Planning reduces tax liability for businesses

by Vera-Jane Goodin

SBJ Contributing Writer

sbj@sbj.net

Business owners tend to hide from tax reality until the dreaded April 15 tax deadline approaches. By planning now, companies can shave money off their tax bill.

The first step for a business is to check with its account or tax advisor to determine its current tax situation, according to local accountants.

"The last quarter of the year is a good time to plan because businesses have a good feel about what their profit levels are going to be by the end of the year," said Lindy H. Maus, CPA.

After determining where the business stands, one option is the newly increased Section 179 deduction, which increased from $25,000 to $100,000.

This increase is part of the Jobs and Growth Tax Relief Reconciliation Act of 2003.

"Businesses can make an election to expend what's normally depreciable assets under Section 179. The president's tax plan, which passed in May, raised that amount up to $100,000. This is on personal property; it doesn't include real estate. It does include business-use vehicles that have a gross vehicle weight of more than 6,000 pounds," Maus said.

Said Jenise Jackson of Jackson & Jackson CPAs: "Current tax law allows you to write off up to $100,000 on new equipment or 50 percent of the purchase price and then depreciate the balance."

The 50 percent write is an increase from the pervious bonus depreciation allowance of 30 percent. The equipment needs to be purchased, in place and in service by Dec. 31.

"If you are looking at and are going to buy equipment in the first six months of next year, go ahead and buy it this year to take advantage of that deduction," said David Myers, partner and CPA with Whitlock Selim & Keehn, LLP. "The $100,000 write off can only be as large as your income."

Beyond the Section 179 write-off opportunity, businesses have various other ways to lower tax liabilities.

"The second thing we (at Whitlock Selim & Keehn) talk about that companies can do is set up a retirement plan," Myers said. "Almost any type of business can set up a retirement plan; it gives them a deduction for the amount that they put into the retirement plan. It benefits both the owner and the employees who don't have to pick up the amount as income until they retire."

Another deduction is granted for something a business may need anyway repairs.

"If your company is showing a profit and you know you need to make some repairs, I would get those repairs done and paid for by Dec. 31 so you can take off that expense," Jackson said.

Here are some further tips:

Counting income: If a business is on a cash basis accounting system, Myers points out that only cash coming in is counted as income and cash going out is a deduction.

"If you delay getting income until next year and pay your bills before the year end, you can lessen your tax liability," Myers said. "Most bigger businesses don't fall into that category."

Bad debts: "If the business isn't on a cash basis system, they should be sure to write off bad debts prior to the year end," Myers said.

Timing bonuses: Bonuses can be a bonus to the business giving them. Myers said to consider giving employee bonuses prior to the end of the year.

Count all expenses: Jackson said to make sure employees turn in their expense reports for mileage and other deductions before the end of the year.

Further review: "Periodically, businesses need to revisit what type of company they are C-corporation, S-corporation, limited liability, partnership, sole proprietorship.

For example, if they are a sole proprietorship, it might be smart at some point to incorporate. Choosing the right entity is the buzz word," Myers said.

Whatever a business does to lower taxes to be paid, it will take some amount of time to achieve the plan.

"You would want to plan with some time to affect this. You'd want to do it by Dec. 1 because you may need 30 days to implement something that you want to do," Myers said.