Still Time to Trim 1999 Tax Liability

With the holidays coming, tax season can’t be far behind. But it’s not too late for small-business owners to make some last-minute moves. CPAs Sally Arnold and Steve Enrico of Santa Barbara-based Damitz, Brooks, Nightingale, Turner & Morrisset, along with the California Society of Certified Public Accountants, offer these tips for cutting your 1999 tax bill.

* Defer income until 2000 where possible. Cash-basis taxpayers don’t have to recognize income until that check lands in their hot little hands. Arnold suggests holding off billing clients until next year, or billing late in December to ensure that you won’t receive the payment until after Jan. 1.

Things get a little messier for accrual-basis filers, who essentially must recognize income whenever they complete a job. Arnold suggests postponing completion of work, holding up delivery of goods or services or putting off the close of a sale until after the first of the year--as long as your customers don’t balk, that is.

* Accelerate expenses. Again, the method used to do this will depend on whether you’re a cash- or accrual-basis taxpayer.

Cash-basis taxpayers can prepay some of their normal operating expenses. If you use a credit card to do it, so much the better. The payment is generally treated the same as cash, so you get the tax deduction for 1999, but you don’t have to pay off your credit card balance until the new year.

A common way for accrual-basis employers to accelerate expenses is to award year-end bonuses to employees, then defer the payment. The company can get a 1999 tax deduction, then wait as long as two and a half months (that’s March 15 for calendar-year filers) to pay the worker bonuses under current tax law. There are some exceptions to this rule for related taxpayers and pass-through entities such as S-corporations. Not to mention your troops may get grouchy waiting so long for their money.

* Buy that equipment before year-end. The IRS allows almost any business entity to deduct up to $19,000 of equipment purchased and placed in service in 1999. (Just don’t go too crazy. The deduction is reduced dollar-for-dollar once the cost of equipment placed in service exceeds $200,000.) There is also a special California tax credit available to manufacturers who purchase equipment to be used in the production process. That credit is equal to 6% of qualified property purchases.

* Do your spring cleaning now. Dispose of obsolete inventory before year-end to get a deduction for abandoned inventory. Or donate unneeded inventory to charity and get an even fatter tax break.

There are exceptions to almost any tax rule, so make sure to check with your accountant before decking the halls with your newfound tax savings.