With the rush and bustle of the holiday season, the last thing many people are thinking about is the 2005 tax season. But, with just a few weeks left in 2004, time is running out to increase your tax deductions.

“This time of year, we get numerous phone calls from clients saying they need to reduce their taxes,” said Chris Mutchler of Southard, Beckham, Atwater, and Berry, a CPA firm in Port Orchard. “A tax professional can assist you in a thoughtful analysis of your business and personal finances to determine if you can take any additional tax deductions that might make paying your 2004 income taxes less painful.”

Business Deductions

Businesses can still receive a generous deduction on purchases of vehicles that weigh more than 6,000 pounds. So if you use a vehicle for your business, now might be the time to get that SUV you’ve been eyeing.

Pre-paying recurring expenses, such as rent, office supplies, and insurance, can also help businesses reduce their 2004 income. Likewise, charges on a business credit card can be deducted, even if you have not yet paid those purchases off.

Consider paying your children who work in the family business a wage, and use that income to fund IRAs or other retirement investments for those children. This both reduces the business’s income and allows you to deduct the retirement investment from your child’s taxable income if you fund a traditional IRA.

If you own a corporation and your home is your primary place of business, the corporation could potentially pay you rent for use of a home office. More importantly, you should set up a formal process to have the corporation reimburse you for legitimate expenses you incur on behalf of the company, such as buying office supplies and vehicle expenses. Generally, the reimbursement is not taxable for you and the corporation can deduct the reimbursement. Otherwise, un-reimbursed employee/shareholder expenses are deductible on schedule A, subject to a 2 percent of AGI limitation.

Reducing corporate income when you own a personal service corporation is especially important, according to Mutchler, since corporate profits get taxed at a flat 35 percent rate.

“Shift income over to the individual level at lower tax rates,” said Mutchler.

Business owners who may have decided not to have a holiday party this year might want to think again. Employer-sponsored events for employees, such as summer picnics and holiday parties, are 100 percent deductible. And while you’re celebrating, consider having a formal Employee Achievement Award presentation. Tax law allows employers to give non-cash awards for length of employment or safety, as long as the total value of individual awards doesn’t exceed $1,600 and the average value of each award does not exceed $400. In addition, the awards are generally not taxable to the employee.

It’s also not too late to establish a new retirement plan. Be aware, however, that some plans have a December 31 deadline for contributions.

Individual Deductions

Individuals can also take steps in December to increase their deductions. New tax legislation passed recently allows for personal sales tax deductions on large ticket items, such as cars and boats. So even if you do not use a vehicle for business, you may still be able to justify purchasing that new SUV.

Note, however, that in order to be useful from a tax deduction standpoint, your itemized deductions must be greater than the IRS’s standard deduction amount, which has increased for some filers in recent years. Therefore, you might make one large donation to your favorite charity this year, instead of several smaller donations over the next couple of years. Small donations, while deductible, often don’t make enough of an impact when you itemize.

“Clean out that closet and garage and donate items to charity you don’t use,” suggested Mutchler.

Gifting

Although not tax deductible, gifting is also an option for transferring wealth. Cash gifts of up to $11,000 are allowed to any person in 2004. You may also be able to establish a family limited partnership to transfer non-monetary assets.

“It may not be too late do to that,” said Mutchler, although he advised that anyone who was interested in establishing a family limited partnership (or if you already have a family limited partnership), should start the process of transferring units for 2004 as soon as possible, since they will most likely require the help of an attorney.

Gifting can be a one-two punch for consecutive tax years when done at the end of the year. The valuation of partnership units as of December 25 will generally be the same as the first week in January. With one attorney visit, you can establish a gift to be given December 2004, another in January 2005, and have two years of gifting taken care of.

Of course, tax law is complex and knowing what you can deduct can be confusing. “A lot of self-preparers won’t take legitimate deductions,” said Mutchler, “because they’re afraid of doing something wrong and getting audited.”

Consulting a tax professional can help you figure out which of these tax deduction strategies may be right for you or your business, as well as point out other deductions that may be available to you.

(Editor’s Note: The proceeding information is presented for general informational purposes only, and may not apply to your specific tax situation. Taxpayers should consult a tax professional for further guidance.).