End-of-the-Year ‘To Dos’
By Jim Calloway, Director, OBA Management Assistance Program and Kenneth W. Klingenberg

But before we think about our New Year’s resolutions, we need to make sure that we’ve done everything that we needed to do this year. We can’t help you with your Christmas shopping or decorating. But maybe we can provide a feature to help save you a little money to apply to those shopping bills. After all, for most of us, the end of the calendar year is also the end of the tax year. The last few days of the year can involve a flurry of checks passing between businesses as everyone tries to pay their deductible expenses “this year.” A business client may drop off a large payment on Dec. 30, and then the lawyer has to decide whether to have a more happy New Year’s or to quickly pay a couple of outstanding statements from the court reporter. Leaving the money in the operating account is not an option (at least that is what the accountant told us).

So are there other things that the enterprising lawyer should be doing at year’s end to minimize tax liability? Well, I didn’t know for certain so I called on the able assistance of Oklahoma City attorney and CPA Kenneth W. Klingenberg of Klingenberg, Brown & Associates PC. And so, with apologies in advance to David Letterman, here’s Ken’s Top Ten List.

KENNETH KLINGENBERG’S
Top 10 End-of-Year Tax Tips

Before midnight on Dec. 31, 2005, all of us tax types realize there are many things our clients could do that would help them prepare their tax returns or reduce their taxes. This article will not offer exotic tax tricks or complicated tax shelters. My assignment was to come up with some practical suggestions on how to do “a lot with a little.” Some of these suggestions will require cash payments while others will merely require either a brain or some effort. These suggestions are not intended to be new or unique but are intended as a reminder of some of the practical things that any taxpayer can do to lower their income tax bill.

10

Assemble and organize all of your personal deductible and business deductible cash expenses. Most practitioners attempt to pay their expenses either using their credit cards or writing a check from their business account. However, at some point in time an expense is paid in cash and, if you do it correctly, you obtain a receipt for that expense. When you get the receipt, write the business purpose on it immediately so you do not forget why you spent the money. Put that receipt in your pocket (or purse) so that you will take the receipt to your office. Put that receipt in a file folder and then, at the end of the year, organize these receipts by category so they can be presented to your accountant to get the write-off for the business expense. The same thing is true for any deductible personal expenses. This is a simple way to keep track of your deductible expenses. By the way, should you ever forget to get a receipt for a cash item paid, immediately make your own receipt including the date, the nature of the expense, the entity paid and the business purpose. Then place this substitute receipt in the file folder with the rest of the paid receipts knowing that you are not attempting to pass it off as an original receipt but merely including it as a substitute receipt.

9

Consider cleaning out your house, including the attic, and giving property to your favorite charity. Although the charity will merely give you a blank receipt, make a list of the property which you are donating to that charity. There are many sources available to value the property on your list but none of them can be used if you have not given the property away or have not kept a list of the property you are contributing.

8

Make certain you have a mileage log for the number of business miles you have driven. Hopefully you have already kept an appropriate mileage log and your mileage is reimbursed to you by your business. However, solo practitioners generally do not get reimbursed and many times have no idea of the number of business miles they have driven. Whether you are deducting your automobile by depreciating it or whether you are writing off the miles on a standard rate, it is still necessary to have an appropriate mileage log in order to make these types of calculations. The mileage log can take any form as long as the appropriate miles are recorded and the business purposes of the trips are indicated.

7

Look back at your last year’s tax returns, whether it is your business return or your personal return, and see the types of deductions you took in the prior year. This is a good idea as a reminder to cause you to accumulate the appropriate information for those deductions and to remember to include all appropriate deductions. From time to time our clients merely forget to inform us of a deduction which had been taken from year to year. Although your tax preparer will probably remind you of the deductions that you previously have utilized but failed to report, it should be your responsibility to get that information as it happens.

6

Set up your pension plan, profit sharing plan, SEP, 401(k) and other appropriate retirement plans before the end of the year. With the exception of an IRA, you cannot make a deductible contribution to your plans after the end of the year if you have not set it up prior to the end of the year. You cannot set up a SIMPLE plan this year unless you have done so on or before Oct. 1, 2005.

5

Make a contribution to your children’s college savings plan, which is known as a 529 Plan. Although you do not get a deduction for federal purposes, you do get one for Oklahoma. The main reason I included this suggestion is the cost of college is increasing every year and you need to get busy putting in enough money for your children to complete their college educations without incurring excessive debt.

4

Buy any needed business equipment before the end of the year to get your Section 179 depreciation. This year you can have an immediate write off of up to $105,000 as long as it does not create a net loss. Please keep in mind that it does not make any sense to buy something you do not need. Be certain what you are buying is needed equipment and not useless junk. Sometimes taxpayers dislike paying income taxes so much that they are willing to spend money even on things that do not really help them in their business. Avoid that mistake. Check with your tax preparer to be certain your purchase qualifies for Section 179 treatment.

3

Get with your tax preparer before the end of the year to make certain that your estimated tax payments have been made and ask your tax preparer to prepare an estimate of your tax liability. Most attorneys have income that fluctuates based upon their collections and related expenses. Do not be surprised on April 15 or Oct. 15 of the following year as to the amount of taxes that you may still owe the federal government and the state of Oklahoma. If you get your estimate prepared before the end of this calendar year, there might be something you can do to help reduce your taxes.

2

You can legally delay the receipt of income but this is an “iffy” suggestion. Since most practitioners are cash-basis taxpayers, you recognize income when received. One way not to receive income is to delay sending out a statement to your client. Unfortunately, this can be a pitfall if you delay billing a client and that client later chooses not to pay you at all. Therefore, if you want to delay the receipt of income by delaying the sending of statements to your clients, make certain that the only ones you do not send statements to are those that you are 100 percent certain will pay you. This suggestion is a catch-22 if in fact your bill is deductible for your client.

It is possible that your client may insist upon getting your statement because they know they have to pay you before the end of the year to write off the payment to you. If that is the case, take the high road and send the bill to your client so that they can pay you promptly.

1

Pay all your deductible bills by the end of the calendar year. The end of the calendar year means midnight of Dec. 31, 2005. Once again you are probably a cash-basis taxpayer and most of you are probably already paying every bill that you can afford to pay before the end of the year. I defined the end of the year to be midnight of Dec. 31, 2005. This does not mean that you can leave your checkbook “open” for the month of January and merely date all of your payments as of Dec. 31. Do not fool yourself in this regard as the Internal Revenue Service is fully aware that there are certain taxpayers who have checks that were dated December 31 and were not processed until February of the following year. Always live by the old saying that pigs get fat and hogs get slaughtered. I recommend that you get fat by paying your expenses before the end of the year but there is no reason to get slaughtered.

There are no tricky or cute suggestions in the list above. However, I do believe these are some practical suggestions that you should consider before the end of 2005.

Originally published in the Oklahoma Bar Journal December 10, 2005 - Vol. 76; No.34