Five money-saving tips for year-end tax planning

By Scott E. Schaefer

Year-end tax planning strategies can help you save money on your tax return and on your bottom line. By applying the following tips, offered by CBIA tax attorney Santa Mendoza, you may be able to save more than you have in the past. 

1. Defer billing. In some instances, it may be possible to gain a tax advantage by deferring billing. If you run your business by the cash method, you can delay billing your customers until after the year-end. Be careful, though: Although this will lower your tax burden for the current year, it could stretch your income a little thin. Before trying this method, be sure you have enough ready capital to cover likely expenses through the end of the year and have a reserve left over for emergencies. 

2. Write off damaged or obsolete inventory. For tax purposes, inventory is often valued at the lower of either the item’s cost or its market value. If you use the market value method, review your inventory to identify any damaged or obsolete items. As the inventory’s overall value decreases, so does the amount of tax you’ll likely have to pay. In many instances the cost of holding damaged or obsolete goods can be written off as a tax deduction at their market price. To claim the deduction, you are not required to scrap the items. However, you must offer them for sale within 30 days of the inventory date and for the price at which you will itemize them on your tax return.

3. Buy now instead of later. If you can swing the expense, consider doing routine plant or equipment maintenance and repairs that are scheduled for early next year before the end of this year. You can then apply the deductions associated with the improvements to this year’s tax return. This practice also applies to restocking supplies — even travel expenses. And if you can hold a few business meetings before the end of the year rather than let them slide into the early part of 2000, you can take advantage of the itemized deductions allowed by law. 

4. Take advantage of phased-in tax cuts. Connecticut’s corporate income tax rate has been shedding percentage points annually as a tax-cut plan passed by the legislature a few years ago has been phased in. As of Jan. 1, 2000, the rate will level off at 7.5%. It would make sense, then, to defer any income you possibly can to 2000 so you can take advantage of the lower tax rate. (The rate for 1999 is 8.5%.)

And if your company is an S corporation, there are more tax-saving opportunities if you can defer income. Unlike the federal government, Connecticut has required S corporations to pay the corporate income tax. But the state is gradually reducing the rate at which S corporations are taxed, to bring our state’s practices in line with the federal government’s. For tax years beginning in 1999, 55% of S corporations’ net income will be subject to Connecticut’s corporate income tax. In 2000, the percentage drops to 35%. In 2001, S corporations will be treated in the same manner in which the federal government treats them — as a pass-through entity. At that point the corporation will no longer have a tax liability. The liability “passes through” to the shareholders, who will pay Connecticut personal income tax at the rate of 4.5%.

5. Don’t overlook tax credits. Many of Connecticut’s corporate tax credits are underused because companies aren’t aware of them. Try to take advantage of any credits for which your company is eligible. For example, direct expenses related to in-state job training, construction or renovation of day-care facilities, and donations to Connecticut universities all qualify for a tax credit equal to 4% of the total expenditure in 1999 (5% in 2000). For more information on tax credits, visit the state Department of Economic and Community Development’s Web site, www.state.ct.us/ecd. 

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