two years. It is a maximum credit of $1650 for tax year 2006. Check this out, it is a great credit if you qualify. Telephone Tax Refund: The IRS has announced that individuals, sole proprietors and businesses may claim this refund for the past 41 months by using a formula. The telephone tax concerns any long distance calls you may have made where an excise tax was charged. For small businesses and sole proprietors there is the IRS form 8913 to fill out. There are instructions on the IRS web site for the details of this great offer for tax year 2006. Defer Income: If you are using a cash basis of accounting you may defer income you might normally assign to tax year until after January 1, 2006. This will reduce your overall gross income until the next tax year. Consider your financial picture. If you have accounts receivable pending or can arrange payments for after January 1 this may help you in reducing your taxes for this year. A good financial and business planner can answer any personal questions you may have on the subject of deferred income. Roth IRA: If you are a sole proprietor, or sub chapter S-corporation and C-corporation this year you may defer some of your income into a retirement plan like a Roth IRA. The good part is that if done correctly you will never have to pay taxes on that income again. Hugh Bromma, CEO of the Entrust Group says this type of income deferral should be done before December 31, 2006. The Roth IRA and this method of pulling in your other retirement investments into a Roth IRA needs to be done by a good financial planner or CPA. Pay Bills and Christmas Gifts: In order to reap the benefit of good tax deduction for your business pay all necessary bills before December 31. Creating a financial plan for attending to these bills is a must. There are numerous items you may think can wait until after the first of the year, but if you need these deductions for tax year 2006 they must be paid by December 31. The type of bills I am referring to are IRS approved business expenses. There must be a strong connection between the expense and the necessary operations of your business. It is important to pay the telephone bill because this tax year, the IRS is going to allow a refund for the excise tax. It requires you to collect all of your phone bills from February 28, 2003 to August 1, 2006. The other items to pay are your employee health care premiums, bonuses, Christmas gifts and anything related to employees in your business. If you have an automobile or van for a business purpose and it needs maintenance and repair, this is the time to do the work. Whatever expense you can pay before December 31 for a valid business purpose will legally reduce your taxable income. For freelance writers don't forget your Internet expenses and costs of research and travel. Pay off these expenses before years end if you have an account. If you have any questions consult the IRS web site for what they consider is a valid business expense. If you think it is a gray area, why cause attention to your tax return. The IRS also has a good help line that is not over burdened this time of the year. Give them a call and ask if you are uncertain. If you have a tax preparer you trust give them a call. Charitable Contributions: Any annual charitable gifts you routinely make should be made prior to December 31 to gain the deduction. There are so many charitable institutions that count on your holiday gift and without it may have to reduce services. There are many charitable organizations. The importance of doing it before December 31 is that you will have your deduction for tax year 2006. If you are uncertain about a charity consult the Better Business Bureau's web site. All good charities provide a receipt for your contribution. Stay away from cash contributions and use a company check for any charitable gifts you may make during the holiday season. If you donate food stuffs to the local food bank have them fill out a receipt for the value of the items. If you contribute used items to St. Vincent's or the like ask them for a receipt for the value of the products you are donating. All of these charitable acts need to be verified by a receipt. A financial adviser can review the necessary requirement of a receipt. Write Offs: This is the time of the year to write off bad debts and damaged good inventory. There are necessary steps in writing off a bad debt. You need to verify the steps in writing off a bad debt. With reference to damaged goods or products in your inventory you also need to follow procedures in writing off goods. Ask your financial adviser on the methods of doing write offs. Capital Purchases and Supplies: Many of the financial advisers including Forbes suggest the tax advantages of buying equipment for the business before December 31 allows the small business owner to take the entire deduction for this year. If you have a necessary equipment purchase this may be a good idea. As far as keeping a large inventory of supplies I am hesitant to suggest that would be a good idea. It depends on your method of accounting and your state's method of taxing inventory. I would talk to your accountant or book keeper about this area. You and your financial adviser know more about your cash flow and other idiosyncrasies than a general tax tip will provide. This is the season of joy and happiness. This may seem like the Grinch has entered and tried to steal the season. It is simple advice that will save your spirit in April 2007 when you may be tearing your desk apart looking for receipts and last minute deductions that should have been done over three months hence. It takes a little financial planning and your Christmas cheer can go on through Spring. |
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