Start 2012 Off Right With 5 Tax-Wise To-Dos
As the new year is about to begin, make it your resolution to start the year off right from a tax perspective. This includes doing the following:
1. Read Your Odometer.
If you use your personal car, truck, or van for business, be sure to jot down your odometer reading on January 1. This will help you track your business mileage throughout the year, so you can claim a deduction for this driving. You’ll also need to keep a record of all your business driving; without this record, your deduction may be disallowed.
2. Decide Whether to Become an S Corporation.
If your business is already incorporated, you generally have until March 15, 2012, to elect to be taxed as an S corporation. This means the owners, rather than the corporation, pay tax on the business’ profits. Electing by this date lets you be treated as an S corporation for the entire year. The election is made by filing IRS Form 2553.
If you incorporate a business in 2012, you have two months and 15 days from the start of the corporation to make the election. For example, if you incorporate on January 7, 2012, you have until March 21, 2012, to file the election form with the IRS.
Talk with your tax advisor about whether an S election makes sense for your company.
3. Determine Contributions to Your FSA.
If your company has a flexible spending arrangement (FSA), you usually have to decide how much to contribute for the new year before the year begins. For 2012, it is up to the company to set limits on how much an employee can contribute from salary to the FSA. (Starting in 2013, the tax law sets the limit at $2,500 per year.)
If your company does not yet have an FSA, discuss with your tax advisor the feasibility of adding one now. Even if you start mid-year, you and your staff can benefit from it.
4. Decide on contributions to your 401(k).
If your company has a 401(k) plan, just like the FSA, you usually have to decide how much to contribute for the new year before the new year begins. The elective deferral limit for contributions from an employee’s salary is higher in 2012 than it was in 2011 ($17,000 in 2012 versus $16,500 in 2011). Those who are at least 50 years old by the end of 2012 can add another $5,500 to the account. Contributions, however, cannot exceed wages.
If your company does not have such a plan, you might want to start one. You can use a 401(k) plan even if you are the only one who works for the business. A solo 401(k) can enable you to maximize your annual retirement plan contributions for yourself because you can use the maximum employer contribution permitted in addition to the employee elective deferrals. These contributions are allowed whether you are an employee of your corporation or you are a self-employed person.
5. Decide Whether to Use an HSA for 2012.
If you do not yet have health insurance in place for your company, you might want to use a high-deductible health plan combined with a savings account called a Health Savings Account (HSA). This can be an affordable way to provide health coverage.
You can decide whether you, your employees, or a combination will pay the health insurance premiums and/or make the HSA contributions. If you pay the premiums, you may even qualify for the smaller employer health insurance credit of up to 35 percent of these premiums!
Hopefully 2012 will be a very good year from a revenue perspective. This is all the more reason to get your tax ducks in a row so you can minimize the portion of your profits that you’ll have to share with Uncle Sam.