Tax-Saving Moves for Small Businesses

There are a lot of important business tax changes on the horizon, and I always encourage my readers to stay up to date on these new developments. By studying the tax code, and planning your finances throughout the year you can save money when next tax season arrives.

The other day the Wall Street Journal posted a great article on easy tax-saving moves business owners can make. I have included a section of the article below, but if you are self-employed or own a business then I highly recommend reading the full text here.

Higher Taxes on Dividends

The maximum federal rate on dividends will automatically leap to 39.6% from the current 15% on Jan. 1 as the Bush tax cuts expire. Although the president has promised more than once to limit the maximum rate on dividends to 20%, the little-known fact is Congress must take action for that to happen. It's no sure thing. Even if it does happen, the maximum rate on dividends will jump again to 23.8% in 2013, thanks to the additional 3.8% Medicare tax that takes effect that year. So you're facing a 59% increase in the maximum federal tax on dividends (at least).

Higher Taxes on Long-Term Gains

Starting Jan. 1, the maximum federal rate on long-term capital gains will automatically increase to 20% from the current 15%. Starting in 2013, it will jump again to 23.8% due to the additional 3.8% Medicare tax. So you're facing a 59% increase in the maximum federal tax on long-term capital gains too.

What Can You Do?

Thankfully, you still have some time to take advantage of this year's historically low tax rates on dividends and long-term gains. Here are three strategies to consider right now. Don't ponder too long, because these ideas will take some time to execute, and Jan. 1 will arrive before you know it.

Strategy No. 1: Take Low-Taxed Dividends This Year

Say your profitable C corporation has a healthy amount of earnings and profits, or E&P. The concept of E&P is somewhat similar to the more-familiar financial accounting concept of retained earnings. While lots of E&P indicates a successful company, it also creates a tax side effect. To the extent of your corporation's E&P balance, corporate distributions to shareholders (like you) count as taxable dividends. Since the 2010 federal rate on dividends can't exceed 15%, dividends received this year will be taxed lightly. That probably won't be true for dividends received in 2011 and beyond. Therefore, shareholders (like you) should weigh the option of triggering a manageable current tax hit by taking dividends in 2010 against the option of absorbing a potentially bigger (but deferred) tax hit on dividends taken in future years.

Californians Back Higher Taxes, Spending Cap

A new poll by the Public Policy Institute of California found that most Californians are ready to take drastic measures to ensure their State’s financial stability. A snippet of the article accompanying the poll can be found below, but you can read the full study at the SF Chronicle website.

Battered and worried by the onslaught of dire economic news, Californians are much more willing than their legislators to take drastic moves to stop the state's financial tumble, according to a new poll by the Public Policy Institute of California.

Solid majorities of the state's voters - Democrats, Republicans and independents alike - favor tax increases and spending caps that have left the Legislature gridlocked in its effort to close California's $42 billion budget gap over the next 18 months.

"Voters are scared and willing to be more flexible," said Mark Baldassare, head of the institute. "Some of the concerns break along party lines, but there's a surprising level of support for (budget) plans that share the pain."

Concern over the economic slide has skyrocketed in recent months, with 59 percent of Californians convinced the state is in a serious recession, up from 39 percent last October. Only 18 percent, a record low for the survey, think the state is heading in the right direction, while more than three-quarters are convinced tough economic times lie ahead in the next year.

"The worries are across the parties and across the regions," Baldassare said. "In California, no group is immune to the downturn and the worry that it could affect them next."

Two-thirds of Californians now name either jobs and the economy or the state budget as the most important issue for the governor and the Legislature, dwarfing schools (12 percent) and immigration (4 percent). But only 39 percent of California adults - and 35 percent of likely voters - are convinced Schwarzenegger and the legislators will be able to work together to accomplish a lot this year.