As the year starts winding down, accountants encourage their small business clients to make an appointment to discuss tax planning for the old year, and for the new one. The uncertainty of the economy, and whether Congress will extend tax breaks that affect business owners, is making that planning harder than usual.
Accountants say it's a good idea to hold those planning meetings as soon as possible. But Jeffrey Berdahl, a certified public accountant with RLB Accountants in Allentown, Pa., said owners should keep in mind that any decisions made now might need to be rethought depending on what happens in Washington with the economy during the next two months.
"You might have to do it all over in December," he said.
Still, owners should meet with their accountants to discuss how the business is doing, and to make at least tentative decisions based on where the company needs to go over the next year.
"You can strategize what your options are," Berdahl said.
Accountants advise that owners don't make decisions solely for tax reasons. If you want to buy equipment or start a retirement plan, those actions should be taken because they're good for your business in general.
THE TAX QUESTION
Accountants are betting that taxes will go up next year. Even if federal taxes don't rise, some states that are hurting financially are likely to raise their taxes.
A big unknown is whether Congress will extend the tax breaks on capital gains and dividends that were passed during the Bush administration and expire at the end of this year. The capital gains tax is currently at 15 percent. Without an extension, it will become 20 percent on Jan. 1. That will affect businesses that sell assets.
Dividends are also currently taxed at 15 percent. Unless Congress acts, they'll be treated as regular income and taxed according to an owner's tax bracket. That affects the owners of what are called C corporations, since they receive dividends from the companies.
In more predictable times, CPAs recommend that businesses try to lower the current year's taxes by taking more deductions now and putting off income until January or later. "It's almost the opposite now," Berdahl said, suggesting that owners consider collecting receivables before Dec. 31 and delaying purchases until 2011, when they may need more deductions.
Edward Smith, a tax partner with the accounting firm BDO Seidman in Boston, noted that some states are changing their tax laws so they are less in conformity with the federal tax code. That can help them raise revenue, but "it's very hard on businesses when you have different rules for federal and state." he said.
That's another reason to be meeting with your accountant now.
NEED NEW EQUIPMENT NOW?
If you do need new equipment now, be aware of the rules regarding deductions and depreciation.
What's known as the Section 179 deduction, which is named for part of the Internal Revenue Code, allows small businesses to deduct up-front the cost of certain kinds of equipment. Without the deduction, companies would have to depreciate the equipment over a period of years.
Small businesses usually take the Section 179 deduction for computers, vehicles, manufacturing equipment and furniture. In the past, real estate and improvements to buildings were not covered by the deduction, but new legislation this year, which raised the amount of the deduction to $500,000 for 2010 and 2011, now allows it to be taken for some real property expenses.
Another requirement: The equipment must be bought and placed into service by Dec. 31. Smith noted that it can take time to order equipment and get it up and running. So he suggests not waiting until the last minute.
"It's very hard to get things done after Dec. 15," he said.
For more information about the deduction, look at the IRS website, http://www.irs.gov.
Owners can also take advantage of a bonus depreciation provision that increases the portion of a purchase price that can be deducted for the first year.
The tax code is very lenient about funding retirement plans. The 2010 contributions for many plans don't have to be made until the due date of an owner's return. That could be as late as Oct. 17, 2011, for owners who get an extension of the April filing deadline.
But, Smith notes, if you're setting up a new plan, you must have the paperwork done on most types of plans by Dec. 31. And, depending on how complex the plan is, that could be time-consuming. Meet with your accountant and/or a benefits consultant as soon as possible.