MEL PERSONAL FINANCE COLUMN Business owners can avoid tax surprises and improve their bottom line by giving their businesses a year-end tax checkup. It involves estimating your taxable income for 1997, identifying tax deductions that can help offset that income, calculating your withholding and estimated payments and implementing a strategy that enables you to take advantage of the tax breaks available to you. ? Deductions that affect your health. Self-employed individuals can deduct up to 40 percent of their health insurance premiums for themselves and their families, with a few restrictions. If you’re self-employed, make sure you have adequate coverage and, if not, boost it by year-end to claim this deduction. Proprietors of unincorporated, closely held businesses may be entitled to deduct even more up to 100 percent of their health insurance if they can demonstrate that it is an employee benefit. ? Let the IRS offset bad debts. When someone owes your business money that cannot be collected, you are entitled to a deduction for the amount of the bad debt. However, you must be able to demonstrate that you have tried to collect the debt before year-end and document your efforts so you can demonstrate that the debt has, in fact, become worthless. Be aware that if your company uses the cash method of accounting, it can deduct a bad debt only if it incurred an actual cash loss or if the amount was included in income. If your company uses accrual accounting, you may deduct a bad debt in the years in which it becomes partly or totally worthless. ? Give yourself and your employees tax-deductible bonuses. If you’re looking to reward your employees for their hard work over the years, Uncle Sam can give you a little help. The tax law allows a business to take a deduction for a large payment or current year bonus given to employees (including business owners) as long as the cumulative amount is considered reasonable. ? Timing is everything when it comes to equipment purchases. Tax law gives you two primary options for offsetting the cost of equipment purchases. You can depreciate certain property that is, deduct some of the cost of the equipment on your annual income tax or elect to expense the deduction in the year of purchase. The amount of depreciation you can deduct in any year depends on how much the property costs when you began using it, how long it will take to recover your cost and certain other factors. Instead of depreciating the equipment over several years, you can elect to treat all or part of the new property as an expense and deduct up to $18,000 in 1997. However, this special expensing allowance is reduced dollar for dollar by the amount of equipment purchases above $200,000. Assess what equipment and other property needs to be purchased for your business by the end of the year and, if possible, buy the equipment that entitles you to the greatest tax deduction. ? Be generous to charities. Another way to offset your income is to contribute to charities. In general, a company can deduct charitable donations of up to 10 percent of its taxable income. ? Help employees save for their future. Make a contribution to tax-qualified retirement plans for your employees and you’ll gain a tax deduction for the business. The maximum amount of an employee’s annual compensation that may be considered in computing qualified plan contributions is $150,000. Therefore, owner/employees who earn more than $150,000 may wish to establish a nonqualified plan, such as a deferred compensation plan. Finally, businesses should also periodically evaluate how they are structured to determine which organizational form offers them not only managerial flexibility but also tax advantages. Protect yourself from financial ruin If you’re concerned about the safety of your assets, the following advice is offered to help you protect yourself from financial ruin. ? Get a personal liability policy. Most homeowner and automobile policies provide $100,00 to $300,000 in liability coverage. Personal liability coverage, or umbrella insurance as it is often called, gives you an extra layer of protection against injury and damage claims by providing liability coverage over and above the amounts you’ve selected for your homeowner and automobile policies. Should a claim against you surpass those limits, umbrella insurance kicks in to resolve the claim against you. Personal liability insurance also extends protection to situations in which you would not otherwise be covered, such as libel, slander, false arrest, invasion of privacy, defamation of character and other similar personal injury claims. ? In these days when a multimillion-dollar lawsuit could easily wipe out your family’s assets, personal liability insurance is essential. And the good news is, it’s also relatively affordable: $1 million of coverage generally costs between $100 and $200 per year. ? Don’t borrow too much against the equity in your home. Home ownership does come with its benefits. Generally you can borrow up to $100,000 against the equity in your home. Interest rates are typically lower than other loans, and the interest may be deductible. Despite these advantages, don’t borrow too much against your home. Since your house serves as collateral for the loan, your lender can foreclose if you don’t keep up with the loan payments, even if your mortgage is up to date. You need to be especially careful with interest-only home equity loans in which you pay the interest in installments and then pay off the entire principal at the end of the loan term. This arrangement may make the monthly payments more affordable, but leaves you with a large outstanding payment. The best advice is to use home equity wisely by tapping into it for value-added investments like home improvements or college tuition. ? Be wary of get-rich-quick schemes. From investment schemes to scholarship scams, and from marketing pyramids to credit repair doctors, scam artists are always coming up with new ways to bilk consumers out of their money. Never give your Social Security number, credit card number or bank account information to an unsolicited caller. Other signs that should wave a red flag include companies that pressure you to act quickly or tell you to send or drop off cash. The Federal Trade Commission via the Internet at www.ftc.gov provides important consumer information about scams. Mel Poteshman is a certified public accountant and president of Poteshman Consulting International & Co., a West Los Angeles-based business consulting firm.