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 2011 tax return. And the tax breaks apply whether you are a full-time business owner or operate a sideline enterprise.
SEE ALSO: Brace Yourself for Tax Changes in 2012
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.
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Small businesses, including sole proprietorships, are permitted to expense up to $500,000 of new business equipment, computers and furniture purchased in 2011. So if you purchased a new computer for $2,500 in 2011, you could deduct the full $2,500 on your 2011 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 2012 (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 2011, there is a special bonus depreciation allowance that allows you to deduct the entire cost of the asset right away, even if your business is not profitable. That could boost your net operating loss and possibly result in a tax refund. But you had better hurry: Bonus depreciation is scheduled to drop to 50% in 2012.
Buy a business vehicle. New heavy SUVs put in service in 2011 are entitled to a huge tax break: You can write off 100% of the cost if no personal use is made of the vehicle thanks to 100% bonus depreciation. SUVs must have loaded gross vehicle weights over 6,000 pounds to qualify for this break. (Used SUVs don't get bonus depreciation). For lighter vehicles, the maximum write-off in the first year is $11,060.
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 2011 return.
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 2011, 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 2011 tax return (including any extensions), you must establish a plan by December 31 to be able to deduct your contributions on your 2011 return. You may set up and fund a SEP as late as your tax-return filing date, which is April 17, 2012, for 2011, or October 15, 2012, if you file for an extension.
Sneak preview: new tax benefits -- as well as burdens -- for 2012
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