Eight Strategies to Pay Less IncomeTax on Your 2006 Business Profits

- Is your business is cash-based or accrual-based? Cash-based businesses recognize revenue when it is received. So if a sale is made in December but not paid for until January, the income is included in the following tax year. An accrual-based business recognizes income when it is earned. In the example above, a sale made in December means taxable income in December, even if the cash isn't received until much later.

- Does it look like you'll have a loss this year? Before you can act to minimize your taxes you should have at least a rough idea of what your income will be. If you are on track to end the year with a loss your efforts to minimize your taxes could be wasted or could cause problems later. Some tax breaks can only be taken if you end the year with a profit, not a loss.

- Can you reasonably foresee that next year you will have a much bigger income, significantly larger expenses, or move into a higher tax bracket? Members of the new Congress have stated they want to eliminate the lower tax rates we've been enjoying for several years. If they make good on their promises, we may all be paying more, even if the tax brackets don't change. If you know that next year will bring a much higher income or higher tax bracket, it might be better to save expenses till after the first of the year.

Assuming you are going to end the year with income and your goal is to minimize this year's tax bill, here are some strategies to help you do that.

1) Does your business include inventory? The lower your year-end inventory is, the higher your cost of goods sold, and therefore the lower your taxable income. If you have amounts on your books for inventory that was stolen, lost, broken, be sure to write off those amounts.

2) Pay your January business rent or mortgage by December 31st so you can deduct an extra month for this year.

3) Buy equipment. Equipment that will be used at least 50% for business and will be placed in service by December 31st may qualify for the Section 179 deduction. For 2006, that deduction is a whopping $108,000. If you're not familiar with 179, it amounts to taking all the depreciation on a piece of equipment in the year of purchase, rather than taking depreciation over a period of years. If you buy equipment that is used less than 50% for business, you may still be able to take this deduction, but you'll need to keep track of your personal use and deduct the amount from the 179 deduction. Also, the deduction phases out if you purchase more than $430,000 worth of equipment in 2006.

4) Stock up on supplies. You're sure to need many items in the first few months of the year. Anything you buy by December 31st is deductible for this year, even if you buy it with a credit card and don't pay the bill until later. Make a list of everything you can think of to buy early, like ink cartridges, business cards, tools and other small equipment. Many retailers know that savvy business owners will be doing this so they put office supply items on sale.

5) Bad debts. If you operate on an accrual basis, you might have bad debts on your books. You can write those off, but first you must prove they are uncollectible by stepping up your efforts to collect them. Keep track of every collection call, letter, or other contact with the debtor. If you have evidence that the debtor has filed bankruptcy that will often serve as proof that you'll never collect, or at least not all of your unsecured debt.

6) Defer income. If you are a cash-based business, you don't recognize income until it is received. So wait till the last couple of days of December to send out invoices. That will allow you to push some income into January.

7) Retirement. For your future security and your current tax liability, put as much as you can into your retirement fund, subject to the tax-deductible limits. Some types of retirement accounts, such as IRAs, can be set up and funded right up to the day you file your income tax, even if you take advantage of extensions. Other accounts must be set up before the end of this year, though you can still contribute until you file your return.

8) S-Corporation. If your business is an S-corp and you are expecting a loss this year, you should know that you can only deduct a loss to the extent of your basis in the company. It may be a good idea to increase your basis by investing more cash in the company (to be safe, invest directly, not through a third party or it may backfire). Talk to your accountant to find out if he or she thinks you need to bump up your investment while there is time.

It's true that small businesses make our economy thrive, but the existing tax breaks are there for the picking for the savvy business owner. Take advantage of them while they last, because they may soon disappear or be negated by other changes that are rumbling in the distance.