What are some recent changes in tax law regarding business credits?
If an eligible small business — corporations that are not publicly traded and partnerships or sole proprietors whose average annual gross receipts for the past three years are $50 million or less — identified a beneficial tax credit but couldn’t use it due to an operating loss for 2010, those credits would have to be carried forward. The new law says you can carry that credit back up to five years.
For example, if you were profitable and had taxable income in any of the previous five years, you can now carryback a 2010 tax credit and get a refund of prior year taxes even if you don’t have any taxes due in 2010 because you operated at a loss.
How can companies reduce 2010 tax liability?
Companies should review their tax accounting methods. If you’re not taking advantage of these, you could be leaving money on the table. Companies should review their prepaid expenses for possible accelerated tax deductions. Assume a calendar year corporation pays its annual insurance premium in Dec. 2010 and it covers them for calendar year 2011. For book purposes, that expense is prepaid and it gets deducted in 2011. For tax purposes, it’s possible to take qualified prepaid expenses and deduct them in 2010. In order to deduct this amount, you may have to file for an accounting method change with the IRS. This is an automatic change that does not require IRS approval and can be done with your timely filed 2010 income tax return.
Will implementing these ideas draw attention from the IRS?
They will look at it, but that does not mean you’re guaranteed an audit. This is not a hot issue with the IRS. If it’s a valid deduction, don’t be afraid of an audit.
What changes are occurring at the state and local level that are impacting businesses?
Many states are struggling to meet their budgets, so they are using Voluntary Disclosure Agreements (VDA) to get companies that may owe taxes to come forward. If you come forward voluntarily, the state can either reduce or eliminate the interest and penalties you would have to pay. For example, if you had a warehouse in California for 10 years and never filed a tax return, if they catch you, they could make you go back and file all those tax returns. The statute of limitation is often three years, but if you never filed, the statute never starts to run. From the state’s standpoint, it’s a win because they don’t have to spend any resources if you voluntarily come clean. It’s done anonymously, and can potentially save you interest and penalties.
Under recently enacted accounting rules, income tax liabilities for unfiled returns have to be disclosed on your financial statements, which can be seen by your bank or investors. Entering a VDA allows business owners to reduce or eliminate penalties and interest and sleep better at night knowing they don’t have to worry about their next phone call being from the California auditor.
Jim A. Forbes, CPA, is a principal with Skoda Minotti. Reach him at (440) 449-6800 or [email protected].
