With tax deadlines fast approaching, a lot of business people find themselves asking how they can reduce their taxes.
The problem is, at this point, it's almost too late.
Most of the strategies businesses can use to reduce their tax burdens have to be implemented during the tax year in question.
If your business is on a calendar year, you need to do your planning in December, if not before.
Notice I said, "almost too late." There is one thing a businessperson can do after year-end to generate much needed tax deductions establish and fund a qualified retirement plan.
Fortunately, that's not so hard to do.
Some plans can be set up quite easily, even this late in the game, and recent changes to the Tax Code have made them even more attractive.
First, there's the Individual Retirement Account, or IRA.
An IRA benefits only the person who establishes the account, so they're good if you only want to provide retirement benefits for yourself or your spouse.
Under the new rules, contributions can be made up to $3,000, with an extra $500 contribution possible if you're age 50 or over.
However, you can't contribute to an IRA once you're age 70.
At that point, you have to start drawing money out.
The ability to take a tax deduction for an IRA phases out at certain income levels for people who are also covered by another retirement plan.
Even if you can't take a current deduction, you may be able to contribute to a nondeductible IRA or a Roth IRA, and your ultimate retirement benefits will then be partially or fully tax exempt.
The deadline for setting up and contributing to an IRA is the deadline for filing your individual income taxes, without extensions, or April 15.
Let's say that you want to contribute more than $3,000, and you want to provide some benefit to your employees as well.
In that case, you should consider the Simplified Employee Pension, or SEP.
SEPs combine the best features of IRAs with those of the more sophisticated retirement plans.
With a SEP each eligible employee gets his or her own IRA, and the business makes contributions to those accounts for them, grabbing off a nice tax deduction for doing so.
The contribution amount is based on a percentage of each participant's compensation.
The maximum percentage used to be 15 percent, but under the new rules it has risen to 25 percent.
That means that if you make more than $12,000, you'll be able to put away more than the $3,000 allowed in a regular IRA.
You are limited to putting away no more than $40,000 for each participant.
You can also continue making contributions after age 70, even though you do have to start making withdrawals then.
To keep things fair, you must generally contribute the same percentage for each eligible employee.
The group of eligible employees includes (at a minimum) each employee over age 21 who, for the past year, earned at least $450, and has performed services for you in at least three of the last five years.
Some adjustment of the percentage may be permitted for participants who earn more than the Social Security wage base.
The contributions are based on compensation, which generally means wages paid to the employee.
If the business is a sole proprietorship, a partnership, or LLC, the working owners' contributions are based on their share of the self-employment income (which can shortcut their contributions if the business shows a loss).
Unlike those of more sophisticated plans, contributions to a SEP on behalf of an employee fully vest when made, so that the employee can take his entire account with him when he leaves.
Although the more sophisticated plans can provide gradual vesting, they also require compliance with several rules, including annual reports to the Department of Labor.
SEPs do not have these reporting requirements, and the ease of administration can make them well worth it.
SEPs outperform IRAs not only in potential contributions, but also in timing of those contributions.
A business can set up and contribute to a SEP any time up to and including the due date for filing the business' income tax return, including extensions.
Imagine getting a deduction on your 2002 income tax for contributions you make up to nine months later! We all know we need to save for retirement, and most of us need to do more of it.
While there are several other retirement vehicles available to businesses, including 401(k) plans and SIMPLEs, none offer the ability to jump start retirement savings for you and your employees now, and generate a tax write-off for last year at the same time.
Kirk Gardner, CPA, MST, is a shareholder with Reno-based Kafoury, Armstrong & Co.
specializing in tax issues.
The company can be reached at 689-9100.
