In the current economic climate, many small businesses are going, or will be going, through cash flow shortage problems. However, there are some ways in which small business owners can use the tax benefits that apply to them to help ease their financial troubles.

Tax planning involves analyzing different tax strategies to see how best to run your small business so that your taxes are reduced or eliminated. Important parts of tax planning include reducing taxable income and accelerating deductions.

When looking to reduce taxable income, it is essential for small business owners, as well as self-employed contractors and freelancers, to take advantage of all the tax deductions available to them. Maximizing your deductible expenses reduces your taxable profit, which translates into you keeping more of your money.

There might also be some personal perks that you can enjoy via business expenditures. A new car or a combined business trip/vacation can result in a cozy tax break if you know how to use the tax rules to your advantage.

Here are some costs of doing business to consider and keep track of for the next time you file your taxes, or speak with your accountant.

Car Expenses

This is a common write-off for self-employed persons, and it applies to some small businesses as well. The rule is that you can deduct the costs of operating a car only when that car is being used for business purposes. Determining when you can and can’t deduct auto expenses can be tricky. Keep track of the miles you drive and add them up at the end of the year.

If you get a new car and use it primarily for business, you will get a larger deduction come tax time. Larger repairs and maintenance costs will be easier to justify. The current deduction rate is 50.5 cents per mile for business related driving.

Travel

In addition to car travel, you can also deduct the cost of plane fare, taxis, lodging, meals, etc. as long as a trip was undertaken primarily for business purposes. Small business owners might not use this deduction as much as C-Corporation and other larger operations, but it is an option.

Taking your family along is okay, but you can only deduct your expenses. Again, the trip must be primarily for business purposes.

Cost of Going into Business

All expenses involved in getting your business up and running are tax-deductible: anything from advertising, utility costs, office supplies and building repairs. However, they cannot be deducted before the business opens its doors to the public. Such expenses are considered capital expenses and are thus deducted over the first five years of business.

How can you get an upfront deduction for expenses paid before opening up the business? If you expect to make an immediate profit as soon as you open up your business, you can delay the payment of start-up costs until after you are operational. Or, simply start doing a small amount of business before the business is fully operational so that you can be officially up and running and thus eligible do deduct these start-up expenses. It is only a good idea to do this if you are sure you will be making a profit during the first year of business.

Education

As a small business owner, staying up to date on the intricacies of your industry is important to run a successful operation. You can deduct education expenses if the courses you take are related to your business field and help improve skills required to run your business.

Entertainment

If you pay for, say, the tab on a lunch meeting with a prospective customer, you can deduct 50% of that tab when you file your taxes.

Any entertainment expenses you paid for that are related to business matters or when business matters were discussed can qualify as tax-deductible. The rule is that the expense must be either “directly related” to the business, as in a catered office event, or “associated with” the business, as in when entertainment takes place directly before or after a business discussion.

Software

Most software programs bought for business have to be depreciated over a period of 36 months. However there are exceptions.

If software is only useful for less than a year, you can deduct its cost as a business expense in the year that you buy it. With the rapid change in technology and software constantly being updated and replaced, this is becoming a more common source of tax savings.

Deducting Full Cost of New Equipment

Depreciation of machinery and equipment bought is usually treated in the IRS form 946. It provides a pretty broad list of the kinds of things you can deduct – everything from desk chairs, to computer systems, to shrubs. But the IRS sets the depreciation schedule at three to 15 years.

However, a Section 179 deduction can sometimes allow a small business owner to write-off the full costs of new equipment in the same year they were purchased. The rule is that you can only write-off up to $250,000 in expenses. Businesses that spend more than $1,050,000 a year on equipment are not eligible.

Carryback

In addition to tax-deductible expenses, executing a net operating loss (NOL) carryback is another good way for small businesses to recoup, through federal tax filing, some of the losses they suffered in the rough 2008 fiscal year.

The carryback works like this. If, for example, you lost $500,000 in 2008 after making a $250,000 profit in the previous two years, you can carry the loss backwards. Simply have an accountant amend your 2007 returns to offset all the profits for that year.

By doing this you would be due a refund on federal taxes that you paid on that profit. About a third of the states also offer refunds in addition to the federal refund.

Happy New Year to everyone. Even though it is going to be a pretty tough year for many people in our country and around the world, we can still all hope for the best. We are all in it together. That said, as a Nevada resident, I need to let you in on what is happening in our state. As you might imagine, people are not traveling to and spending in Las Vegas, which means the state of Nevada’s take on gaming taxes is way down. The state faces severe loss of revenue.

So what are some legislators proposing to do about it?

Believe it or not, they want us to put in a state tax on individual and corporate income. Nevada, a tax free state, has been a magnet for all sorts of business owners and out of state people wishing to incorporate for asset protection and no extra taxes. But some in the legislature (which convenes in February) want to end all of this with new state taxes.

We will certainly keep you informed of what will happen in Nevada’s 2009 legislative session. But for those of you who are worried even by the talk of new Nevada taxes, you may want to set up your corporations and LLCs in Wyoming. Wyoming has no state taxes and is sitting on a billion dollar state surplus. They are not likely to put in a tax anytime soon, if ever. For now, the safer choice is to set up in Wyoming and see what happens in Nevada.

We have an office in Jackson Hole, Wyoming and set up entities there all the time.

Again, I hope you have a prosperous and beneficial New Year.

The Financial Accounting Standards Board has recently announced that it plans to release its codification of accounting standards in July of 2009.  The codification does not change Generally Accepted Accounting Principles (GAAP), rather it re-organizes, codifies, and simplifies the existing structure of guidance which had become a labyrinth of convoluted accounting literature.  The new codification will be based on a topical format rather than the existing format that is organized by standards.  So, how does this affect our San Diego accounting firm, other San Diego accountants, CPAs, and others within the industry?  And is this a change for the better?

To begin, once released, the codification will supersede all existing guidance from the Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants, emerging issues task forces, and other related sources.  So, say goodbye to every acronym that once went by FASB, FIN, EITF, SOP, ARB, SAB, etc, etc, etc…  All of this literature will now be considered non-authoritative.  This puts all of those in the accounting environment on a level playing field in terms of locating certain accounting related literature and guidance, as we all must now familiarize ourselves with the changes so that we are ready for the transition.

Next, as opposed to the current format, the new codification will be topical in format, reorganizing U.S. GAAP into about 90 accounting topics.  This will greatly simplify the research process.  As opposed to running the risk of being unaware of existing guidance, the researcher can now take comfort that all information on the related topic is organized together, thus reducing the risk of noncompliance with standards and reducing time and effort in research.

Once released on July 1, the codification will become the single official source of nongovernmental U.S. generally accepted accounting principles, superseding existing literature from FASB, the American Institute of Certified Public Accountants, emerging issues task forces and related sources.   After that date, all other literature will be considered non-authoritative.

The current codification changes are a step towards simplifying and organizing GAAP as it has become today.  In addition, it is a switch toward the more topical approach, which is consistent to the eventual plan of converting to the International Financial Reporting Standards (IFRS).  Most of the younger generation accounting and financial personnel will applaud the change as overdue.  Some seasoned veterans of the profession may grumble about having to find where everything is again.  Overall, this is a positive step for the FASB and will assist in easing the transition into IFRS.

In light of the soft economy, businesses are seeking new ways to save money and maintain strong financials. Increasingly, business owners are looking to the IRS as a source of assistance and valuable savings opportunities to help ride out the economic slowdown. There are a few easy steps that savvy business owners can take to make the most of what Uncle Sam has to offer:

Don’t Skimp on the Necessities – The amount allotted for small business equipment purchases has doubled for 2008. This may allow business owners to afford the necessary tools to keep their businesses up and running. Up to $250,000 can be expensed this year, as compared to $125,000 in 2007. “Equipment” refers to items such as computers and software, office furniture and machinery.

Last Year’s Loss May Be This Year’s Gain – Did your expenses exceed revenues last year? If so, you may have had a net operating loss. Consider carrying back this loss to offset your income and receive a tax refund. If business is still down, it’s not too early to start planning for a carryback this year. Net losses can be carried back for up to two years, so follow up on old losses for a quick infusion of cash.

Don’t Let Unpaid Debts Go Unnoticed – Even if your business is doing well, there is a possibility that your customers or other business connections may be struggling. If sales go unpaid or loans are not repaid, business owners are entitled to a bad debt deduction. Documentation is key here, as debts must be proven worthless in order to qualify.

Take Care of Your Health – The last thing a small business needs in difficult times is a sick or injured owner. The IRS has made it easier for business owners to take proactive steps to care for their health by allowing them to deduct health insurance premiums on policies held in the owner’s name.