It’s that dreaded time of year where the mail brings post holiday bills and tax records. I manage several different businesses, so I already started making my piles of tax files and have even started some of the recaps needed for my tax preparation. This article by Bob Koncerak was recently printed in the Gwinnett Business Journal. He has several tips to help you survive the tax season. My best tip is do a little at a time and don’t procrastinate. Taking small bites is much better than having it hanging over your head for the coming months.
6 Tips to Surviving Tax Season
January 2011 | Bob Koncerak
Happy New Year – your business made it to 2011! Now it’s time to get organized for tax season. While most small businesses hire outside help to get the job done, it’s a good idea to be aware of some key strategies that will help you achieve the best possible outcome on your tax returns. Here are some valuable tips for the small business owner:
1. Expense deduction for equipment purchases IRS section 179 provides for businesses to write off as much as the full cost of purchased equipment. For tax year 2010, the maximum first-year write-off is $250,000. This deduction is often one of the most valuable to a small business owner. Equipment can have been placed in service at any time during the tax year. Even if you purchased an asset on December 31, you can receive the full $250,000 benefit up to the amount of your company’s taxable income.
2. Take advantage of valuable credits. Be sure to prompt your tax accountant to scour the numerous provisions afforded in the 2010 tax code to support small businesses through the recessionary economy. In addition to special 2010 allowances, some lesser-known credits can significantly reduce your tax bill. Employers who provide in-house child care for their employees’ children qualify for an Employer Provided Child Care Credit of as much as $150,000 for the year. The Small Employer Pension Plan Start-Up Cost Credit is a 50-percent offset to the first $1,000 in administrative expenses incurred to set up an employer pension.
3. Beware the limits of S corporation compensation. S corporations need to take care when planning dividend cash distributions; if the payments are perceived by the IRS as an attempt to avoid paying reasonable employment taxes, the distributions risk being reclassified as compensation, resulting in significant penalties for the company. The IRS has not specifically defined “reasonable compensation” for S corp officers and shareholders, but instead relies on various court rulings to determine when to question tax filings. Factors reviewed to determine reasonable compensation include training and experience, duties and responsibilities, time devoted to the business, dividend history, payments to non-shareholder employees and examination of what comparable businesses pay for similar services.
4. Many start-up costs are tax deductible. For 2010, the IRS provides for a write-off of up to $10,000 in start-up costs. Those costs can include market research, advertising, employee training, business travel and professional fees rung up before the business began operations.
5. Keep good records. The biggest tax mistakes and lost opportunities result from the failure to keep good files and records. Good tax planning requires good documentation. Invest in a QuickBooks subscription or something similar if you haven’t already done so.
6. Lease assets to your corporation. Leasing personally owned property, such as a building, vehicle, or equipment to your incorporated business can provide a tax savings. A separate business entity in which you have an ownership interest can also lease assets to your company. Lease payments are deductible expenses to your corporation. While lease income is taxable, you in turn can deduct the costs of ownership, including loan interest, maintenance, taxes, repairs and depreciation. If lawsuits are common in your industry or environment, it may not be a good idea for your corporation to own a lot of assets. Leasing instead of owning is one way to insulate assets from potential creditors.
Planning and forethought go a long way to avoiding grief with the taxman. So celebrate – you’ve got a business to run in 2011! Get your taxes done right so you can focus on the new year ahead.
Bob Koncerak is principal at BankForward Consulting, LLC.