Tax Tips
WHEN CAN YOU WRITE OFF BAD DEBTS?
Regardless of the business you're in, sometimes customers or clients simply can't pay you. Fortunately, the tax code eases the pain somewhat by allowing you to take a tax deduction for debts that become "wholly worthless" during the tax year.
There's no standard test or formula for determining whether a debt is worthless; it depends on the facts and circumstances of each case. To qualify for the deduction, your business must use the accrual method of accounting and you must have no reasonable expectation of repayment. It's not enough that the debtor lost his or her job or became insolvent. You must be prepared to show not only that the debt is uncollectible at the time you take the deduction, but also that it has no "future value," considering factors such as the debtor's age, educational status, income and earning potential.
The deduction also requires you to exhaust all reasonable means of collecting the debts. If you think you may claim a bad-debt deduction this year, start your collection efforts early and document those labors to support your position.
CAPTURE TAX BENEFITS WHILE REDUCING INSURANCE COSTS
As insurance costs continue to skyrocket, an increasing number of businesses are fighting back by forming captive insurance companies. A captive - an insurance company owned and controlled by the businesses it insures - can provide a number of valuable benefits. For example, captives typically offer more stable premiums and lower fixed costs than traditional insurance companies. They also allow you to participate in the insurance company's underwriting profits and investment income.
In addition, if the captive is properly structured as an "insurance arrangement" for federal income tax purposes, you'll enjoy some significant tax benefits. Unlike other forms of "self insurance," you and the other owners will be able to deduct your premiums.In addition, the captive will he taxed as an insurance company, allowing it to deduct most of its loss reserves (that is, funds set aside to pay claims).
If this strategy is right for you, you may want to team up with other businesses to form a group captive or join an existing captive operated by a trade association or other industry group.
THE GIFT THAT KEEPS ON GIVING
Making regular gifts to your loved ones - always a valuable estate planning strategy - just got a little better. This year, the annual gift tax exclusion, stuck at $11,000 for several years, increases to $12,000 per recipient ($24,000 if you split gifts with your spouse). Annual exclusion gifts allow you to reduce the size of your estate tax-free and without using up any of your lifetime gift or estate tax exemptions, all while keeping your wealth in the family.
