(as submitted by Dave on the November 19 edition of TAE)

1. Determine your method of accounting (cash vs. accrual) – For any new business, it’s recommended that, upon initial creation of the business, the owner determines whether or not it will employ a cash-based or accrual-based accounting method. (Cash-based accounting means that you credit the income as being in place at the time of the transaction, whereas accrual-based accounting means that the income is credited a short time after the product is distributed or the service is executed.)

   Generally, accrual-based accounting is better for retail businesses, whereas cash-based accounting is better for service businesses.

2. Delay production and sales in December - By doing this, you can push a lot of the resulting income into 2006. In addition, you are also deferring a good portion of the tax liability as well.

3. Accelerate expenses/deductions. – If you have a lot of office equipment to purchase or other materials or services, do it during December of the current year (a “holiday shopping spree” of sorts). This is another way to decrease a company’s tax liability in 2005. A similar method is to make sure all bills are paid off before the end of 2005, even if you find yourself paying a bill a month or two earlier than you’re generally used to.

4. Income shifting – If you have a spouse or any children, they provide great opportunities for shifting some company income around, thus decreasing your tax liability for 2005. Basically, at any opportunity that arises where a spouse or child does work that applies to the betterment of the company (answering phones, making a delivery, “consulting” by way of talking about company issues), you can pay them for what they’re doing. A good way to take advantage of this scenario is to involve a 401K or other retirement plan. If you pay your spouse for work that is done, then the spouse contributes the bulk of that payment to a 401K plan, you actually get two tax advantages for the price of one, as the initial payment defers your company’s income, and your spouse’s deposit into a tax-deferred retirement account will defer the income tax as well.

   (NOTE: The key with this strategy is documentation. For every instance for which you defer income by way of payment to a spouse or child, you must have proper documentation of hours worked, duties performed, etc. Failure to do so will put you at serious risk when it comes time for an audit.)

5. Reinvest your profits - Just like in Tip #3, you can reinvest your company’s profits for 2005 into more office equipment, or another company car, or software that improves productivity. All these purchases, so long as they’re business-related, defer tax liability for 2005.

   For federal tax purposes, a business is allowed to expense $105,000 worth of assets in this manner for 2005. This number is targeted for “small-businesses”, which are categorized as companies that spend under a $400,000 for assets. “Large businesses”, those that spend OVER $400,000, don’t qualify for that expense.

6. Reinvest in Research and Development – If you don’t want to reinvest in hard assets, you can always reinvest in a new concept or strategy. If you spend money on a new design or a new form of software in 2005, that can also reduce your tax liability for this year.

7. Take advantage of year-end tax credits – There are a number of tax credits that are available at years-end, ones which come “right off the bottom line”, in that they are credited to the amount you owe, as opposed to your income.

   A major source of tax credits come from your kids. Whether it comes from tax credits earned by putting a child through college, or simply by having a child who may not be college age, there are credits to be had within your own household. There are also child care credits as well, should you choose to go that route.

   In addition, there are also earned income tax credits and real-estate improvement taxes that can be used to reduce 2005 tax liability as well. For the latter, there are tax credits available should you make your facility more accessible to the handicapped. You can earn up to 50% of your costs of making adjustments to that end in the form of tax credits. There are also tax credits available for real-estate rehabilitation.

   Also, down the road, there will be energy tax credits available. These are the ones that Dave spoke of about a month ago on the program. Unfortunately, they won’t kick in until 2006, but it IS something to look ahead to when you sit down for some long-range planning.

As always, if you’re confused as to where your company stands with regard to any of these strategies, Dave suggests that you consult your tax advisor for more information. For more information on the tips that Dave provided, contact Wilke and Associates at (412) 278-2200 or on the web at www.wilkecpa.com.