Taxes

What to keep in mind as you work in '09

SBOCTeam — Wed, 04 Mar 2009 01:36:00 GMT

Take advantage of this year's tax changes to help your small business today

By Reed Richardson

This year, the tax code has undergone a number of changes that could offer substantial benefits come filing season next spring. But to take full advantage, savvy small business owners should start incorporating these new rules into their day-to-day business practices right now.

Section 179 Expensing: If you missed out-or couldn't afford-to make large capital investments for your business in 2008, you still have the chance to do so in 2009 while enjoying the more generous Section 179 deduction enacted last year. This deduction, which covers depreciable assets like manufacturing equipment or office computers and furniture, was raised from $122,000 to $250,000 in 2008 and will continue at the same level for 2009. Section 179 deductions are only available in the same tax year that the claimed assets were placed into service. It does not matter, however, whether they were financed in part or in total. Similarly, the Section 179 total annual threshold on all depreciable assets increased to $800,000 annually for the 2008 tax year, will also remain in effect for 2009.

Implications: For small businesses projecting a profit for 2009, Section 179 deductions can be a smart way to re-invest in their business, lessen their potential tax bill come next spring, and prevent greater erosion of asset value to inflation over a long depreciation schedule. Companies that will end up losing money in 2009 would be better off skipping the Section 179 deduction and sticking with the normal depreciation schedule, however. So, a wise strategy might involve waiting until later in the year-when a small business owner has a better sense of whether or not their company will finish 2009 in the red or the black-to purchase new production equipment or finance an expansion. Also note that a small business can wait until filing its tax return in March 2010 before declaring whether or not it will take the deduction.

Bonus First-Year Depreciation: Similar to Section 179, this deduction applies to depreciable assets. The bonus first-year deduction, raised to 50% of an asset's total cost in 2008, was continued for qualified purchases made in 2009. This tax break, much like the more generous Section 179 deduction, is intended to spur business re-investment and expansion.

Implications: When coupled with the Section 179 deduction and regular depreciation allowances, this more robust bonus first-year depreciation deduction means savvy small businesses could make some substantial investments in 2009 and still keep their tax liability relatively low. On qualified purchases of up to $250,000, a small business could choose to deduct the entire amount in 2009. And for more expensive investments, like, say, a new, $750,000 production line, which would ordinarily be depreciated over 15 years, the potential tax writeoff from combining Section 179, bonus first-year, and normal depreciation deductions could equal nearly three quarters of the total-$550,000 ($250,000-Section 179 + $250,000-Bonus 50% first-year depreciation + $50,000-Ordinary 1/15^th^ depreciation).

Estimated Taxes: The recently passed stimulus package also has a new provision that allows small business owners (and employees) to withhold more of their individual estimated taxes this year. According to the new rule, individuals who have an adjusted gross income of under $500,000 and who draw more than half of their income from a business with an average of fewer than 500 employees can enjoy a through-year 10% cut in their estimated tax payments.

Implication: Paying just 90%-rather than the full amount-of estimated taxes during the year frees up more capital for small business owners and employees. Of course, deferring full payment of estimated taxes may mean those individuals will end up with a larger tax liability come spring 2010. But for many entrepreneurs, this change could provide much needed cash flow now, with the hope that by the time they have to file their 2009 taxes, an economic recovery will have finally begun.

Targeted Hiring Benefits: Also included in the president's February recovery package were two new work opportunity tax credits for employers. These credits, which top out at $2,400 per hired worker, are geared toward the hiring of two specific types of job candidates: "disconnected youth" (people ages 16 to 24 who haven't held a job or been attending school in the past six months) and unemployed veterans (Armed Services members, discharged or released within the past five years, who have also collected unemployment for at least one month during the past year).

Implications: For small businesses looking to perhaps add unskilled labor or first-line supervisors, these work opportunity tax credits may be a smart and financially savvy way to up your staff.

Small Business Stock Investment: Geared more toward investors than employers, the stimulus plan also relaxes tax rates on future capital gains of Section 1202 small business stock investments purchased between mid-February 2009 and Jan. 1, 2011. According to the new law, investors that purchase stock in qualified smaller companies (defined as certain C corporations with gross assets less than $50 million), and hold that stock for at least five years, can exclude up to 75% of their eventual gains from taxes. This represents a 25 percentage-point increase over the 2008 capital gains exclusion rate of 50%.

Implication: For small, incorporated businesses, this tax change could provide just enough of an incentive to lure in hesitant investors. Additionally, this new provision should be factored in when considering the best strategy to raise money-stock issue vs. equity stake-for your company in 2009.

S-Corporation Gains Taxes: Staring in 2009 and continuing through 2010, small businesses organized as S corporations will enjoy a shortened recognition period on built-in gains taxes. Normally 10 years, newly elected S corporations now will only be exposed to the top corporate tax rate on realized gains during their first seven years of existence.

Implication: For small companies currently organized as C corporations, IRS Section 1374, which originally closed a big tax loophole, has now been opened back up a bit to make re-forming as an S corporation more enticing. For small business owners looking to shed a more complicated corporate structure and convert to a more straightforward organizational and profit structure, 2009 and 2010 might offer a good opportunity to make the switch without having to pay steep financial penalties later on.

For more on the 2009 individual and business tax changes stemming from the February economic stimulus bill, try these websites: http://finance.senate.gov/press/Bpress/2009press/prb021209.pdf
http://www.journalofaccountancy.com/Web/SmallBusinessTaxBreaksinStimulusBill.htm

Audit Odds: Are you at risk? Can you avoid them?

SBOCTeam — Wed, 04 Mar 2009 01:27:00 GMT

Some valuable advice on how to avoid an audit and what to do if you can't
By Max Berry

Just how much time the IRS will devote to small business audits in the current financial climate remains to be seen, but one thing is for sure: Small business owners have always run a heightened risk of being audited. Some businesses are more vulnerable than others, but knowing how to best avoid an audit-and how to deal with one if one can't be avoided-will only help you come tax season.

Risk Avoidance
"Self-employed people have always been...audit targets simply because a salaried person has very few deductions, or ways to cheat," says Fred Daily, tax attorney and author of Stand Up To The IRS. With the IRS looking for cheaters, the best way to avoid an audit is, quite naturally, to play fair. Make sure you report all your income, particularly if you run a cash-based business. Dubious deductions will arouse suspicions as well: Be strict about which ones you claim.

Also take note that the IRS is often on the lookout for businesses that categorize full-time employees as independent contractors in an effort to avoid payroll taxes. If your business uses freelancers, make sure you draw up individualized contracts for their services and refrain from dictating the terms of where and when they complete their work for you.

Speaking of categorization, unincorporated businesses tend to be at greater risk of audits than those that are incorporated. "It's historically true that if your small business is in entity form, your audit likelihood is lower," says Daily. "Small corporations can incorporate and operate as S corps or limited liability corps to reduce their chances of being audited."

Be Prepared
Even if you've taken all the necessary precautions to avoid an audit, it never hurts to be prepared. The National Federation of Independent Businesses recommends keeping all records and receipts for at least seven years. "Records are the Achilles' heel of the small business person," says Daily. "Very few-if they're successful-have the time or ability to keep records." For help staying organized, Daily recommends using an accounting software program.

No one who aims to save every receipt for seven years will be successful. Thankfully, the IRS allows you to reconstruct missing records when necessary. Notations made in a business diary or a calendar from the period in question are acceptable substitutes for actual records and receipts. Also use pre-numbered invoices so the IRS will be able to tell that all transactions are accounted for. Hang on to voided invoices for the same reason.

Deductions need to be documented just as carefully as revenue. Home office deductions, for example, are not valid if your dining room doubles as your office. Take a photograph of your (separate) home workspace and keep it on hand in case an auditor challenges the validity of the deduction. Personal vehicles may be used for business, but take great care to record where and why you used them and keep track of exact mileage. If family travels with you on business, none of their expenses may be deducted; if you take a client out for a nice dinner, make sure you save the receipt.

Handling an Audit
Should worse come to worst, and you become the subject of an audit, don't panic. The IRS does most of its auditing by mail. Even if you are audited, chances are you won't come face-to-face with an agent. But if you do, the easiest way to handle it may be to employ an accountant or tax attorney. That is, if you think the reward will be worth the investment. "If you're dealing with six or seven figures, you may want to think of hiring a professional," says Daily.

Or, if the money you'd save by winning your audit is more or less equal to what you'd pay a pro, you may want to go it alone. "If you're confident," says Daily, "I don't think there's any reason you can't handle [the audit] yourself." If this is the tack you choose, organize all your records ahead of time. Being forced to sort through a messy stack of documents will only force the agent to take a harder look at each of them. Always be polite and answer the agent truthfully, but know your rights. Reading IRS Publication 1, explaining the Taxpayers' Bill of Rights, will give you a sense of what the agent is allowed to ask for and what you are allowed to withhold. Buying yourself some time never hurts either. Request a postponement if you need more time to get your records in order.

Whenever your audit takes place, it is never a good idea to host. Holding the audit at the tax office or your attorney or accountant's office is the smarter practice. Daily explains: "An IRS agent may see something [in your office] that raises a question in his mind. Secondly, there's nothing to stop an agent from talking to your employees, and you probably don't want your employees to know you're being audited."

Employing a professional may be a good way to spare yourself such a visit. An attorney or accountant will know exactly which documents you are required to provide and, perhaps more importantly, the ones you aren't. Once you have supplied your representative with the appropriate materials, you may not even have to be present at the audit. You do have a business to run after all.

Seven Year-End Tax Tips

SBOCTeam — Tue, 02 Dec 2008 15:24:00 GMT

By Christopher Freeburn

The autumn leaves are falling, a chill is in the air, holidays are looming, and, for small business owners, it's a good time to think about ... taxes. While no one likes to ponder the intricacies and implications of the Internal Revenue Code, taking the time to do so toward the end of the year can save your business a considerable amount of money come tax time.

So what can you do now?

1. Lower Revenue. Since your tax bill will be calculated on the basis of how much income your company has made during the year, a good way of keeping that bill down is to defer the receipt of as many payments from customers as possible into January. If your business operates on the cash basis of accounting, this can be easily done by simply delaying the mailing of bills for end-of-year purchases until very late in December, or permitting other bills that are due to be paid in January. Not only does this allow you to lower the current year tax bill, but you get to keep the tax due on those funds in the bank, accruing interest, for a whole year. Additionally, your customers will appreciate the added time to pay their bills, especially around the holiday season.

Note, however, that this strategy only benefits you if you won't be entering a higher tax bracket in the coming year. If you estimate that your business will be operating in a higher tax bracket next year, deferring payments until next year may cost you more later. Also, if your business shows a loss for this year, it makes less sense to defer the payments, since doing so only increases the size of your loss for this year and will have no tax impact.

Also note that simply not depositing a check received before the end of the year does not mean that you can defer that revenue to next year. The IRS requires you to include any checks received before December 31 as part of this year's revenue. Failing to do so could result in penalties if you are audited.

2. Make that major purchase. If you are considering a major purchase of business equipment, it's a good idea to do it now, so that the cost can be deducted from this year's taxes. As part of the Economic Stimulus Act of 2008, signed into law earlier this year, the limit on Section 179 deductions for business equipment purchases was raised from $125,000 to $250,000, and the total amount of equipment purchases that are deductible was raised from $500,000 to $800,000. Both used and new equipment qualify for the deduction and you are able to finance the purchase. But any new equipment acquired must be put into use by your business by December 31 to qualify for the deduction.

3. Increase Expenses. You can reduce your tax bill by increasing the amount and number of deductions you take for business expenses like office supplies and office furniture. You can increase the benefit by charging such expenses on your business credit card, which means that-if you make the purchase in December-you get to claim the deduction for this year's taxes, but won't have to pay the credit card bill until next year.

4. Pay Recurring Bills Now. The same applies to bills for business services, like rent, phone service, and equipment leases, which should be paid before the end of the year, even if not due until after December 31. Consider pre-paying for bills that you know you will need to pay anyway like rent. Such payments can be deducted against this year's taxes. Make sure that pre-payments made now won't complicate your cash flow in January.

5. Contribute to a Retirement Plan: If you don't have one, you really should, and this is the perfect time to set it up. Payments made to a retirement plan-401(k), IRA, KEOGH, or SEP plan-are deductible against this year's income. Most retirement plans have a contribution limit.

6. Consult a Tax Advisor. Tax law is complicated. Very few small business owners, outside of CPAs themselves, have the time or inclination to acquaint themselves with the IRS code and the yearly changes made by Congress. Instead of trying to work it all out yourself, you are better off consulting someone who has made business taxes his or her profession. A tax advisor can make certain that your business is not only in compliance with all the relevant tax codes, but is taking advantage of every allowable deduction.

7. Consider the home office deduction. Do you conduct business out of any part of your home? Many small business owners have at least one room devoted to some aspect of their business, whether it is keeping shipping materials in the garage, or a bedroom that has been converted into an office or filing storage space. With so many small businesses operating partially or completely out of people's homes, the IRS allows small business owners to deduct a portion of rent, mortgage payments, utilities, and maintenance for qualifying home offices. The IRS has fairly stringent tests for such deductions, however, and it is advisable to consult a CPA about your particular situation to make certain it qualifies.