The Art of the Startup Write-off

Today we’ve picked up a useful piece in Crain’s Chicago Business on how entrepreneurs can do more for their small companies with tax write-offs.

With only three weeks left in the year, the clock is ticking. Crain’s interviewed accountant Russell Romanelli, of the firm Wolf & Co. LLP, who shared several opportunities for lowering your tax bill, including some deductions many entrepreneurs overlook.

The most salient tip is for “struggling buisnesses” – in our case, nascent startups that a founder might be bootstrapping with his or her own capital. If this is you, Mr. Romanelli suggests that you loan your company more money:

If the business is an entity like an S corporation or an LLC [with fewer than 100 shareholders] where income and deductions are reported on the owner’s tax returns, the law limits your ability to deduct losses equal to your capital investment in the enterprise. In other words, if a person had an S corporation that lost $50,000 in 2007, and his capital contributions and profits minus the losses totaled $20,000, that’s all he’d be able to write off. The remaining loss would carry over to future years. At the end of the year, if he can afford to, he should loan $30,000 to his company. Direct loans count as basis, so that would allow him to deduct the entire $50,000 loss this year.

A few more of Mr. Romanelli’s Tips:

  • use the cash method of accounting determine those of your expenses that you’ll have to cover in 2008, but which you could actually pay in the next three weeks. Pay them now, and then deduct these from this year’s return.
  • wait and invoice your customers at yearend, so you won’t get paid in 2007, but in 2008.
  • C corporation owners may decide to pay themselves a dividend rather than a bonus because dividends are taxed at 15%, whereas salary is taxed at whatever bracket you happen to fall in.
  • Establish a qualified-benefits plan to omit income. There are many ways to do that — 401(k) plans, profit-sharing plans and self-employed plans.

Deductions you might not have considered:

  • Hire family members. Seriously.
  • Capital Equipment (servers; databases) “We always point out the Section 179 expense deduction, which allows you to write off up to $125,000 of capital equipment purchases this year.”

For more tax tips read similar stories in Crain’s here.

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