You must keep records to support items reported on your tax return.  You should keep basic records that relate to your federal tax return for at least three years.  Basic records are documents that prove your income and expenses.  This includes income information such as Forms W-2 and 1099.  It also includes information that supports tax credits or deductions you claimed.


Combine miscellaneous itemized deductions in the same year.  Only miscellaneous itemized deductions that exceed 2% of your adjusted gross income (AGI) are deductible.  Consequently, most people find that their miscellaneous itemized deductions are not deductible.  Loophole:  By paying two years of expenses in the same year, you can often get over this 2% of AGI limit.


  1. Not updating your insurance needs. Consult with your insurance agent once a year, preferably in January when you begin to assess your tax situation.
  1. Setting your deductible too low. Insurance premiums drop dramatically when you raise the deductible.  Check it out.
  1. Not taking advantage of group plans. Business and professional organizations to which you might belong frequently offer group health or disability coverage at substantially lower premiums than anything that’s available from an agent.
  1. Not shopping for the best cost. You comparison-shop for a car, so why not do it for insurance?  Just because you’ve always dealt with one insurance company doesn’t mean your getting the best deal.
  1. Failure to have disability insurance. It’s three times more likely that you’ll be disabled before age 65 than it is that you’ll die.  Disability insurance is particularly important for professionals and self-employed individuals.
  1. Not considering insurance as part of your personal financial planning. For example, life insurance can be used to generate interest income or to reduce estate taxes.
  1. Doing business with a disinterested insurance company agent. You’re much better off dealing with an independent agent who’ll shop around for the best coverage at the lowest cost.
  1. Buying insurance you don’t really need. Examples: life insurance for children, travel insurance that probably duplicates coverage you already have, collision insurance for an old car, and car rental insurance that might be included in your homeowner’s policy.


American Opportunity Tax Credit is available for the first four years of undergraduate college education.  The credit is worth up to $2,500 and is equal to 100% of the first $2,000 of qualified tuition and related expenses and 25% of the next qualifying expenses.  Qualified expenses are tuition and related expenses. Added bonus:  Up to 40% of the credit is refundable, meaning that your refund can be greater than the amount of taxes you paid. The credit does phaseout for higher income taxpayers.


The manner in which you buy a business can have significant tax ramifications.  Of the two ways to buy a business – by purchasing the stock or by purchasing its assets – an asset purchase can create better opportunities for bigger write-offs.  Here’s why.

Disadvantages of a stock purchase.

When you buy a company’s stock, the cost basis you must use for depreciation is the value of the assets as shown on the company’s books at the time you purchase the stock.  Any amount you pay over the book value of the assets cannot be depreciated.

Advantages of an asset purchase.

When you buy a company’s assets, you can allocate the purchase price among various assets of the business based on their fair market value at the time of the purchase.  The amounts you allocate can then be used as the basis for the company’s depreciation deductions and to establish a loss or gain when you dispose of the assets at a later date.

For example, assume that you pay $100,000 for a business that has fixed assets with a fair market value of $100,000 and a book value of $50,000.  If you buy the company’s stock, you can only depreciate $50,000 of fixed assets.  But if you buy the assets of the business, you can take depreciation deductions on the full fair market value of the $100,000 in fixed assets.

Allocate asset values for maximum tax savings

Since some assets are depreciable and some are not, the way you allocate the purchase price to the various assets of the business is the key to maximizing deductions.  When you’ve determined those allocations, make sure that the assets are listed in the sales contract and that a specific amount is assigned to each.  You’ll need this information to support your deductions.

Handling Critical Assets

Goodwill is the amount you pay for a business in excess of the value of all the other assets of the business.  The amount you allocate to goodwill is amortized over a 15-year period beginning in the month of acquisition.  Be careful to assign a reasonable value to goodwill and to include it in the sales contract.  If goodwill is left out of the contract, the IRS can assign a value to it and lower the value you allocate to another depreciable asset.

Seller’s agreements not to compete often assign a specific value to this item and typically

cover a fixed time period.  The IRS allows agreements not to compete to be amortized over a 15-year period regardless of the fixed time period stated in the contract.  Be careful not to overvalue an agreement not to compete of less than 15 years since it must be amortized over a 15-year period.

Consulting fees are often paid to sellers who remain active in the business over a period of time.  If you allocate a portion of the purchase price to a consulting fee the amount is fully deductible. 

Employment contracts are sometimes given to key employees before a business is sold.  You acquire these contracts when you buy the business, so you can allocate a portion of the purchase price to them.  The cost can be amortized over the life of the contracts and is deductible.

 Lease purchase premiums are amounts paid by the buyer to acquire an existing lease at an attractively low rent.  You can write off lease premium costs over the remaining term of the lease.

Subscription lists and customer lists may be amortized if its value can be ascertained and the list has a limited useful life, the duration of which can be determined with reasonable accuracy.

Business-buying traps to avoid

Don’t forget that while buildings are depreciable, land is not.  If you buy buildings and land, be sure that the sales contract separately states the price of the buildings and the price of the land so you can determine depreciation deduction for the buildings.

To maximize depreciation deductions, some buyers often seek a relatively high purchase price allocation for fixed assets such as machinery and equipment.  However, fixed assets may be subject to state sales tax and a high valuation can result in a higher sales tax.  Some simple advance calculations will help you avoid this trap.


Regardless of whether interest rates are high or low, the ability to borrow is an important factor in running a successful business.  Whether you need to borrow money now or in the future, it=s good business practice to know what information a banker or other lender will need in order to grant your loan request.

This information falls into two broad categories.  The first is general information about you, your business product or service, and your plans for the business.  While some banks will gather this information from a loan application, it=s wise to prepare a clear, written presentation of the general facts about you and your business.

The second type of information a lender needs is financial information.  This includes several key documents, each of which plays an important role in the lender=s decision.

General information

You=ll probably be asked to supply some of this information on the loan application form, but you can often provide additional facts that will have a favorable impact on a lender.  That=s why it=s good strategy to prepare a written presentation that gives a lender a clear description of you and the business you are in.

Here=s a checklist for the general information you should include in your written presentation:

  • Your management background, abilities, and accomplishments as well as those of your key management personnel.
  • A general description of the nature of the industry or business you are in.
  • The sales potential of your product or service. This should include your short-term and long-term marketing plans and how you intend to handle any problems or opportunities which your business faces.
  • An explanation of exactly how the money you are borrowing will be spent, whether the amount is sufficient for your immediate or long-term purposes, and how the borrowed funds will contribute to your firm=s well being.

In short, your general information presentation should tell the lender who you are, what your business has done and what you expect to do, how you intend to reach your goals, and, of course, how the money you are borrowing will help you achieve those goals.  If you make a logical presentation of this general information, you=ll set the table for a clear understanding of your financial information.

Financial information

It=s critical that you present all financial information in a formal, professional manner.  A sloppy financial presentation is almost certain to result in the rejection of your loan request.  The following financial documents should be prepared by your accountant:

  • A personal financial statement for you and other principals of the business or other guarantors of the loan. Be sure that your personal financial statement includes the amount of money that you yourself have at risk in the business.
  • A balance sheet which shows your company=s assets and liabilities for your most recent accounting period. It=s important that the balance sheet includes the amount of the company=s present indebtedness and the terms of repayment of any outstanding loans.  Copies of recent company tax returns should be attached to the balance sheet as supporting material.
  • An income statement which shows the company=s profit performance over a specific period of time.
  • A cash flow projection which includes the prospective loan funds and other sources of money and shows how the money will be used.
  • A sales forecast which projects and preferably allocates sales by type of customer over a given period of time.
  • A current ratio position which shows the relationship between the company=s current assets and current liabilities.

The role of your accountant

It=s important to involve your accountant in both the preparation of all financial documents and in your meetings with the lender.  Your accountant can supply whatever degree of assurance about the financial information that your lender may require.  The degree of assurance will vary, depending on matters such as the lender=s previous experience with you, the size of the loan you=ve applied for, and how well the bank knows your business.

For example, audited financial statements may be required if you are requesting a large loan and the lender has not had any previous experience with your company.  In other situations, a review of the financial information by your accountant may be sufficient, particularly if the lender has had previous dealings with your company.

It=s generally recognized that banks credit standards vary among banks, some banks have tighter credit standards than others.  But if you=re properly prepared and make a solid presentation, your chances of getting that vital business loan will be greatly improved.


Put your safe deposit box in your corporation’s name

 In most states, a safe deposit box in an individual’s name will be sealed when the individual dies so that the authorities can take an inventory of its contents.  If you are a shareholder in a closely held corporation, you can avoid this problem by renting a safe deposit box in the name of your corporation.  Safe deposit boxes in corporate names are not sealed when a shareholder dies.

By giving the right of access to the box to a fellow corporate officer whom you trust, you can assure your heirs of immediate access to the box.

Check the law in your state first, because some states will not seal a safe deposit box if it is rented jointly in the names of you and your spouse.


Big time tax loophole.  When you die you do not need any records to support any appreciation in your assets.  The assets for tax purposes are “stepped up” to market value on the date of your death or the alternate valuation date, usually six months later.


Everyone in business should be aware of how income taxes will affect them.  Although most business people try to set up a favorable income tax plan, they are often unaware of some important estate planning strategies.

Tom Crandall is a good example.  Tom is a very successful real estate developer.  Shopping centers, condominiums, industrial parks – no matter what the project, Tom tackled it with the enthusiasm and skill that were the foundation for his success.

At age 45, Tom Crandall is now firmly in control of his life.  His wife is warm and supportive, the perfect mother to their three children.  His business is growing rapidly and he can look forward to even greater financial rewards.

Tom understands the importance of tax planning and because his future is so promising, he wants to set up the best possible tax plan for his estate.  His lawyer has explained that by taking advantage of the unlimited marital deduction, Tom or his wife can transfer their entire estate to the surviving spouse tax-free.  In addition, each can use what is called the “applicable credit” to reduce federal estate taxes dollar for dollar.  The applicable credit amount is $780,800, which is the equivalent of an estate deduction of $2,000,000.

However, Tom is certain that his and his wife’s estate will be much greater than $2,000,000 – probably in the millions.  Even with the unlimited marital deduction and the unified credit, Tom realizes that his estate will eventually be subject to substantial federal taxes.  He feels there must be another answer to his problem.


Tom is right.  There is a better way.  A program that takes advantage of the maximum annual exclusion of gifts from taxes will not only help Tom protect the estate from federal estate taxes, but can save him current income tax dollars as well.

Here’s how it works.  Under the tax law, a taxpayer can exclude from tax gifts of up to $12,000 a year for each gift recipient.  If the taxpayer and spouse elect to “split” the gift, the annual limit is increased to $24,000.  Amounts over these limits are subject to gift taxes.  To qualify for the exclusion, the gift must be an outright gift.  If income producing property (including cash) is transferred as a gift, the income tax liability for that property is also transferred to the recipient of the gift.

A gift program could work wonders for Tom’s estate.  He and his wife can give $24,000 annually to each of their three children – a total of $72,000 a year.  If the couple has an additional life expectancy of thirty years, that means they’ll be able to shift $2.16 million out of their estate.  If they also had four grandchildren, the amount could total $5.04 million.

It’s true that you can’t take it with you, but your accountant can help you see to it that the IRS won’t take it either.


  1. Paying more taxes than you have to.  Keep good records so you get all the deductions you’re entitled to.  Shift income to a year when you’ll be in a lower tax bracket.  Shift deductions to a year when you’ll be in a higher tax bracket.
  2. Not preparing for the unexpected.  Set aside at least two months income to protect yourself and your family from serious cash flow problems in the event of an emergency.
  3.  Not putting your money to work.  Take all excess funds out of no-interest or low interest checking and savings accounts.  Put the money to work in liquid but higher yielding places such as mutual funds.
  4. Not setting financial goals.  If you don’t have goals, you can’t make a plan to achieve them.  Write down where you want to be and when.  Then start making a plan.
  5. Making investments based on tips.  No matter how well-intended, a tip is the worst reason to make an investment.  Investment decisions made under pressure are also unwise.
  6. Failing to have your will updated.  Your situation changes along with that of your heirs.  Your will should always reflect your present circumstances.
  7. Not establishing credit in the name of each spouse.  No one likes to think about death or divorce, but not having credit can be much more than a minor inconvenience.
  8. Borrowing money when it’s not necessary.  Not all interest is fully deductible.  Interest deductions have been sharply curtailed.  Don’t assume tax benefits when you consider borrowing.
  9. Not keeping organized financial records.  Poor recordkeeping can cost you significant tax savings, cause you to make bad financial decisions, and leave your family with unnecessary problems if you become ill or die.
  10. Failing to put a yearly tax plan to work as early as possible.  Year-end tax planning can be costly.  The sooner you put your tax plan to work the greater your savings.