B.E. Guide To Midyear Tax Planning.

WHETHER YOU'RE AN ENTREPRENEUR, INVESTOR, OR SELF-EMPLOYED, THESE STRATEGIES WiLL PROTECT YOUR HOLDINGS FROM UNCLE SAM 

MOST PEOPLE DO THEIR TAX PLANNING IN THE DEPTHS OF WINTER. WORSE YET, MANY TRY TO ENGAGE in this practice when the hyacinths bloom, weeks, if not days, before taxes are due.

In fact, it makes more sense to hold a session with your tax professional midway through the year. During the summer months, you can assess your situation and identify tax-busting measures with little or no pressure. Whether you own a business or not, now is the perfect time to assess whether you are keeping proper tax records or need to meet with your accountant to figure out such strategies as maxing out your 401(k) and IRA contributions. Now is a good time to plot business expenses and charitable donations that you can write off later in the year.

To help you meet your tax-planning needs, BLACK ENTERPRISE has developed this multi-sectional guide for entrepreneurs, investors, and the self-employed. Read on to find out the best moves to make now.

Home Sweet Home Office

William and Linda Privott of Durham, North Carolina, run not one but two home-based businesses. William, who has worked for major pharmaceutical companies, operates Privott & Associates Inc., an organization that monitors clinical trials, while Linda provides artwork framing and consulting services with her company. Art Expressions.

"Up to now, we really haven't been able to take a home office deduction," says Linda. The rules say that a portion of your home must be used "regularly and exclusively" as your "principal place of business." In other words, your home should serve as your primary headquarters. So if you do not operate a home-based business, you cannot take deductions With two active, school-age children, the Privotts haven't been able to set aside a portion of their residence for their respective enterprises "However," says William, "our house has a third floor that's not being used now. With some work, we could convert that space to a home office, so we're considering that for a summer project."

The Privotts' tax advisor, Genevia Gee Fulbright, a Durham, North Carolina, CPA, believes the long-term tax benefits would justify the expense of developing a separate home office "They could create an office of about 500 square feet," she says. "and then take a proportionate deduction of household expenses, plus depreciation." If one-sixth of your home is a home office, for example, you can deduct one-sixth of such expenses as utilities, security systems, and home owner's insurance, as well as all direct costs toward the renovation of the office space. However, deductions related to your home office can't exceed the income you receive from the business.

There had been sortie question about whether you can claim a home office deduction if you earn money elsewhere. "Congress broadened the definition," says Fulbright. "As long as your home office is where you me age your business and there's no other fixed location from which you send invoices, recruit new clients, and, yes, figure out your taxes, then you can claim the home office deduction, even though you don't use your office for client meetings."

What's more, if you qualify for home office deductions, you may be able to write off your car expenses for trips to and from your home to client locations or to pick up supplies, for example. "With a home office," says Fulbright, "you calculate your business mileage using your office as the starting point."

Get The Most Out Of Your Business Resources

"i meet with my advisor on a regular basis," asserts Robert Thorne, CEO of Fanlink Networks, a New York-based company that offers spectators at sports and entertainment events the opportunity to make purchases over their wireless devices. Thorne relies upon Allison McSweeney, a CPA in the New York office of the accounting firm BDO Seidman.

So what tax issues do Thorne and McSweeney discuss at these periodic meetings? "Payroll taxes, for one," says Thorne. "We're already operating in several states, and we hope to expand nationally. Every state has its own rules for payroll taxes."

There are service providers that can handle payroll taxes for growing businesses. Maintains McSweeney: "However, some of these services don't like to look back into a prior year. In 2002, for example, it may be difficult to straighten out payroll tax paperwork from 2001, [and] the penalties for errors in this area can be severe. That's why it's better to keep current with your payroll taxes, and a midyear planning session can be very helpful."

Like most entrepreneurs, Thorne is not only concerned with tax management as it relates to human resources. He and his accountant also focus on equipment purchases. "We're going to be acquiring computers, servers, and software-related items this year," says Thorne. "By working with Allison, we can get the equipment we need without taking too severe a hit on taxes."

Thorne's company may be able to use what is known as the Section 179 election, which permits taxpayers to take an immediate write-off for equipment outlays rather than spreading the deduction over several years. "In 2001," says McSweeney, "you can deduct up to $24,000 worth of equipment costs. However, if you buy more than $200,000 worth of equipment, you lose the right to deduct the entire amount immediately."

Here's an example of what she means: Your company buys $208,000 worth of equipment this year. The excess $8,000 is deducted from your Section 179 allowance so you can deduct only $16,000 worth of equipment purchases in 2001. The other $192,000 worth of equipment ($208,000 minus $16,000) must be depreciated over several years.

Therefore, you might want to pay close attention to equipment purchases for the remainder of the year so you don't pass the $200,000 limit by year's end. If you think you may cross that threshold, postpone some purchases until 2002 or lease equipment that you must have this year. "Leasing expenses are deductible," says McSweeney. "Regardless of the Section 179 deduction, you should plan equipment outlays with your tax advisor because the time of purchase may affect the depreciation schedule you can use."

Making Retirement Plans SIMPLE

now is the best time to check up on the contributions you're making to a tax-deferred retirement plan. Make sure you're getting the maximum tax deferral from a 401(k) or other employer-sponsored plan. If you've recently changed jobs, decide what you want to do with the money that you have accumulated with your former employer.

For example, Eno Essien of Cary, North Carolina, recently left a large tech company to set up his own firm, Essential Solutions, which provides high-security network systems. "I had a 401(k) account," he says, "and I want to keep maximizing my retirement plan contributions. In fact, I may be able to make even larger contributions to a different type of plan." Therefore, Essien plans to roll over the account balance from his old 401(k) to a simplified employee pension (SEP) or a profit-sharing plan, where he'll have the potential for greater diversification as well as for larger contributions.

For most types of retirement plans, the key deadlines are year-end and the due date of the tax return, including extensions. There is one exception, though: "You must set up a SIMPLE plan by September 30 of the year for which you're filing taxes," says CPA Genevia Gee Fulbright, referring to a savings incentive match plan for employees.

If you own a small company or represent one of the legions of the self-employed, you may want to set up one of these plans, especially if you have a small amount of income. With a SIMPLE plan, the maximum amount that can be deferred from wages is $6,000 per year. The employer can match up to 3% of wages.

Because of the September 30 deadline, you should start making arrangements soon if you want a SIMPLE plan to take effect for the 2001 tax period.

Fun In The Sun With Tax Breaks

at this time of year, you're probably thinking about your summer vacation. With some advance planning, you can get the IRS to foot part of the bill.

How? By combining business with pleasure. As long as the primary purpose of a given trip is business, you can write off a chunk of your travel, hotel, restaurant, and other bills. That's true even if you manage to find the time to go to the beach or play a few holes at a golf course. So you might attend an industry convention and tack on a couple of days at the end for your vacation. You might just want to schedule a series of meetings with clients or prospects that happen to coincide with a family trip. The key to sustaining such deductions is preparing a paper trail.

Another strategy: If you're traveling this summer, consider this tax-savvy idea. Rent your house while you're away. "You can rent a home for up to 14 days per year without having to declare any taxable income," says Larry Torella. If you live in a prime tourist area or near the site of a major golf tournament, you might be able to collect thousands of dollars for a two-week rental--and not pay a penny in income tax.

tax-saving tips

As you get together with your accountant, you may want to explore the tax-planning ideas below:

For the self-employed: Evaluate estimated tax payments.

Two out of the four annual payments are due around midyear, on June 15 and September 17. "Most people pay enough to meet the `safe-harbor' test, so they won't owe an underpayment penalty," says Larry Torella, tax partner in the accounting firm Richard A. Eisner & Co., in New York. "This year, that means paying 110% of last year's tax obligation. However, if your income will be lower this year, perhaps because you won't have large capital gains, you can pay much less and avoid a penalty."

For investors: Pore over your portfolio.

A new tax law lowers the tax rate on long-term capital gains, from 20% to 18%, for assets held more than five years. "To get this rate," says Torella, "assets need to have been acquired after 2000."

Therefore, this may be an excellent time to review your investments. Get rid of underperforming dogs and purchase eagles--stocks, bonds, or mutual funds that are expected to perform for the long haul. You'll start the clock running for the five-year, 18% rate.

Give away capital gains.

Are you going to have to sell appreciated securities in order to pay next fall's college bills for children or grandchildren? In this situation, give away the securities to the student who can make the sale. (A married couple can give away up to $20,000 worth of assets each year, to any number of recipients, without gift tax consequences.)

The student will have to report the capital gains, but he or she will probably be in a low bracket and, as a result, owe taxes at a 10% rate, not your 20% rate. If the securities have been held at least five years, an 8% rate will apply. "For this 8% rate, it doesn't matter when the assets were purchased," says Torella.

For entrepreneurs: Cash in on your children.

While your kids are out of school for the summer, pay them to work for your business or professional practice. You'll get to deduct the wages you pay while they'll owe no tax this year on up to $4,550 in earned income. "They must actually earn the money and you must pay them a reasonable market wage," says CPA Fulbright. "If your business is unincorporated and your children are under 18, no Social Security, Medicare, or unemployment taxes need be withheld. In the right circumstances, this can be a sizable tax saver."