Flat tax plans are the hot topic in the republican presidental candidate race. After seeing the popularity of Herman Cain skyrocket after his proposed 9-9-9 flat tax, Texas governor and presidental candidate Rick Perry has proposed his own flat tax plan.

Perry has proposed his own flat tax plan that allows taxpayers the option to continue using the current tax code or pay a flat tax of 20%. Even though the details of his flat tax strategy hasn’t been announced, the tax plan cannot work.

In summary, the Texas governor’s flat tax plan would give taxpayers a choice between filing taxes under the current tax code and an flat tax of 20%. Those who opt for the flat tax could maintain their mortgage deductions if they earn less than half a million dollars, about 99% of taxpayers. Perry’s flat tax plan would allow taxpayers to declare exemptions of $12,500 for each family member.

At first glance the plan might look appealing but it falls short because it won’t foster growth and it would send the federal deficit even higher.

The advantages of implementing a flat tax is to encourage individuals and corporates to invest in businesses instead of looking for tax breaks and tax loopholes. By offering taxpayers the option to choose between a 20% flat tax and the current tax code, big businesses will continue to rely on their tax accountants to file under the current system.

Rick Perry’s 20% flat tax proposal appears to be nothing but a knee-jerk reaction to Herman Cain’s 9-9-9 flat tax plan.

I wonder if the governor read his plan and critiqued it with his tax accountants before announcing it!

There can be no denying that the rise in popularity of republican presidential contender Herman Cain is due to his 9-9-9 flat tax plan. It’s also proof that American taxpayers strongly support a dramatic simplification of the federal income tax code.

Cain’s 9-9-9 tax plan is a brilliantly simple proposal to replace the extremely complex current tax code with a three part flat tax - 9% income tax, 9% corporate tax and a 9% national sales tax.

Steve Forbes, editor-in-chief of Forbes Media, estimates that the federal income tax code and all its attendant rules and regulations contain almost 10 million words.  It has changed 14,000 times since 1986; last year alone there were 500 changes to the federal income tax code.

IRS estimates that Americans spend more than 6 billion hours each tax year calculating and filing taxes.  By the tax year 2015, the cost to file taxes will cost Americans $483 billion a year.

Herman Cain’s 9-9-9 tax proposal, or flat tax, would replace all the current tax code with a single rate that would apply to all incomes after deductions.  His flat tax would eliminate taxes on savings, terminate the death tax. It would drastically cut the business profit tax and reduce tax loopholes.  Surprisingly, it would also do away with Social Security and Medicare payroll taxes.

Proponents of the flat tax say it would stimulate the economy and create jobs, would end crony capitalism and reduce lobbying in Washington.

Cain’s 9-9-9 tax plan has it’s challenges.  Introducing a national sales tax, on top of state and local taxes (that are already 9%) is a tough sale.  And if it did come to fruition, Washington politicians will always be looking for reasons to raise it.  This is already a problem in Europe, where some countries that already have their version of a national sales tax, called the Value Added Tax, have steadily increased the tax percentage.

Not everyone is gung-ho on the flat tax proposal.  Critics claim that the lack of the home mortgage interest deduction would hurt housing. They also point out that without a charitable contribution deduction, donations would plumment.

Both proponents and critics of a federal flat tax have to agree that the current federal income tax code is outdated, too complex, and too costly to continue.

Since Cain announced his 9-9-9 tax plan, other presidential contenders are coming with their own version of flat tax.

So what does all this mean?

The writing is on the wall, it’s just a matter of time before the flat tax replaces the current federal tax code.

The month of December is the time for small business owners to put together a year-end tax strategy and developing a tax plan for the tax season. But putting together a tax plan for the this tax season will be difficult due to open tax law issues, especially the status of the Bush tax cuts.

So how should the small business owners approach this year’s tax strategy? Business owners should develop a tax strategy based around on tax rules that will not change or be affected by tax law changes due to new regulations.

Here are a few year-end tax strategy tips for business owners this December:

Update Your Books
As a business owner, it is essential you know your company’s current financial state before any tax planning can be done. Knowing whether your company make or lost money for the year is critical to developing the right tax strategy.

Look Into A Retirement Plan
Profits can be sheltered in qualified retirement plans, and the 2010 rules remain relatively unchanged from 2009. For example, a corporate owner or self-employed person whose salary or net earnings are sufficient can contribute a maximum of $49,000 to a SEP (Simplified Employee Pension) plan, scoring a tax deduction while saving for one’s golden years.
Owners who don’t yet have qualified retirement plans for their companies need to complete the paperwork (provided by their financial institution or mutual fund) by Dec. 31. Then they’ll have until the extended due date of their 2010 return to make their contributions for the year.
It’s wise to discuss the wide range of plan options with a CPA or other financial adviser. Keep in mind, if you do miss the Dec. 31 for setting up a qualified retirement plan, you still have one plan option – the SEP – which can be set and funded as late as the extended due date of the return.
Remember Health Coverage
Owners (other than those with a C corporation) who pay for their health coverage can deduct it, but only as a personal expense rather than as a business expense. However, for 2010, if you are self-employed you can use the premiums to offset the amount of net earnings used to calculate self-employment taxes (which cover mandatory Social Security and Medicare contributions). Because of the tax savings, owners may want to reduce their estimated taxes. The last payment for 2010 is due on Jan. 18, 2011.
Those who use the cash-basis accounting method might also want to pre-pay their 2011 premiums to boost their write-off for 2010 while saving on self-employment taxes.
If the insurance qualifies as a high-deductible health plan, then you’re allowed a tax-deductible contribution to a Health Savings Account, or HSA, for 2010. (To be considered “high deductible” in 2010, the policy’s deductible must be at least $1,200 for individuals and $2,400 for families and meet certain other tests.) While the HSA 2010 contribution can be made as late as April 18, 2011, the sooner it is made, the more earnings you can build up on a tax-advantageous basis. Earnings will never be taxed if withdrawn to pay qualified medical costs.

Donate to charity
Business owners who have had a good year can share their good fortune with charities. The donations are tax-deductible within the limits allowed by law. For example, if you own a C corp, your charitable deductions are limited to 10% of taxable income.
For owners who record business income on personal tax returns (such as sole proprietors, or owners of S corporations or limited liability companies), it’s helpful to note a change for 2010: There’s no phase-out of itemized deductions for high-income taxpayers. That’s a shift from prior years, when contributors lost part of their charitable deductions when income exceeded a threshold amount.

Upgrade equipment
If you need to invest in new business equipment or upgrade old machines, now is a great time to act. Whether the business is profitable or not, there is a tax break to help.

• If the business is profitable, elect first-year expensing for the cost of equipment up to $500,000. (This dollar limit is up from $250,000 in 2009). If the cost is more than the dollar limit, you can also use 50% bonus depreciation and a regular depreciation allowance to effectively write off most of the cost of the purchase. The bonus depreciation option is set to expire on Dec. 31.
• If the business is not profitable, rely on 50% bonus depreciation to write off half the cost (plus a regular depreciation allowance on the other half). This write-off can create or increase a net operating loss, which can result in a carryback that can generate a cash refund.
• While first-year expensing can be used for new or pre-owned equipment, bonus depreciation is limited to new equipment. However, the purchase of equipment for both first-year expensing and bonus depreciation can be financed in whole or in part without any impact on the tax write-off.

One final tip regarding tax strategy is make to update your tax plan when the Bush tax cut and other tax credit issues are resolved in Congress