1. Pay outstanding bills. If you're on the cash method of accounting, doing so entitles you in most cases to deduct these payments in 2002, reducing your net income and minimizing your taxes. If you're short of cash, charge expenses to your business credit card—you can deduct the charges in 2002 even though the credit card bill is paid in 2003. (Note: This deduction rule applies only to general credit cards such as MasterCard or American Express; not to store credit cards such as Staples).
2. Buy needed equipment. As long as it is bought and placed in service before the end of the year you can expense the cost (up to $24,000 for 2002) instead of depreciating it over a number of years. You can also claim 30% bonus depreciation (for costs over $24,000), as well as depreciating excess amounts under the usual depreciation rules.
3. Take inventory. To know where you stand, make sure to make a year-end count of what you have on hand.
4. Set up a qualified retirement plan. If you don't yet have a qualified retirement plan for your business, complete the paper work for one before the end of the year. This will allow you in most cases to make plan contributions up to the extended due date of your 2002 tax return. For example, if you're a sole proprietor and you set up a profit-sharing plan by December 31, you have until October 15, 2003, to put the money into the plan (assuming you apply for filing extensions for your 2002 return).
5. Amend your retirement plan documents. If you already have a retirement plan, be sure to keep it tax-qualified by signing necessary plan amendments reflecting law changes in the past eight years. Also, make necessary amendments so you're able to use new limits on plan contributions for 2002.
6. Hold a meeting of your corporate board or board of advisors. It's a good idea to assess where you stand and a meeting of your board can help decide where to go from here. What's been working for you (and what had not)? How's your cash flow? If it's been a good year, authorize year-end bonuses and dividend distributions. If you retain earnings, be sure to note in your minutes the reason for doing so to avoid potential accumulated earnings penalties.
7. Get ready for 2003. Now's the time to prepare for the coming year. Update your budget and payroll systems to reflect the new Social Security wage base ($87,000 in 2003, up from $84,900 in 2002). Set up accountable T&E; reimbursement plans so that you and your employees start the new year right with proper record-keeping for reimbursable business expenses.