September can be a painful time for small-business owners: their quarterly estimated taxes are due on the 17th. Next year could hurt even worse. The Internal Revenue Service will scrutinize more small-business returns to try to collect more of the $68 billion in lost tax revenue created by owners who underreport income. Here's how to use legitimate moves, and what's left of 2007, to cut your taxes without provoking the Feds.
• Buy stuff. Business owners can take a tax deduction of up to $125,000 for equipment they buy in 2007 without having to depreciate it, says Mildred Carter, a senior tax analyst with research firm CCH. That includes computers, cars and even the iPhone that you use exclusively in your business. You can buy it all on Dec. 31 and still have it count against your 2007 taxes, but why wait that long?
• Sock away money. You can feed your IRA or private 401(k) until April 15, 2008, and still have it count for this year. But you have to make sure you establish your 401(k) or more specialized pension plan before the end of this year, warns Tom Ochsenschlager of the American Institute of Certified Public Accountants. You can do this even if you already have a pension-paying day job and simply moonlight as a business owner.
• Hurry up and drag your feet. As the end of the year approaches, sole proprietors can manipulate their own taxable income by paying all their bills promptly and getting a little bit slow to invoice. The money you pay out this year is deductible; the fees you don't collect until January won't get taxed until 2008.
• Keep clean. The IRS has said it's going to close the tax gap, even if it means comparing state sales-tax filings with federal filings, investigating the supplies that businesses order or checking out the cars, houses and lifestyles of cash-based business owners. So, keep good records of the money you bring in, the money you spend, and the amounts you send to your bank account and your state tax authority. Filling out your returns in the spring will be a snap. And anyway, cheaters never prosper.