November 19, 2008
Year end tax planning for your business is kind of like computer maintenance in a couple of ways. The first is that most people fall into one of two groups, those that are religious about it and those that don’t worry about it until something breaks. The second way is that a failure to do it can be very expensive in the long run. Fortunately there are tax saving items that can be of help to anyone, but those that plan ahead are more likely to experience the full benefit of the effort.
Let’s define the term year end tax planning. Year end tax planning is any action taken to reduce the tax impact on a business in the current year. You might guess that there would be a lot of things that could fall inside such a broad definition and you would be correct. However an article that would cover all those possibilities would be immense and provide the perfect cure for insomnia, so I will focus on a few items that should be helpful to the greatest number of people.
I would like to point out the one cardinal rule to remember relating to tax planning “Never spend a dollar to save 35 cents”. In other words it is never a good idea to give up income to avoid the tax on that income.
For the “regularly scheduled maintenance” people the easiest way to reduce tax liability is to accelerate expenses. Prime examples are paying state tax estimates prior to year end or buying a needed piece of equipment this year instead of next year. Now is a good time to consider the fact that this strategy tends to be a “rob Peter to pay Paul” situation; you save taxes this year but next year there are reduced expenses and most likely increased tax liability. The cardinal rule applies here in that you should not purchase something you don’t really need just to get a tax deduction.
Both groups can avail themselves of the section 179 expensing election which allows a write off of the full purchase price of qualifying assets. Furniture, equipment and even most computer software qualify for section 179. Write that down, ask for it by name and impress your accountant. The expensing election is limited to $250,000 for 2008. Obviously this would compound the benefit of buying that equipment mentioned earlier. If filing an election seems like too much work, any new assets you purchase during 2008 also most likely qualify for “bonus” depreciation. This allows a current year deduction of fifty percent of the assets value.
Ok, so now you have dealt with all that taxable income and you are safe from the dreaded tax man, right? Maybe not. What about that check you wrote yourself to pay for that new super gaming rig or the money you took out of the company account to buy that big screen to watch the Cubs/Sox win the World Series? Those are distributions and may or may not be taxable income to you. It all comes down to what kind of company you own and whether or not you have basis in it. This is a tricky area that stumps even some professionals. The short story is that if your losses plus your distribution cumulatively exceed what you put in plus the earnings you have paid tax on the excess may be treated as income to you. If you even think this is an issue for you, consult your tax advisor prior to year end. Now may be a good time to consult a tax professional to try to prevent that tax return balance due that could crash your economic hard drive.
TECH cocktail Community Contributed Knowledge
Jerry Murdick, CPA is a tax manger at Frost, Ruttenberg & Rothblatt, P.C. of Chicago. Jerry specializes in tax consulting with closely held businesses and is the go to person for the tax department’s technology initiatives. Jerry can be reached at email@example.com
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