Companies face year-end tax-planning issues

The first step for all companies, according to Frank Carnahan, attorney with Carnahan, Evans, Cantwell & Brown PC, is to be aware of the enterprise’s financial situation.

“You need to have good books and records and good accounting information,” Carnahan said. “It’s pretty hard to make decisions unless you have a good basis to do that on – unless you know what your situation is.”

Tax liability issues and company profitability can determine when – or if – companies spend money, according to Ed Samek, certified public accountant with Samek Fritz & Co. PC.

“If someone has a very profitable year, and they’d like to reduce that profit for tax purposes, maybe they ought to review what equipment they might need in their business in the near future,” Samek said. “They should see if they can acquire that prior to the end of the year, so they can avail themselves of the pretty generous write-off that’s allowable.”

Larger companies probably won’t have much of an issue with knowing their situation, according to Samek, as they tend to keep their books more up-to-date on a monthly or weekly basis.

“That’s not necessarily true in smaller operations where maybe the owner or the owner’s wife is doing the accounting,” Samek added. “Maybe the books need to be cleared up and reviewed, so they may want to have their accountant look at the books and make sure everything is in order.”

There are other ways companies can reduce their tax bills, depending on their individual circumstances. Tax-cutting measures include increasing retirement plan contributions for owners and employees, employee bonuses or equipment repairs.

“And then, of course, the reverse is true,” Samek added. “If you didn’t have a very good year, you may want to look at deferring all of that expense into a future year.”

Depreciation deductions

One tax law that business owners should be particularly aware of is Section 179 of the federal tax code, which allows companies to take immediate deductions for purchases instead of tracking their depreciation over several years.

The limits on depreciation deductions allowed in Section 179 have been increased; companies can claim up to $108,000 in equipment purchases for 2006. That number will increase to $112,000 in 2007.

Companies that are unsure of when to make a large purchase could use the rule as a factor in their decision. But, Carnahan said, a deduction should be only one of many factors.

“You probably shouldn’t let taxes drive your sound business judgment,” Carnahan said. “Taxes are more of a factor to consider than a decision-maker. Is it an additional benefit? Is the benefit big enough to warrant accelerating that purchase you wouldn’t have made until next year into this year? Doing things solely for tax reasons is generally a bad idea.”

Taxes aren’t the only issue that comes up near the end of the year, but for many issues, if they haven’t been addressed, it may be too late for adequate planning.

“You have strategic planning issues like sales goals, marketing goals and things of that nature, but generally you don’t wait until the end of the year for that,” said Jane Cargill, director of the Small Business Development Center at Missouri State University. “You should really be doing that in September, if your fiscal year ends in December.”

Shifting expenses

There are several ways to shift income or expenses into 2006 or 2007 to save in taxes:

• Accelerate/postpone transactions that produce income or yield deductible expenses;

• Maximize annual contributions to retirement plan accounts, since annual limits cannot be carried forward;

• Bunch deductible expenses into one year or the other;

• Match long- and short-term capital gains with capital losses to decrease capital gains tax; and

• Take full advantage of the expensing deduction: $108,000 for 2006 and $112,000 for 2007.

Source: Carnahan, Evans, Cantwell & Brown PC