You are smart and ambitious. You work hard, and are constantly developing and planning to create an edge on the competition. Are you as smart and ambitious regarding income tax planning?
Here are some of the facts:
The IRS tax code is complicated, ambiguous and ever-changing.
Income taxes are a significant expense item for most small businesses.
Many businesses do not take advantage of legal tax strategies.
Many businesses pay too much in income taxes.
Don't be intimidated. Find someone to explain the income tax system and how it applies to your business.
Here are some ares to think about in order to minimize your tax bill:
Tax vs. book methods of accounting - You need to understand the difference between your book method of accounting (typically, the accrual method) and the tax method (the method that your taxable income is derived - it could be accrual, cash or one of several other methods). Given your current and projected future company financial profile, there may be methods available to you that offer more flexibility and tax deferral options.
On a recent business analysis for a client, we determined that changing the tax accounting method to another industry-accepted method would save a present value of $100,000 in taxes over the next five years. This change did not eliminate the taxes the business would owe. It just pushed the taxes further into the future, representing real money for the business, now. Management decided that in the near term, the money could be better utilized in the business than giving it to the government. Certain industries offer more flexible tax accounting methods than others, and some method changes require IRS approval, while others do not. Ask Questions. A method change may be worth it for your business.
Estimated tax Payments - Generally, two points on estimated payments apply: 1) estimated income taxes are due uniformly throughout the year; and 2) current year estimated tax payments are based on last year's tax. If you don't follow the rules and underpay the IRS, you will be penalized. On the other hand, if you overpay them, you get the satisfaction of granting them an interest-free loan. The idea is to remit just enough tax to avoid penalty.
The tax law allows businesses to satisfy the estimated tax prepayment requirements in a variety of ways - many times it is not as simple as last year's tax divided by four equals your current year quarterly estimated tax payment amount. Get help to make sure you are making the best choice as to when taxes are really due.
Depreciation - The Section 179 deduction allows many businesses to expense some depreciable assets in the year they're placed in service. The increase in the limit for initial year expensing to $250,000 has been extended through 2010. This higher limit is the same as the 2009 limit and is applicable to either the 2010 calendar year or your construction company's fiscal year beginning in 2010. The expensing election begins to phase out dollar for dollar when total asset acquisitions for the tax year exceed $800,000. If you qualify for the full election and are in the 35% tax bracket, this increase could mean more than $40,000 in additional 2010 tax savings. The special "bonus" allowance that was available in 2009 is in the process of being extended through 2010.
Have a taxable loss? - Another tax savings strategy is taking advantage of tax law that allows businesses and individuals to carry back losses. The carry back period was expanded to up to five years for 2009. Previously you could carry back a loss only two years in most cases. This increases your ability to successfully carry back taxable losses to offset previous tax-paying years, thus obtaining cash refunds now, when you need it. An extension to 2010 of the five-year carryback provision is being considered by Congress and is likely to be extended.
Happy planning - Income tax planning is a part of sound comprehensive business planning, an important component that assures your business has the needed capital and cash to sustain business operations. Be smart - give it the strategic attention that it deserves.
