By BECKY GILLETTE
Most people think of the spring as tax season. But when the autumn leaves are falling is a good time for business tax planning.
“Overall, the fall season is a good time to do some tax planning because of the majority of the year has passed,” said Lee V. Martin, CPA, director, BKD, LLP, Jackson. “Most clients have a better understanding of how they are going to do this year unless they are a retailer, whose busiest time of the year is the last quarter.”
Martin advises clients to check with their CPA before making major transaction such as real estate sales and purchases that might have major implications for capital gains taxes. If she only hears about the transactions after the fact, she doesn’t have an opportunity to give advice on how to structure the transaction to save taxes.
“There might not be a better solution, but you don’t know unless you talk to somebody about it,” Martin said. “If it is something you not familiar with, always seek help. It is good to just have a sounding board a lot of time. There might not be an issue, but just being able to talk through it helps.”
Small businesses in particular can find it difficult to carve out time for financial management. But she advises taking time before the end of the year to do some planning. It might only take up an hour or so to go over your yearly operations with a CPA to see if any red flags come up, or there are any opportunities for saving on taxes.
“Go through accounts receivable and see if anything is not going to be collected,” she said. “If you are in an income situation and trying to defer income, defer sending out invoices until the end of the year so that income goes on next year’s taxes. Scrub your depreciation schedules to see if there are assets that you no longer have. There might be some write-offs potential there. If you are going to have capital gains, you may might want to sell some securities that will produce a loss to offset some of that gain. And, depending on your income or loss situation, pay your property tax before the year end so you have a deduction for that year.”
Ted B. Edwards, CPA, a member of Haddox Reid Eubank Betts PLLC, said ideally planning is done throughout the year. However, most people don’t think about it until toward the end of the year.
“So, yes, autumn is a good time for small businesses to place some focus on tax planning, and, yes, there are certainly things that can be done to reduce tax burdens,” Edwards said. “Even if it is too late in the year to implement some tax planning ideas, a benefit is they could be implemented for the next year.”
Edwards said here are some of the areas to be considered:
*Is your business operating under the most tax efficient entity format? Should you consider electing to be taxed as an S Corporation?
*Does the business have a 401(k) plan or other small business retirement plan? If not, would it make tax, and financial, sense to establish a plan?
*Consideration should always be given to accelerating tax deductions and deferring taxable income, with the goal not only being deferral of income tax, but also possibly having the income taxed at a lower rate. In some cases, depending on how your business has done, the opposite could be true – accelerate income and defer expenses.
*If new equipment or business vehicles are needed, does it make tax sense to make the purchase sooner (this year) rather than later? With Section 179, bonus depreciation, and accelerated depreciation, the tax deductions can be nice.
*Consider the effect of the relatively new tangible property repair regulations, especially the favorable election to currently expense items if the cost falls below the applicable threshold amount – the “de minimis rules”.
*Consider whether your business qualifies for any tax credits such as work opportunity credits or the research and development credits, and what needs to be done to insure eligibility.
Always be mindful of the alternative minimum tax, and what might can be done to reduce or eliminate this somewhat hidden tax.
The most common mistake Edwards sees is not even considering what can be done to reduce taxes. Most small business owners are focused on running their businesses, doing what they know how to do, and trying to make money.
“This is understandable,” Edwards said. “Sometimes, though, people try to do ‘too much’ tax planning. I remind clients frequently that for every dollar you spend, it does not reduce your taxes a dollar. It typically reduces your taxes thirty or forty cents. So, economically, you are still out sixty or 70 cents. In other words, don’t unnecessarily spend a dollar just to save taxes.”
Business owners also need to be aware that Congress extended many tax benefits that were scheduled to expire at the end of 2015.
“There are not many changes in 2016 as compared to 2015,” Edwards said.
Mike A. Carraway, Jr., CPA, a partner at Grantham Poole in Ridgeland, said the fall offers unique advantages.
“For taxpayers reporting on a calendar year, prior year tax returns have been filed, providing a good picture of the results of prior planning and reporting,” Carraway said. “Entering the fourth quarter of the year (for calendar year taxpayers), financial performance for the year against expectations/projections is coming into sharper focus, allowing for better analysis of cash flow, borrowing capacity and needs, capital expenditure requirements, and other budget considerations.”
Carraway said areas deserving scrutiny depend on the nature of the business, as well as the unique needs of its owners, but some areas include: planned capital expenditures, current tax structure and its effect on the owners’ access to equity (and the related tax effect of that access, such as regarding compensation), retirement planning and employee benefits, the potential effect of planned or aspirational business combinations, divisions, or restructurings, and many others.
Among the most common mistakes Carraway sees are poor or incomplete bookkeeping/accounting, which creates avoidable challenges in proper reporting and planning. Other mistakes include inefficient or inappropriate business/legal/tax structures, improperly planned and/or executed acquisitive or divisive business transactions, incorrectly handled compensation issues, and missed tax deferral opportunities available for everything from tax deferred savings accounts to proper treatment of capital expenditures.
Carraway said there have been some significant changes over the past few years, from the treatment of expenditures to repair, improve, or acquire depreciable assets, to the reporting and penalty system put in place by the Affordable Care Act with regard to health insurance.
“Recently, a number of preexisting temporary tax provisions were made permanent, including the research and experimentation income tax credit, increased Section 179 expensing limits for depreciable property, and others,” Carraway said. “Taxpayers also need to be aware of recently changed tax reporting deadlines.”
Tax laws and regulations are continually evolving and being affected by legislation, regulation change, and judicial decisions, and the areas in which they change, even in a short period of time, are hard to track for busy business owners.
“That is why it is so important for active business owners and management to work closely with a CPA well versed in relevant tax and accounting issues who can serve as a trusted adviser,” Carraway said.
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