You know the disclaimer: this information can not replace the advice of a trained professional tax preparer. That said, the more preparation you have before meeting with your tax professional, the better your tax outcome. Take control of your tax planning to enjoy fewer worries and more tax deductions.
Section 179 Is Your Friend
Section 179 should be your primary focus at year end. Profitable companies can expense, rather than depreciate, up to $250,000 worth of equipment. Almost everything IT companies buy, such as computer equipment, software, and other IT equipment, qualifies. All can be written off as an expense in 2009 rather than carried on the books and depreciated over the next three to five years.
This was originally called the “SUV Exemption” when it first appeared several years ago because the feds carved out an expense opportunity for certain classes of SUVs. Section 179 still allows SUV deductions, but only up to $25,000. Long term equipment leases with a buyout that transfers ownership can also be expensed under Section 179.
Profitable companies can realize tax savings on purchases up to $800,000 under Section 179 in a sliding scale your accountant can explain to you. If you need equipment, and the deduction doesn't wipe out your profits, then Section 179 is your friend.
This rule applies to individual businesses, not holding companies linking multiple businesses. Companies that separate operational areas for tax reasons, such as using one company for personnel and another company for hardware purchases, must be careful and monitor the profitability of each subsidiary taking Section 179 deductions.
Section 168 Is Your Other Friend
If your company is not profitable, your other friend is Section 168. Much like Section 179, Section 168 allows new equipment purchased before the end of the year to be 50 percent expensed and 50 percent depreciated over the next few years. There is no dollar cap like there is on Section 179.
The equipment must be new, not refurbished or used in any way (there is no such restriction on Section 179). Some companies are using Section 168 to leverage two tax advantages: expense half the price of items bought this year, and drop down into the red. By losing money in 2009, you can recapture some of the tax you paid when profitable over the past five years.
Stimulus Plan Savings
This tax code change from the stimulus plan may actually stimulate some companies, or at least save them money. Losses this year may be applied to profitable years as far back as five years, rather than the normal two years. Even better, you can choose which years of past profits are being used to offset current losses.
Double up on this stimulus plan benefit by choosing carefully which year of profits to apply current losses. If you recoup enough past taxes, you can even drop a previous year's tax rate when your lowered profits push you down into a lower tax bracket for the year. That's a shovel-ready stimulant.
Gather Uncollectable Invoices for Write Off
Those using accrual accounting (almost every business) must post income when they invoice customers rather than when they're paid, like those using the cash accounting method. When bills become debts become bad debts, gather them in December and write off those debts as uncollectable. You will be able to reclaim any taxes paid on the income before filing in April. Writing off those debts in the same tax year they occur requires less accountant hours, saving you money.
Retirement Plan Contributions
You'll see the ads in January about ways to contribute to various retirement accounts that still affect 2009 taxes, but don't fall for it. Choices after year-end are limited and not necessarily the best deal for individuals or companies. If you have the money in December, make the contributions and control your tax planning, rather than letting tax rules control you in January.
Pay in December to Reduce April's Burden
Every expense in December comes off 2009 taxes. The same items bought the first week of January apply to 2010 taxes. Take your tax breaks earlier to keep money in your pocket longer.
That said, spend your money wisely. Buying unneeded items just for the expense value won't help your business. If you have the cash and know exactly what you need in the way of new equipment for early next year, buy in December. This helps your tax planning and may help your supplier as well.
Pay Last Quarter Taxes Before December 31
Using the same logic as grouping expenses into December, pay your last quarter taxes ahead to reduce the income for this tax year. Again, the difference on the calendar between December 31st and January 15th isn't much, but the tax advantages may make a difference. More expenses paid in December mean less taxes paid in April.
Small Businesses Must Stop Thinking “Long Term” Is Lunch
Big companies have staff for tax planning, budgeting, and to develop a long term strategy. Too often, small businesses think “long term” is planning where to go for lunch. That keeps them behind the tax 8Ball constantly.
Take one minute to recap the past year in your business as a whole. Look at what worked, and what didn't. Replicate what worked, and look for ways to improve what didn't work. File on time or not? Have organized books that helped your tax preparer, or did you hand them a disaster? You don't have a staff to do all the planning for you, but on the other hand, you can make decisions and implement improvements without suffering through committee meetings.
Hire Your Children and Other Special Employee Groups
Family businesses learned this trick years ago, and small, unincorporated businesses have the best chance of leveraging this to their tax advantage. Income paid to children of the owners (under 18 years old) is exempt from the FICA tax. Planned properly, you can exempt up to $5,700 of wages per child from federal and state income taxes. That beats putting after-tax dollars in their college savings fund.
There are specifically targeted groups of individuals, such as veterans and ex-felons that provide tax advantages to companies hiring them. A special tax credit of up to 40 percent of the employee's first $6,000 of wages earned may be taken. If you need seasonal help, hiring workers from one of these special classes will help them and your tax bill.
Clean Your Car Mileage Logs
Are you running an after-hours tech business? If so, or you are deducting car mileage per trip rather than the actual car expenses, clean up your mileage logs. The IRS expects to see some type of calendar with handwritten mileage notes tied to verifiable destinations.
True, you're small potatoes in the world of audits, and the IRS will lose money assigning an auditor for a personal audit to catch you padding mileage. But the IRS no longer needs to open an audit with a physical auditor to demand to see your mileage details. Today they use a form with check boxes for about 30 areas demanding more information, including auto expenses. Sending a letter takes them little time and effort, but recreating trip details from last February will cause you plenty of headaches. Track your mileage as you go, write it down in one place, and have one less thing to worry about when tax time rolls around next spring.
Everyone's tax situation differs from the company next door, but all benefit from more preparation and a long term view toward tax planning and tax reduction. Take advantage of the extra deductions and other programs available to you during this economic stress test. You may not get a bailout, but maybe you can get a tax refund.
Mark Hale, CPA
Trey Bayne, CPA
Tate Holt, CEO