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 areas 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, but postponed them. This represented real money for the business. 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, it 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. Make sure you are making the best choice as to when taxes are really due.
Depreciation – The popular Section 179 deduction has been extended through 2010, and allows businesses to expense some new or used depreciable assets in the year they are placed in service. This tax election allows an initial year deduction of up to $250,000, and begins to phase out dollar for dollar when total asset acquisitions exceed $800,000. It can only be used if your company has taxable income, however, any unused amounts can carryforward to future years. In addition, 2008 and 2009's "50% bonus depreciation" is in political limbo right now, and has not yet been renewed for 2010. Stay tuned on this one.
Have a taxable loss? - Another tax savings strategy is taking advantage of tax law that allows businesses to carry back losses. The carry back period was expanded to up to five years for 2008. Previously you could carry back a loss only two yeas 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.
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.
