End-of-year tax tips for small business

As amazing to me as ever, we are in the end-of-the-year holiday tax season.

To many people, this time of year means many things, so let me add just one more item to your checklist.

The clock is ticking for most action items that need to be made this year to reduce or defer your 2009 income taxes. Any tax planning done in 2010 is too late for 2009 — this can be an expensive mistake.

Here are some tips to make sure you are aware of the options that could apply to you and your business:

New vehicle purchases before 2010

You can deduct sales tax paid on up to $49,500 of the purchase price of a new vehicle.

This is helpful particularly if you are taking the standard deduction on your tax return. In that case, remember you can add the sales tax to the standard deduction.

Stock losses

This is an issue I see every year. A client comes in and says, “I lost $20,000 in the market but there were no sales.”

Remember, the IRS doesn’t recognize paper losses. You need to execute a sale to realize the loss. So if you have a few investments that are still down from your original purchase, you should discuss this with your investment adviser. You may be able to sell enough stock to benefit from the $3,000 capital loss limits. This is an example of creating a deduction instead of letting the loss stand with no tax benefits.

Roth IRA conversions

These Roth IRA investments are also getting more media attention and will continue to. The short summary is that in 2010 you can convert your traditional IRA to a Roth IRA. The income limit does not apply for those taxpayers with adjusted gross incomes over $100,000.

The sticky part is that when you convert you have to pay income tax on the amount converted. For 2010 conversions you can elect to pay tax on 50 percent of the converted amount in 2011 and the rest in 2012.

The key long-term plan here is that you are paying tax today with the idea that the Roth IRA will grow and that growth will be tax free in the future when its distributed.

My advice is look at the cost-benefit rule to see if this works for your situation. If you have a traditional IRA that has nondeductible contributions, then you have a wonderful opportunity to convert without the tax hit.

Benefits of Section 179

Section 179 is still very attractive for 2009 year-end purchases. The asset has to be in service by Dec. 31 to take advantage of the ability to deduct up to $250,000 of the investment on your 2009 tax return. The bonus depreciation of 50 percent of an asset purchase cost is also available in 2009. These have been around for a few years but still should be considered with any business tax planning.

Business Assistance Act of 2009

Nov. 6, the president signed the Worker, Homeownership, and Business Assistance Act of 2009.

This addresses homebuyer credits in two ways:

1) It extended the New Homebuyer Credit expiration to April 30 and increased the income limits that apply.

2) It created a new Move-up/Repeat Homebuyer credit for sales after Nov. 6 and before April 30. The new credit is for $6,500 as opposed to the $8,000 new homebuyer credit. The credit applies to a homeowner who owned and resided in a home for at least five out of the last eight years prior to the date of purchase.

A couple of side notes for you. You don’t have to purchase a more expensive home. Also, if married, both individuals have to meet the ownership and usage tests. The home must be a personal residence, not investment property, and it can’t be purchased from related parties.

So there are new laws on the books, and most likely more are on the way in 2010. Remember, a lot of the Bush-era tax cuts expire in 2010 also. The key point is, don’t wait to call your adviser to see if your individual situation warrants any of the listed strategies or other ideas. The time to act is now to lock in the benefits of these planning options.

David Rumsey is the owner of Pettis Rumsey Inc., a Marysville accounting firm that works with small-business owners to increase financial performance, tax planning and preparation. He can be reached at 360-659-8502 or by sending e-mail to david@pettisrumseycpa.com.