QUESTION: Can I still reduce my 2000 taxes?
ANSWER: Yes, with a SEP-IRA. You and your employees can set aside up to 15% of salary. Deadline: Oct. 15, if you use extensions.
QUESTION: Are there any deductions I might have overlooked?
ANSWER: Don't forget health insurance. If you're incorporated, it's 100% deductible. If you're a sole proprietor, you can deduct 60% of the cost. Take it right off the top, like an IRA deduction, and deduct the remaining 40% under medical expenses, says tax accountant Ed Slott in Rockville Centre, N.Y.
QUESTION: What changes in the law affect employment taxes this year?
ANSWER: They can now be paid quarterly if you owe less than $2,500.
QUESTION: Were there any big tax law changes last year?
ANSWER: Yes. Congress retroactively abolished the 1999 installment tax law. If you sold all or part of your business in installments in 1999 or 2000 and paid taxes on the full sale price, apply for a refund.
QUESTION: What changes in the capital-gains tax rate will affect my business this year?
ANSWER: The rate has been cut. For example, taxpayers in the 28% bracket or higher will pay 18% on the gain from assets acquired after the first of this year, and held for at least five years. (This applies to assets owned by S Corporations and LLCs, too.)
DID YOU KNOW
Your chances of getting audited by the feds are at a record low: about 1%. Audits of corporations dropped by almost 13% last year.
Assets of S Corps and LLCs bought before this year can qualify for an 18% capital-gains tax rate in five years if you "sell and repurchase" them by next April. It's just a paper-shuffling transaction, and quite legal. Be prepared, though, to pay capital gains on appreciation rung up before 2001.
DO...find out what state income tax credits you're entitled to. Some state credits have names similar to federal credits but lower requirement thresholds, so they're easier to qualify for. DO hire a payroll service to handle your withholding taxes. There's a 100% penalty for failure to pay them. DO discuss the tax consequences of any major business decision, such as the purchase of new equipment or rental of new property, with your accountant.
DON'T...claim a tiny salary from your profitable S corporation to minimize Social Security and Medicare taxes. It's a red flag to the IRS. DON'T lose track of year-to-year carryover deductions for state and local taxes and capital losses. DON'T file a self-prepared, handwritten return.
-- Set up a defined benefit plan for you and your employees. You can put away enough to fund a $130,000 annual retirement income and get a tax deduction to boot. The older you are, the bigger the contributions that are allowed. The oldest and highest-paid employees get the lion's share.
-- Hire your spouse and provide medical coverage for employeees and dependents. Voila--100% deductible health insurance. Two caveats: Your spouse must be a bona fide employee and not a co-owner, and the policy must be owned by the business.
The IRS is now actively targeting small-business owners who fail to withhold payroll taxes for their employees
77%: That's the percentage of entrepreneurs who say federal and state gift and estate taxes had no impact on their companies. Only 2% were forced to sell assets to pay the taxes, says Arthur Andersen. The rest hired a lawyer or accountant and set up trusts to duck the impact.
By Lynn Brenner