Ways to Cut Small-Business Taxes
I’m a self-employed consultant. What can I do before the end of the year to reduce my 2009 taxes?
If you’re self-employed, or even if you just have some income on the side from freelance or consulting work, then you probably dread tax time. But you can take a few steps before the end of the year to help lower your tax bill in April.
Buy business equipment before December 31. If you were planning to get any new equipment for your business in the next few months, consider making the purchase before December 31 so you can benefit from the tax break for 2009.
You can write off the cost of equipment you use for your business, such as a computer, printer, fax machine, copier and phone system. You can also deduct the cost of office supplies and business-related software. Buying items you don’t need is never a smart financial move. But if you were going to make some of these purchases soon, you can time them to lower your 2009 taxes.
Open a solo 401(k) account. If you have any self-employment income, then you can open a special small-business retirement account that lets you lower your taxable income now and save money tax-deferred for the future. The two best options are a solo 401(k) and a Simplified Employee Pension (SEP).
A solo 401(k) may be your best bet if most of your income is from self-employment. You can contribute $16,500 to a solo 401(k) in 2009 plus 20% of your net business income (which is business income minus half of your self-employment tax), up to a maximum of $49,000 in 2009. You can also make a catch-up contribution of $5,500 if you’re 50 or older. You can’t contribute more than your business income for the year, but even if you earn just $16,500 from self-employment, you can contribute the entire amount to a solo 401(k). You must open a solo 401(k) by December 31, and you have until April 15, 2010, to make your 2009 contributions Your combined contributions to a solo 401(k) and any 401(k) you may have through another job cannot exceed the contribution limits.
If you have a 401(k) through a primary job and earn some freelance income on the side, a SEP-IRA may be a better option. It's easier to set up -- you can open an account at most brokerage firms or mutual fund companies that offer IRAs -- and you can set aside 20% of your net business income, up to a maximum of $49,000 in 2009. You have until April 15, 2010, to open a SEP and make your 2009 contribution. See Do-It-Yourself Retirement Plans for more information.
Start gathering your tax records now. Don’t miss out on valuable deductions because you’re scrambling in April to find the paperwork to back up your deductions. Now is a great time to look at Schedule C and the Instructions for Schedule C to remind yourself about everything you can deduct -- including equipment, business travel and lodging, 55 cents per mile driven for business in 2009 (keep a log of your business driving), tolls and parking fees, phone calls, mailings, printer cartridges, paper, professional fees, and part of the cost of business meals.
If you have a qualified home office, you can write off part of your mortgage or rent, insurance and utilities -- as long as you pay the bills by December 31. See IRS Publication 587, Business Use of Your Home, for details.
Self-employed people can also deduct the amount paid for health insurance for themselves, their spouse and their dependents for any months that they were not eligible to participate in a subsidized health plan maintained by their employer or their spouse’s employer. For more information, see IRS Publication 535, Business Expenses.
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