10 steps to year

8/3/2019 10 Steps to Year

1/4

10 Steps to Year-End Tax Planning

0

inShare

Tweet

Today's Editor's Picks

10 Management Secrets of Kim Jong Il

14 Easy Ways to Get Insanely Motivated High Tech & Handmade: Meet the New Artisans Top 6 Management Mistakes Entrepreneurs Make Are Google AdWords a Waste of Time?

As the eggnog starts to flow during the holiday season, far too many business owners overlook last-minute

opportunities to take control of their tax picture and paint it to their advantage. How can you maximize

your savings as the year draws to a close? Here are 10 easy steps.

Step 1: Add to your revenue. It's not too late to increase your cash flow by finishing up open jobs.

Cash-method businesses can, however, defer the income (and the tax on it) to 2006 by waiting until the

end of December to send out invoices for the work. The added week or so you wait for the funds translates

into tax deferral for a whole year.

Step 2: Pay off accounts receivable. If you are on the cash method of accounting, settle up

outstanding receivables before Dec. 31, so you can deduct the payments in 2005 -- and preserve a goodcredit record.

Step 3: Make capital investments. Upgrade your equipment -- from office computers and phone

systems to furniture and machinery -- and write off the cost this year. If profitable, you can opt to expense

up to $105,000 of equipment placed in service by the end of the year, instead of depreciating the cost over

several years. The deduction is allowed whether you pay cash or finance the purchase.

Step 4: Stock up on supplies. Pile up your copy paper and other supplies that you'll use in the coming

year to deduct their cost now. You'll also save on money through better buying (e.g., bulk purchases).

Step 5: Distribute profits. If 2005 has been a good year for your business, pay out earnings -- and take

a deduction -- in the form of bonuses to your staff. Corporations may want to distribute profits as

dividends to owners. While dividends are not deductible by the corporation, they are taxed to owners at

no more than 15%, a rate that may be less than the owners would pay on additional compensation.

Step 6: Save for retirement.You have until the last day of 2005 to set up a profit-sharing or other

qualified retirement plan for the year by signing the paperwork with a financial institution. You then have
http://twitter.com/share?url=http%3A%2F%2Fwww.inc.com%2Fresources%2Ftax%2Farticles%2F20051201%2Fweltman.html%3Futm_source%3Dtwitter%26utm_medium%3Dsocialmedia%26utm_campaign%3Dbutton&text=10+Steps+to+Year-End+Tax+Planning&related=:Barbara+Weltman&via=IncMagazinehttp://twitter.com/share?url=http%3A%2F%2Fwww.inc.com%2Fresources%2Ftax%2Farticles%2F20051201%2Fweltman.html%3Futm_source%3Dtwitter%26utm_medium%3Dsocialmedia%26utm_campaign%3Dbutton&text=10+Steps+to+Year-End+Tax+Planning&related=:Barbara+Weltman&via=IncMagazinehttp://www.inc.com/constantine-von-hoffman/mangement-secrets-of-kim-jong-il.html?nav=pickhttp://www.inc.com/constantine-von-hoffman/mangement-secrets-of-kim-jong-il.html?nav=pickhttp://www.inc.com/geoffrey-james/how-to-motivate-yourself-14-easy-ways.html?nav=pickhttp://www.inc.com/geoffrey-james/how-to-motivate-yourself-14-easy-ways.html?nav=pickhttp://www.inc.com/jessica-stillman/new-school-entrepreneurs-blend-artisinal-skills-and-tech-savvy.html?nav=pickhttp://www.inc.com/jessica-stillman/new-school-entrepreneurs-blend-artisinal-skills-and-tech-savvy.html?nav=pickhttp://www.inc.com/jeff-haden/6-management-mistakes-most-entrepreneurs-make.html?nav=pickhttp://www.inc.com/jeff-haden/6-management-mistakes-most-entrepreneurs-make.html?nav=pickhttp://www.inc.com/marla-tabaka/why-arent-you-using-google-adwords.html?nav=pickhttp://www.inc.com/marla-tabaka/why-arent-you-using-google-adwords.html?nav=pickhttp://www.inc.com/resources/tax/articles/20051201/weltman.htmlhttp://www.inc.com/resources/tax/articles/20051201/weltman_Printer_Friendly.htmlhttp://www.inc.com/resources/tax/articles/20051201/weltman.htmlhttp://www.inc.com/resources/tax/articles/20051201/weltman_Printer_Friendly.htmlhttp://www.inc.com/marla-tabaka/why-arent-you-using-google-adwords.html?nav=pickhttp://www.inc.com/jeff-haden/6-management-mistakes-most-entrepreneurs-make.html?nav=pickhttp://www.inc.com/jessica-stillman/new-school-entrepreneurs-blend-artisinal-skills-and-tech-savvy.html?nav=pickhttp://www.inc.com/geoffrey-james/how-to-motivate-yourself-14-easy-ways.html?nav=pickhttp://www.inc.com/constantine-von-hoffman/mangement-secrets-of-kim-jong-il.html?nav=pickhttp://twitter.com/share?url=http%3A%2F%2Fwww.inc.com%2Fresources%2Ftax%2Farticles%2F20051201%2Fweltman.html%3Futm_source%3Dtwitter%26utm_medium%3Dsocialmedia%26utm_campaign%3Dbutton&text=10+Steps+to+Year-End+Tax+Planning&related=:Barbara+Weltman&via=IncMagazine


2/4

until the extended due date for your 2005 return (e.g., Oct. 16, 2006, for sole proprietors) to complete

contributions to the plan that will be deductible on 2005 returns.

Step 7: Make charitable donations. In this post-Hurricane Katrina era, businesses can provide

substantial assistance to organizations aiding storm victims or other causes through cash donations. For

instance, consider a leave-based donation program for your staff -- they forego vacation pay, sick leave,and personal days, and you donate these funds solely to hurricane relief efforts for a charitable

contribution deduction. And since the money isn't taxed as compensation to employees, you avoid the

payroll taxes you'd otherwise owe.

Step 8: Get slow movers off your books. Sitting with inventory that just won't sell? To claim a write-

off, offer the items for sale at a huge discount. If they don't sell, you can take a write-down -- by removing

them from your inventory account.

Or, you could donate inventory items for a charitable contribution deduction. C corporations can take

enhanced deductions for donations of certain inventory items (e.g., computers and peripherals donated toschools and libraries).

Step 9: Adjust your estimated taxes. Don't make an interest-free loan to the government by

overpaying estimated taxes. Calendar-year corporations should reassess their fourth installment of 2005

estimated tax due on December 15, 2005. Owners of unincorporated businesses should do the same for

their estimated taxes due on January 17, 2006.

Step 10: Get ready for 2006. Tax laws that first become effective on Jan. 1, 2006, present new

opportunities for tax savings. For example, if you own your commercial space and make certain energy-

saving improvements, you can deduct them at $1.80 per square foot. Home building contractors may

qualify for a tax credit up to $2,000 for building an energy-efficient home.

For those of you, who believe that it's too soon to start thinking about tax-planning, think again! With a little over six months left forthe close of the financial year, we believe this is the right time to start the annual tax-planning exercise.

Rushing around in the month of March to get invested in any investment avenue available on hand is pass.

Investments for the purpose of tax-planning (the ones eligible for deduction from gross total income under Section 80C) are no

different from conventional investments.

The same degree of effort and planning needs to be 'invested' while tax-planning. Likewise, it is vital that tax-saving investments be

made in line with the investor's risk profile; also the tax-saving portfolio should be a well-diversified one.

In the present investment scenario, investors have a wide range of avenues to choose from while conducting their tax-planning

exercise. Everything from market-linked instruments like tax-saving funds to small savings schemes like National Savings Certificate
http://www.inc.com/topic/Hurricane+Katrinahttp://ads.rediff.com/5c/inbusinessA.rediff.com/business-article.htm/191561475/x15/default/empty.gif/634734616e453176302b3041424c4b38http://www.inc.com/topic/Hurricane+Katrina


3/4

(NSC) and Public Provident Fund (PPF) to 5-year bank fixed deposits (FDs), among others vie for the investor's attention. A

judicious mix of the above in the right proportion is what the investor must target.

We present a 4-step strategy for conducting the tax-planning exercise.

1. Review your existing investments

The tax-planning exercise can commence with a review of the existing tax-saving investments. For example, PPF accounts and

insurance policies/ULIPs (unit linked insurance plans) which run over longer time frames should be put under the scanner.

Investors should enlist the services of an investment advisor and review the utility of such investment avenues. If any avenue has

ceased to add value to the portfolio or is a mismatch, then the same should be done away with.

For example, the only insurance instrument in a moderate risk-taking investor's portfolio could be a ULIP (with a nominal sum

assured) which invests its entire corpus in equities.

In such a scenario, the investor stands the risk of being underinsured and also being invested in an avenue which doesn't match his

risk profile. Such an investor can be a candidate for a portfolio review.

2. Provide for the fixed commitments

The next step can be to compute what the fixed commitments are. For example, for salaried individuals, a statutory deduction like

contribution towards Employees Provident Fund (EPF), which is also eligible for Section 80C benefits would qualify as a fixed

commitment.

Similarly, premium payments for on-going insurance policies or contributions towards existing PPF accounts would fall under the

same category.

The intention is to determine, what portion of the Section 80C deduction (Rs 100,000), the investor can freely invest. Consider anassessee who is required to invest Rs 100,000 for the purpose of tax-planning; he holds an endowment policy wherein the annual

premium is Rs 35,000.

In such a scenario, the investible surplus for the purpose of tax-planning would be only Rs 65,000 (Rs 100,000 less Rs 35,000).

3. Get the right allocation

Drawing out a detailed investment plan for the purpose of tax-planning is the next step. The investment advisor should be actively

involved at this stage. The investor's risk appetite will play a vital role in determining the allocation to each investment avenue.

Broadly speaking, assured return avenues like NSC and FDs will dominate a moderate risk-taking investor's tax-planning portfolio.

Conversely for risk-taking investors, tax-saving funds and ULIPs should be staple diet.

4. Execute the investment plan

Executing the investment plan would be the final step. If tax-saving funds feature in the plan, starting a systematic investment plan

(SIP) which runs over the ensuing 6-month period could be a good idea.


4/4

By investing over a longer time frame, investors can minimise the risk of mistiming the market. Conversely, investments in assured

return schemes like PPF should also be made well-ahead of the due date. Apart from ensuring that the necessary paper work is

completed on time, it would also help the PPF investments clock higher returns as compared to deposits made just prior to the due

date.

To state that investments made for the purpose of tax-planning can have a huge impact on the overall finances would be an

understatement of sorts.

An example will help us better understand this. Rs 100,000 invested annually, over a 15-year period with a return of 10% per annum

(considering that assured return schemes offer a return of 8% per annum, this assumption for the composite portfolio is a realistic

one), would amount to approximately Rs 3,177,200 on maturity. Few would dispute the fact that there is merit in giving the tax-

planning exercise due thought and effort.

Our advice for investors - commence the tax-planning planning exercise now and you will be placed to utilise the month of March for

something more constructive than worrying about investments.

10 steps to year

Documents