The clock is running, but have no fear. There is still time to make plans, as the tax filing season nears. How clever, yet another poem from the host of the most complete business program on radio, "Better Business". What can be done to reduce income tax exposure for 2006? Read on if dare, read on if you care.

Outside salesmen should take note. Get reimbursed for your business expenses, please. The life of the salesman is one where meals & entertainment and use of a personal auto create income tax deductions that are not terribly beneficial. They are recorded on form 2106 and lead to miscellaneous itemized deductions that are subject to a 2% adjusted gross income (AGI) floor. Besides this limitation, it is entirely possible that our client, the outside salesman, is subject to the dreaded alternative minimum tax or AMT. Getting into the AMT causes miscellaneous itemized deductions to be lost permanently in the winds leaving taxpayers stunned and bewildered. How can a defense be mounted against such a noble foe as the AMT? Get reimbursed I say. Get reimbursed for whatever your employer will allow. Here's what to do.

In lieu of getting paid a final sales commission, gather all of your expenses for the year, including auto mileage. Multiply your business auto mileage by 44.5 cents, add your supplies and travel costs to your ledger, and present this expense report to your employer. Remember meals & entertainment will be limited to 50% so your employer might not be quick to offer reimbursement for this expenditure. Here's how it can work to the benefit of both employer and employee. If one is due a commission of $10,000, turn the commission into expense reimbursement if you have $10,000 of expenses. By doing so, the salesman will receive income that is not reported for tax purposes and it will not matter that the 2% AGI floor and AMT are present as they will be handily defeated with this strategy. The salesman's expenses will serve to keep the $10,000 commission out of income in the first place rendering the efforts of AMT and AGI thresholds useless. The employer is also happy. No employer paid payroll taxes of any kind will be due on expense reimbursements unlike the payment of commissions. This is truly a situation where everyone can be happy, how rare is that?

Other Things to Consider

If you started a new business during the year, understand this important fact. Income is not a prerequisite to having deductible business expenses. Suppose you started a sideline business or quit your previous job to begin the dream of owning a business. The 2006-year might have generated plenty of expenses without so much as a dollar of revenue. The good news is that current efforts will yield a boon for later years and current efforts will not be left unforgotten in the current year.

Expenses incurred for the current year will serve to offset income from other sources during the year (W-2 income, interest and dividends, etc.). Providing the business is organized as a sole proprietor, partnership, or S corporation (caution: the S corporation requires direct capital contributions from shareholders in order to create basis for taking losses) the taxpayer stands to get a tax benefit. Here's where additional planning can take form. Suppose the new business owner determines that new equipment is needed. Is it better to place it in service during the current year, or wait until next year? To make this assessment, it become necessary to determine what tax rates are currently and what they will be next year. Suppose the taxpayer is in a 35% federal bracket for 2006. The business is projected to generate income in the next year that will put the taxpayer in the 15% bracket. The answer is to put the equipment in service during the current year and taking 179 expense if there is enough W-2 income from jobs of the taxpayer and spouse. W-2 income will give the taxpayer basis for taking the immediate expensing election of up to $108,000 for assets placed in service during 2006. An example of how this works would include a husband and wife with W-2's totaling $80,000 start a business in 2006. They have expenses totaling $10,000 from the business and need to purchase equipment totaling $40,000. It is determined that it is more beneficial to take the 179-expensing limit in the current year as income will be minimal in 2007. The expensing limit of code section 179 limits the amount of deduction to income. Since income from the business is zero, the W-2 income counts as income from a trade or business thus allowing the full deduction of $40,000. This will drive the income from the taxpayers down to $30,000 ($80,000 -$50,000).

Checklist for other items to consider:

-Create a retirement plan and determine the best plan
-Don't forget about auto expenses (mileage rate is 44.5 cents in 2006)
-Don't forget the home office deduction if it applies
-Remember capital gains and losses
-Buying a principal residence