The April 15th deadline for sole proprietors, as well as calendar-year partnerships and limited liability companies (LLCs), to file their 2008 income tax returns is fast approaching. Still, there is plenty of time to take action that can save tax dollars and avoid penalties.
What’s new on your return
This year, more than ever, pennies count, so be sure to take advantage of every tax break to which you are entitled. Some new items of note include:
- Increased first-year (Section 179) expensing limit for the purchase of equipment and machinery. The limit is $250,000 for 2008 (compared with $125,000 in 2007). Because of limitations in the law, you must be profitable to benefit from this break.
- 50% bonus depreciation for new equipment purchases (there was no bonus depreciation in 2007). The deduction is automatic unless you waive it.
- Higher IRS standard mileage rates. If you used your personal vehicle for business driving in 2008, you may be able to deduct mileage at 50.5¢ per mile for the first half of the year and 58.5¢ per mile for driving in the second half of the year. Make sure you have written or electronic records substantiating your business driving.
- Longer net operating loss carrybacks (NOLs). If you weren’t profitable in 2008, instead of the usual two-year carryback, you can opt to carry back your NOL for three, four, or five years. The carryback is used to offset income in prior profitable years to generate an immediate tax refund.
Still time to save money
Even though the 2008 tax year ended on December 31, you still can make some moves now to reduce your 2008 tax bill. Consider setting up and funding a Simplified Employee Pension (SEP) plan, which you can do up to the extended due date of your return. The maximum deductible contribution for 2008 for self-employed individuals is effectively 20% of net earnings from self-employment or $46,000, whichever is smaller. Owners who want these retirement savings must make contributions on behalf of their staff.
Another post-year end move is to contribute to a health savings account (HSA). If you were covered by a high-deductible (low cost) health plan in 2008, you can contribute to an IRA-like account. Contributions (within limits) are deductible, earnings in the account grow tax-deferred, and withdrawals from the account to pay for medical costs are tax free. Unused amounts remain available for future needs.
If, for any reason, you can’t complete your return by April 15, request a filing extension by this date. Individuals receive an automatic six-month extension to October 15; partnerships and multi-member LLCs have a five-month extension to September 15. It’s probably a good idea to ask for an extension if:
- You lack all the information needed to complete your return. For example, if you’re a member of an LLC that has requested a filing extension, you’ll need an extension for your personal return since you do not yet have a Schedule K-1 from the LLC telling you your share of business income and deductions to report on your personal return. Or, if you made charitable contributions but don’t have acknowledgments from the organizations you gave to, obtain the acknowledgments before you file; an extension will give you time to do this.
- You want more time to fund your retirement plan. If you set up a plan before the end of 2008 or are considering a SEP plan but lack the cash to make the contributions, a filing an extension request will give you more time to make 2008 contributions.
A filing extension does not extend the time to pay taxes. Pay as much as you can of any tax you estimate will be due on the final return to minimize or avoid penalties and interest.
April 15 is not only the due date for the 2008 income tax return; it’s also the date on which the first estimated tax payment for 2009 is due. Under a new rule created by the American Recovery and Reinvestment Act of 2009, individuals with adjusted gross income in 2008 under $500,000 and who derive more than half of their gross income from a business with 500 or fewer employees can avoid estimated tax penalties for 2009 taxes by making sure that quarterly payments total at least 90% of the tax shown on the 2008 return. This is a lower required payment that usually applies, allowing small business owners to keep more of their money for the time being.
Barbara Weltman is a top selling author, attorney, tax and small business expert. Barbara serves as an expert on the Small Business Online Community, powered by Bank of America. She recently conducted an expert forum on the Small Business Online Community, where she answered questions about the impact of the stimulus package on small business owners. Barbara has also authored several books include JK Lasser's Small Business Taxes 2009 and The Complete Idiot's Guide to Starting a Home-Based Business, 3rd Edition.