By BECKY GILLETTE
Small businesses went through most of 2015 without knowing whether business tax provisions would be extended – allowing bonus depreciation which lets businesses deduct up to half the cost of eligible equipment placed in service in 2015, and Section 179 expensing that allows the expense of up to $500,000 of eligible equipment placed in service in 2015. Both those and other popular tax relief extensions were passed by Congress shortly before it broke for the holiday recess.
Susan M. Lummus, CPA, partner, Watkins, Ward, and Stafford, PLLC, West Point, said the Section 179 extension was very welcome.
“The higher limits have been in place for several years, but Congress late passing of legislation keeps businesses from being able to plan adequately,” she said. “Some businesses invest in new equipment each year, and for several years have been able to plan to take advantage of the accelerated deductions allowed by Section 179. If the so-called tax extenders had not passed this year, those businesses who traditionally buy a substantial amount of new equipment each year would have had to spread the deduction over several years under the current depreciation rules, and as a result could owe substantially more taxes, even if their overall income and cash flow is very similar to the previous years.”
Since bonus depreciation and Section 179 expensing were extended for two years, in 2016 business owners won’t have that uncertainty hanging over their heads.
With 2016 kicking off, business owners may be thinking of making a New Year’s resolution to do a better job with tax planning. That could start with getting professional advice.
Lummus said one of the most costly mistakes many business owners make is seeking tax advice from neighbors, family member, and co-workers.
“These people mean well, but sometimes they do not have a full understanding of the business or the transaction that the business owner is contemplating,” Lummus said. “Business owners need a CPA to discuss major events such as buying or selling a business, undergoing major improvements, or substantial asset sales or purchases before entering into the transaction so they will understand the tax consequences beforehand.”
She also recommends that business owners seek the advice of their CPA before setting up a new business. The choice of entity type is very important, so consideration needs to be given to the taxability of income from each type of entity so the business owner will not have any surprises at tax time.
Better tax planning starts with maintaining a good set of books during the year. Lummus said that is critical to knowing what the tax situation will look like before filing time.
“It is a good idea to have your CPA review your financial statements at least quarterly and prepare interim tax projections so the business owner will know what to expect,” Lummus said. “Too often we have clients who know they have more income during the year, but they are not prepared for how much the additional taxes will be.
“We often see business owners cash out retirement funds to start a business or add capital to an existing business. Taxpayers often think the mandatory withholding will cover the tax liability associated with the distribution, but this is rarely the case. Many taxpayers are in a higher tax bracket than the withholding percent, (sometimes caused by the distribution itself), and if the distribution is premature, penalties will also apply. As a result, there is often additional tax due that the taxpayer is not prepared for.”
Blair J. Waggoner, a CPA and tax manager in Ridgeland, said many times the biggest mistake taxpayers make is not being up-to-date on tax legislation.
“That is the job of the tax adviser,” Waggoner said. “They may be doing their books themselves and not in the day-to-day of that. What we see when we get returns prepared elsewhere is that sometimes they overlook important things.”
Another common mistake is the lack of adequate bookkeeping, which results in deductions being missed. Waggoner said a lot of deductions can be missed by not providing complete information.
He also suggests paying careful attention to the business structure, which can hurt the owner if not correct. “There are certain small businesses not under a Limited Liability Corporation LLC, so there is no separation of business and individual assets. A lot of times not seeking tax advice on the best structure for your business can be detrimental as far as tax implications.”
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