It’s the last chance for 2005 tax planning

NEW YORK — The next few weeks will be a critical time at small businesses — by mid-December, companies need to have their tax planning for the current year pretty much complete. They also need to be looking ahead to 2006.

For many businesses, the two biggest year-end concerns will be capital spending and retirement plans — either category can give your company a potentially large tax deduction. But before you make any big commitments on equipment or a pension plan, you need to be sure that you’re making a decision that makes sense when you consider how profitable your business is, not just this year, but next year also.

“You’ve got to look at your tax bracket from year to year, the whole picture,” said Jeffrey Berdahl, a certified public accountant with Beard Miller Co. in Allentown, Pa.

You also need to be certain that you should never make a year-end decision solely for the purpose of lowering your taxes — if you buy equipment, for example, you should do so because it fits into your overall business plan.

Small businesses that buy certain kinds of equipment and put it into service by the end of this year are eligible to deduct the full amount of the purchase price, up to a maximum of $105,000, rather than depreciate it. Computers, cars and manufacturing machinery are among the kinds of equipment that qualify for this deduction; heating and cooling systems are the kinds that don’t.

You can find out more about the deduction, known as the Section 179 deduction after an Internal Revenue Code provisions, by downloading IRS Publication 946, “How To Depreciate Property” from the IRS Web Site, www.irs.gov. Another online resource is the CCH Business Owner’s Toolkit at www.toolkit.cch.com/text/P07_2930.asp. Small business tax guides in libraries and bookstores will also explain the basics.

While retirement plans may seem to be an obvious way for a company to lower its tax bill, accountants say many small business owners don’t get around to starting one.

You can get a quick education into retirement plans at the IRS Web site. The agency’s Publication 560, “Retirement Plans for Small Business,” spells out the differences among plans such as Simplified Employee Pensions (SEPs), Savings Incentive Match Plans for Employees (SIMPLEs) and the more complicated plans such as Keoughs, defined contribution plans and defined benefit plans.

But beware — while you still have time to set up a SEP plan, you’ve passed the deadlines that apply to some other retirement plans. And, if you’re going to create a qualified plan, you have a fair amount of paperwork ahead of you. Publication 560 explains the requirements.

Berdahl noted that many companies at this point are working on setting up plans for early in 2006 rather than trying to cram them in before the end of the year. And that’s a sensible way to do it — taking the time to set up a plan carefully will help ensure you get one that works best for your company.

It’s a good idea to consult with a tax professional before setting up any retirement plan — and, to be on the safe side, before you make any big tax decision.