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.

As this historic year comes to a close, it will be necessary for all small business owners to take time from their busy schedules and conduct careful inventories of their respective financial situations. Unfortunately, in many cases due to the dramatic downturn of the second half of 2008 it will be a difficult and painful process. As a small business owner there are a few suggestions I have as the new year approaches. Conducting a thorough financial review will be an important first step in terms of tax preparation, a 2009 company operations budget (although in some cases this particular exercise will have already been completed) and anticipating changes that may be in order when the Obama Administration takes office. It is also absolutely the right time to make decisions on ways to make your organization leaner and more efficient heading into the new year.

If you’re a small business owner and looking for financing services or tax preparation, visit our tax reporting business service center.

The details in regards to proposed tax cuts are relatively few under President-elect Obama’s plan, even as to whether his $250,000 threshold is on Adjusted Gross Income or Taxable Income. That would make a big difference for many small businesses. Generally for everyone above the mark, you would want to maximize as much as your cash flow allows in terms of contributions to retirement plans: SEP’s, Simple’s, IRA’s, deferred compensation plans, etc. Equipment purchase write-offs are most important in those high income years. For one to consider deferring Social Security benefits or taxable retirement income to later years when income is lower may be preferable. At this point there is very little information as to what the Obama plan actually is and what will materialize from it, so it will be advisable to watch closely how this all unfolds in future months.

It’s certainly very easy to be negative and cynical when times are tough, especially after the second half of 2008. However, it’s also essential to keep in mind that history dictates this as a cyclical occurrence and things should improve at some point in 2009 or 2010. It’s equally essential to take a few minutes to remember every day how fortunate we are to live in the greatest country in the world. I ask that you reflect upon the incredible freedoms and capitalistic traditions we all benefit from.

During a year in which there has been a lot of disagreement throughout our country on a long laundry list of issues, at the end of the day, I don’t think you’ll find a lot of division on this particular statement.

Peter Miralles is the President of Atlanta Wealth Consultants (www.awc2.com).