Year-End Tax Strategies

Every December, I attend a tax workshop geared towards self-employed small business owners. I came away with some tips that I thought I'd share.

Your choice of business entity can have a big impact on your taxes.

• A sole proprietorship is the easiest to setup. You'll file a regular tax return with a separate Schedule C.
• The Limited Liability Corporation (LLC) offers some limited protection for your personal assets. It's the ideal business structure if you have partners -- it's easy to get into and easy to get out of.
• A S Corporation can also be a good choice for a sole proprietor. If you've been a sole proprietor for a period of time, there can be some tax advantages to evolving into a S Corp. Attorneys will often recommend LLCs, but the S Corp has an advantage from a tax standpoint because you can control the amount of money you pay self-employment tax on. You can elect to pay yourself "a reasonable salary" (which you will pay taxes on), and then receive additional "compensation" in the form of "dividends" as a shareholder of the corporation (not subject to self-employment tax). (Note: You must elect to change to a S Corporation by March 15.)
  

Is record-keeping the bane of your existence?

• Check out this link for a free "Simple Start" version of QuickBooks (Windows only). It's a good way to get into a computerized accounting system (if you've been keeping those records by hand or the "shoebox" method."
• If you'd like the flexibility to access your accounting information from anywhere, QuickBooks also offers an online version, for about $20/month. It can even import your online banking records and allow you to accept credit cards online.
• Compare QuickBooks 2008 Editions
  
  

Vehicle and Business Mileage Tax Deductions

• If you buy a vehicle for your business, you may be eligible for a tax deduction. But make a good economic and personal decision (not just based on the tax deduction) -- get the vehicle that works for you. If you are considering buying a new vehicle, consult your tax advisor BEFORE you go shopping.
• Do you track your mileage when you drive from your home-based office to the office supply store, the bank, and the post office? How about when you run these errands from work? You should be! The deduction is 48.5 cents for 2007, and 50.5 cents for 2008. It's an 8-mile round trip for me to go to the post office -- so I am able to deduct a little less than $4 per trip using the "Standard Mileage Rate" deduction.
• If you use your car more than 50% exclusively for business, you may wish to use the "Actual Expense" method. Consult your tax advisor for details.

Do you pay for your own health insurance?

• Did you know it may be 100% tax deductible? Have you considered a Health Savings Account (HSA)? I got mine through eHealthInsurance, but shop around for rates. Get a Health Insurance Quote!
  
• Your pretax contributions to an HSA will save you money, and you can roll over your account from year to year. Also, when you turn 65 and are eligible for Medicare, you can convert your HSA account to a retirement account, and not pay tax on distributions.
  

And check out this blog post for more tax strategies for 2007.