Year-end tax planning

The end of the year is fast approaching, and there is only a little time left for small business owners to take steps to reduce their 2001 tax bill.

Here are some ideas to consider if your business is on a calendar year basis, in which Dec. 31 is the close of the tax year.

Monitor billing. If a business is on a cash basis, invoices for services rendered or goods sold can be sent out so that payment won’t be received until 2002. However, given that we are likely entering a recession, invoicing shouldn’t be delayed if there’s a chance this may prevent you from receiving payment or if the business’s cash flow needs require immediate payment.

Stock up on supplies. Supplies are expensed as soon as they are purchased, and purchasing supplies now for next year could significantly lower this year’s tax bill. Paying multiyear subscriptions or multiyear insurance premiums, however, will not generate a full tax deduction this year, since the IRS requires prorating over the period for which the payment relates. You may, however, want to prepay monthly bills like postage and medical insurance prior to year’s end.

Make last-minute equipment purchases. In 2001, the cost of equipment can be expensed up to $24,000 instead of depreciating it over a number of years, provided that taxable income is sufficient. For example, when buying a computer for $3,000, the entire cost can be deducted this year as long as it’s in service before Dec. 31. If cash is a problem, purchase equipment on a credit card and claim the same write-off .

Establish a retirement plan if the business doesn’t already have one. This only makes sense if the business is profitable. Contributions can be made up to the due date of the return, including extensions, and the business can receive a deduction on its 2001 tax return as long as the plan is established by Dec. 31.

Simplified Employee Pension Plans (SEPs) can be established up to the filing date of the return, including extensions. Those wanting to establish a SIMPLE IRA retirement plan are out of luck, though; those needed to be established by Oct. 1.

For those with a sideline business, a retirement plan can be established even if that person participates in a plan through his or her regular employer. However, limits on contributions may apply.

Lastly, meet with your financial advisory team prior to year’s end so planning can be proactive. It may save you tens of thousands of dollars.

Louis P. Stanasolovich, CFP, is founder and president of Legend Financial Advisors, Inc., a fee-only financial advisory firm with headquarters in Pittsburgh’s North Hills. Legend provides wealth advisory services including comprehensive financial planning and investment management to individuals and businesses. Reach Stanasolovich at (412) 635-9210 or