We asked tax professionals who work with shop owners to pass along their best quick tips to help you keep more of what earn. Here's a baker's dozen of ideas to discuss with your own accountant and tax adviser.
Donate office equipment
Donate old computers or office equipment to a local school or nonprofit organization. If you haven't depreciated it fully, you can get a tax write-off. Even a computer worth only $250 can save you $90 in taxes. A local high school or college-level collision repair training program might also welcome your donation of used equipment or tools.
Or if you can't find an organization to which to donate, the National Association for the Exchange of Industrial Resources (www.naeir.org, 800-562-0955) often can distribute your donation and give you the appropriate tax papers.
Gifts over meals
Want to schmooze with a source of referrals? Consider sending them a gift rather than taking them out for lunch. Unlike the meal, which is probably only 50 percent deductible, business-related gifts up to $25 are fully deductible.
Review property taxes
Think your newly-assessed property tax is out-of-line? David Riggan, chief financial officer for Caliber Collision Centers, a chain of about 70 shops in California and Texas, said it may be worth challenging the assessment yourself - or hiring one of the companies that will handle the challenge for you for a fee. If you outsource this, Riggan recommends working with a local company that may know the market better than some of the national assessment-challenging firms.
A 2004 change in leasehold depreciation rules may make it more attractive to fix up your building. Any business making qualified leasehold improvements can depreciate those costs over 15 years instead of the previous 39-year standard. The more favorable schedule is good for improvements made through the end of 2005.
Another change last fall was an expansion of Section 179, which gives businesses the ability to immediately write off large amounts of equipment. The 2004 tax change extends through 2007 your ability to deduct at least $100,000 in qualifying equipment purchases annually. That amount is reduced only if you put into service more than $400,000 in equipment in any one year.
Employ the family
Consider putting your spouse, parents or work-age kids on the payroll. By shifting taxable business income to another family member, you can move dollars from higher tax rates to lower tax rates - creating real tax savings for you and your business.
If you planned on giving your children money anyway, this is a great way to give them wages that are tax-deductible to your business, and tax-free to them, up to the $4,750 standard deduction. (For wages in excess of $4,750, their beginning tax rate is only 10 percent.) And you still get to claim your children as dependents on your personal income tax return. Pay them contemporaneously (not just at year-end) and in the same manner as other employees - on a regular basis by check.
Write-off bad debt. If someone stiffs your business, that bad debt may be deductible. But be careful here: Businesses that sell goods can deduct the cost of products they sold for which they aren't paid, but businesses that provide services cannot deduct labor time. (The rationale behind this rule is that it would be too easy for businesses to inflate bills and claim large deductions for bad debts.)
Use pre-tax dollars
Pay for some of your medical expenses with pre-tax dollars. Yes, you can itemize medical expenses on your taxes but only if they exceed 7.5 percent of your adjusted gross income. But set up a health savings account (HSA) and you can use pre-tax dollars to fund some of those medical expenses. An HSA combines a high- deductible (and thus less expensive) health insurance policy with a special savings account. Contributions to the account are tax deductible; withdrawals for medical expenses not covered by insurance are tax- free.
If your policy covers your employees and you contribute on their behalf, your contributions to their account are tax deductible and are exempt from payroll taxes. HSAs won't benefit all employers and employees, however, so make sure you understand how they work - and consider working with an insurance provider that allows you to offer employees a choice of an HSA or a traditional health insurance plan.
Make it a business trip
Anytime you're traveling across the state or across the country, try to find a shop owner in that area who will let you stop by for a tour. You'll no doubt come away with an idea or two you can use in your business, and you may then be able to write off part of your travel expenses (be sure to find out from your accountant how to document the business aspects of the trip).
Deduct unreimbursed losses
If you've suffered the results of a theft, accident, fire, flood, or some other casualty during the year, you may be able to deduct some of your unreimbursed losses. In particular, if you're in an area that was declared a federal disaster area, the tax deduction for your casualty losses can be claimed retroactively, by treating them as if they occurred in the previous year and filing an amended tax return for that year. This allows you to receive a quick tax refund - money that you can use right away.
Delay income, accelerate expenses
Remember the old adage of delaying incoming and accelerating expenses to reduce your tax burden for the year. Your accounting method determines when you must recognize income and deduct expenses. For example, under the accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred.
If this is the system you use, employee bonuses may be deductible even if your company will not pay the bonuses until early 2006. Make sure the corporation declares the bonuses before year-end and pays them by mid-March 2006.
Bonuses generally cannot be accrued for employees who own a greater-than-50-percent interest in a C corporation. Bonuses cannot be accrued for S corporation shareholders who own more than 2 percent of the stock. In addition, partners or members of partnerships and LLCs cannot accrue bonuses no matter how little stock they own. Similarly, profit-sharing or 401(K) contributions can be deductible even if you will not have the cash to contribute (or have it but want to hang on to it) until after the end of the year - you have until you file your tax return.
Businesses using cash-basis accounting method can also accelerate expenses and defer income near the end of the year to reduce tax liability. Consider prepaying some bills by December 31, 2005, rather than waiting until January (when you won't be able to claim those expenses until your 2006 return).
You could also notify some customers in December that, as a holiday benefit, you are extending their credit terms from 30 days to 60 days. This is a way to show appreciation for your customers - and reduce deposits in December.
Think like an auditor
Think like an IRS auditor. Nobody likes the idea of being audited. But did you know there's a document that helps IRS auditors understand what to look for when examining tax returns for collision repair businesses?
Prepared in 1995, the document includes "examination techniques, common and unique industry issues, business practices, industry terminology and other information to assist examiners," and discusses "some issues that may be encountered, including other sources of income; cost of sales; employment taxes; etc."
Reviewing this document can help keep you out of trouble - and you can download it for free from the IRS website (www.irs.gov/businesses). Click on the "Audit Technique Guides" link to bring up the list of guides. "Auto Body and Repair Industry" is second on that list.
John Yoswick is a freelance writer based in Portland, Oregon, who has been writing about the automotive industry since 1988.