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Making sure you get that year-end deduction

December 22, 2009

When you're spending money to get a tax deduction for your business by the end of the year, you might as well make sure the deduction will hold up when your friendly neighborhood IRS agent comes calling. 

If you're a cash-basis taxpayer - if you aren't sure, check your business tax return or your 1040 schedule C or schedule F - you will need to show that you spent the money to claim the expense this year.  Some things to remember:

• A credit card is as good as cash.  Better, even, because if you incur a business expense before the end of the year, you have your credit card statement to prove it.


• If you mail a check for a business expense, the check needs to be in the mail and postmarked in 2009 to be a deductible 2009 expense.  If it's a big check, maybe you should spend a few bucks extra to send it Certified Mail so you can document the postmark.


•  If you receive a check in the mail, it's taxable the day you receive it, even if you don't deposit it.


• There is no "close is good enough" rule for cash basis taxpayers.  Just because you could have paid a bill doesn't get you a deduction if you didn't pay it before year-end.
• Don't overdo it.  If you prepay expenses more than a year out, you don't get the deduction until the year to which the payment applies.

If you are an accrual-basis taxpayer, your big year-end issues come from related-party payments.   For example, a C corporation can only deduct payments to an over-50 percent owner if the payment is made before year-end.  If you and a family member both own stock, you combine your ownership to see if you own over 50 percent. For C corporation personal service corporations -- doctors, lawyers, consultants, and accountants -- that pay all of their earnings out as salary, this is a critical issue; any earnings left at year-end get taxed at a flat 35 percent federal rate.  S corporations and partnerships are related to all of their owners for purposes of taking deductions.  They are also related to anybody in the owner's family up to kissing cousins, more or less, including ancestors, lineal descendants, spouse and siblings.

If you are looking for a deduction from buying equipment or fixed assets -- say, a Section 179 deduction or a bonus depreciation deduction -- make sure that your asset isn't just purchased, but placed in service too, before year-end.  It doesn't count if it's sitting on the dock in the packing cases. 

Tags: year-end tax planning.

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