It’s that time of year again when the
dreaded “T word” can’t be avoided.
Businesses across the country need to reconcile their books and pay up. Tax season can’t be bypassed, but preparation
can make the situation as painless (to
your stress level and your bottom line) as
possible.
“Business owners should make sure to
meet with their tax adviser and review
their tax situation for 2006 and 2007,” says
Christopher G. Sivak, CPA, a partner with
Skoda, Minotti & Co., Cleveland-based
CPAs, business and financial advisers. “In
addition to long-standing tax issues, there
are a number of new legislative provisions
that could affect their tax and accounting
procedures.”
Smart Business spoke with Sivak about
points to keep in mind this tax season.
What are some tax traps that businesses
should avoid?
Small business owners of pass-through
entities, where the company’s profit flows
into the owner’s individual tax returns,
need to carefully evaluate their tax situation. As they look at income and expenses,
they need to consider the tax consequences to their business and their individual returns.
For example, a person who owns multiple businesses needs to make sure he or
she doesn’t go over the individual limit for
expensing capital improvements ($108,000
in 2006). If using the maximum capital
improvement amount for one or more
business entities, the owner may be limited
in how much he or she can deduct on an
individual return in a given year. Therefore,
the person may be better served by not
using the maximum amount in one of his
or her businesses.
Investors in small businesses should also
be sure to consider the possible limitations
on the deduction for losses such as basis,
at-risk and passive loss limitations.
What are some of the new tax laws that affect
businesses?
Businesses benefit from many of the provisions Congress passed in the Tax Relief
and Health Care Act of 2006 (TRHCA).
Research and Development (R&D)
Tax Credit: The extension of this credit
covers R&D expense for 2006 and 2007.
For tax years ending after 2006, it increases the value of the alternative incremental
credit and adds a new alternative simplified credit.
Work Opportunity Tax (WOT) and
Welfare-to-Work (WTW) Credits:
Employers receive WOT credit when they
hire individuals classified as facing barriers
to employment. Companies get WTW credit when they employ people who have been
on public assistance for an extended period. These credits remain unchanged for
2006, and then in 2007, they are combined
and qualification rules are relaxed.
15-Year Depreciation for Qualified
Leasehold and Restaurant Improvements: For 2006 and 2007, businesses
can continue to depreciate qualified
leasehold and restaurant improvements
over 15 years using the straight-line
method. The typical depreciation time
span for leasehold and restaurant
improvements is 39 years. The extension
of this provision may provide added benefits for those taxpayers conducting cost
segregation studies.
Deduction for Energy-Efficient Commercial Buildings: For 2006 and 2007, as
much as $1.80 per square foot could be
deducted for the cost of energy-efficient
property. TRHCA extends this credit for
property placed in service during 2008.
How can a company’s business structure
affect its taxes?
There are a number of ways that a business’s structure plays a role in its taxes. For
instance, many owners of smaller businesses choose to form S Corporations,
which are corporations that elect not to be
taxed as corporations. This allows them to
manage their self-employment tax liability.
With this format, business income that
flows through to the owners’ tax return is
not subject to self-employment tax.
However, owners also need to make sure
they draw a reasonable amount of salary
from the corporation. The IRS has been
pretty aggressive in pursuing taxpayers
that set their salary artificially low.
Another type of business structure is a
limited liability company (LLC). Like a corporation, an LLC provides limited liability
to owners. All active income from these
companies is subject to self-employment
tax, but LLCs have much greater flexibility
in how they allocate income and loss to
owners. In S Corps, income and loss have
to be allocated on a pro-rata basis. This
means that income and loss distributions
must match the percentage of shares an
owner holds. An LLC can use different tiers
of allocation.
If a business wants to change its legal
structure from an LLC to an S Corp, it can
‘check the box’ to modify its election at any
time. Typically, owners need to make the
election within the first 75 days of the year.
There is also a late election procedure if a
company intended to operate under a different structure but missed the deadline.
CHRISTOPHER G. SIVAK, CPA, is a partner with Skoda,
Minotti & Co. Reach him at [email protected] or (440)
449-6800.