To save on taxes in 2009, small business owners should begin tax planning in Q4.

Tax planning is a process of looking at various tax strategies in order to determine when, whether, and how to conduct business so that taxes are reduced or eliminated.  Keys to tax planning often include reducing your taxable income and tax rate, posponing income and accelerating deductions. It’s also important to consider the implications of potential tax credits and the affect of  Alternative Minimum Tax (AMT) rates.

Reduce Taxable Income
Make sure you take full advantage of all available tax deductions, both business and personal.  Don’t overlook the possibility of purchasing health insurance, investing for your retirement, or providing perks like a company car through your business.

Reduce The Tax Rate
Target a lower tax bracket by reducing income reported in the current tax year. If you’re operating you business as a sole proprietorship, you can incorporate your business and deploy tax strategies that reduce your personal tax liability. One reason many sole proprietors and partners incorporate their businesses is because of the tax advantages related to operating as a corporation.  Structure transactions so that payments you receive can be classified as capital gains. Long-term capital gains earned by noncorporate taxpayers are subject to lower tax rates than other income.

Postpone Income
To reduce your 2008 income, delay year-end billings until late enough in the year that payments won’t come in until 2009.  If you operate your business as a C corporation, arrange for any dividends to be paid after the end of the year.  If you are planning to sell assets that have appreciated in value, delay the sale until next year.

Accelerate Deductions
Purchase equipment and other large ticket items in 2008.  Consider expensing the cost of new equipment, rather than depreciating it. Prepay deductible business expenses, including rent, interest, taxes, and insurance.

Be Prepared to Claim Tax Credits
Be aware of tax credits you may be eligible for and ensure meet deduction requirements in 2008. When they’re available, tax credits are generally better for you than deductions would be, because credits are subtracted directly from your tax bill. And, its typically a good idea to take the credits when you can get them — don’t depend on them being available in the future. Tax laws change!

Consider Alternative Minimum Tax
If applicable, AMT can play havoc with tax planning. If your AMT liability and your regular tax liability tend to be approximately equal from year to year, your best bet is to maintain this stability. If your deductions are not so evenly spaced and you tend to have great fluctuations in income from year to year, you may be able to shift some AMT-triggering items from an AMT year to a non-AMT year.

It’s a good idea for small business owners to discuss these strategies with their accountant.  It’s a good idea to have a tax professional help predict your taxable income and determine strategies that will work best for their business. In particular, it is important to identify and apply strategies that need to be implemented by December 31.

Small business owners who invest a small amount of time in tax planning now may reap huge benefits in April.