2011 Tax Strategies for Businesses

Business assets: Under Section 179 of the tax code, a business may “expense,” or currently deduct, the cost of qualified business assets placed in service during the year. For 2011, the maximum expensing allowance is $500,000. In addition, a business may still qualify for 100% “bonus depreciation” deductions for certain new (but not used) assets placed in service before 2012. These two tax breaks may be combined for an unprecedented write-off in 2011.

Qualified small business stock: If you invest in “qualified small business stock” in 2011, you may be able to exclude tax on up to 100% of the gain on sale if the stock is held at least five years. (The exclusion was increased from 50% and 75% in previous versions.) This enhanced tax break expires on December 31, 2011. It may represent a viable opportunity to inject more cash into your own small business.

Bad business debt: In these uncertain economic times, a business may have difficulty collecting outstanding debts. As a general rule, the bad debts of a business may be deducted from gross income when they become worthless. Business owners should keep records of all collection efforts, such as letters, phone calls, e-mail communications and collection agency activities. This documentation can support deductions based on the worthlessness of the debts.

Repairs vs. improvements: If you simply repair a business asset, you may currently deduct the entire cost. In contrast, the cost of an improvement to business property must be capitalized. When possible, you might make minor repairs before the end of the year to offset your taxable income for 2011. Caveat: If you make repairs and improvements at the same time, the IRS may lump in the cost of the repairs with the improvements as part of a general betterment plan. In that case, the repairs are not currently deductible.

Section 199 deductions: A deduction under Section 199 may be available to a business entity with qualified domestic production activities. For 2011, the so-called “manufacturing deduction” is equal to the lesser of 9% of taxable income from qualified production activities or taxable income. Do not think that the Section 199 deduction is limited to traditional manufacturing firms. Obtain professional guidance concerning your operation.

Business supplies: A business can generally deduct the routine supplies it purchases during the year, even if some of the supplies are not used until the following year. When appropriate, your company might buy more supplies in December to increase its deduction for 2011.

Remember that this is only an overview of several common year-end tax-planning strategies. Also, as noted above, the tax laws are subject to change. Consult a professional tax adviser concerning your situation.