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

The end of the year is approaching but it’s not too late to reduce this year’s tax bill. However you need to be careful not to do anything that will cause you to pay more in 2010 than you would save on your 2009 federal income tax. Here are three year-end tax strategies for individuals from the experts at smartmoney.com

1. Sell Loser Stocks Held in Taxable Accounts

Cut your losses by selling those doggy investments held in taxable brokerage firm accounts. The amount you lose can lower your 2009 tax bill because you can deduct capital losses against your capital gains for the year. If your losses exceed your gains, you’ll have a net capital loss for the year. You can deduct up to $3,000 of net capital loss against your 2009 ordinary income from salary, self-employment activities, alimony received, interest or whatever (the net capital loss deduction limit is only $1,500 if you used married filing separate status). Any excess net capital loss is carried forward to 2010 and beyond and will generate future tax savings.

2. Take the Standard Deduction

If your total itemized deductions are usually close to the standard deduction amount each year, consider the strategy of bunching together expenditures for itemized deduction items every other year. Itemize in those years to deduct more than the standard deduction figure. Then claim the standard deduction in the intervening years. Over time, this drill can save hundreds or even thousands in taxes by significantly increasing your cumulative write-offs. Why?

Because you’ll bag higher itemized deductions in alternating years and relatively generous standarddeductions in the other years. Regardless of what happens with future tax rates, you’ll come out ahead. For 2009, the standard deduction is $11,400 for married joint-filing couples versus $5,700 for singles and $8,350 for heads of households. For 2010, the numbers remain the same — except the standard deduction for heads of households increases ever so slightly, to $8,400.

3. Give to Charities

Thanks to this year’s stock market rebound, you probably have some appreciated shares (currently worth more than you paid for them) that you’ve owned for over a year. If so, consider donating them to IRS-approved charities. You can generally claim an itemized charitable contribution deduction for the full market value at the time of the donation and avoid any capital gains tax hit. On the other hand, don’t donate loser stocks. Sell them, book the resulting capital loss, and give away the cash sales proceeds. That way, you can generally write off the full amount of the cash donation while keeping the tax-saving capital loss for yourself.

Warning: You must itemize deductions to gain any tax-saving benefit from these charitable donation ideas.

source: smartmoney.com – Year-End Tax Prep Strategies for Individuals