Astrong balance sheet is critical for
maintaining and positioning your company. But, don’t be fooled by impressive profits. Even in a big-money year, your
balance sheet may suffer if you don’t initiate
tax strategies and tax-saving options.
“You need to be aware of how your company and profits will be taxed,” says Jay
Williams, senior vice president of The
Huntington Investment Company. “While
your tax adviser will help you control your
tax bill, there are 12 tips for keeping a healthy
bottom line that will get you started.”
Smart Business spoke with Williams about
the 12 tips and how to act on them.
What do businesses overlook come tax time?
Actually, tax season isn’t the only time
when business owners should be thinking
about ways to minimize taxes. Think of all
that happens in your business during a year.
You purchase more equipment, lease a new
building, add a significant customer, give
salespeople company cars, set up a qualified
deferred compensation plan, etc. Include
your banker/adviser on these discussions
throughout the year so he or she can search
for tax-savings opportunities.
What if your business is operating at a loss?
Generally, a net operating loss can be carried back two years to generate a current tax
refund. Any loss not absorbed in the prior
two-year period is then carried forward for
up to 20 years. If business is going well, you
can waive the ‘carryback’ and carry the loss
forward. This could be beneficial if your marginal tax rate in carryback years is low. Also,
if you confront an alternative minimum tax
(AMT), the carryback could be less beneficial, so you may decide to waive it for another year. A prior year’s loss can work toward
your advantage, if you discuss the options
with your certified public accountant.
What are the top 12 tax-savings strategies?
Here they are, in no particular order:
- Defer income. In high-income years, consider deferring income to later years. For the
cash method of accounting, you can defer
billing for products and services as you approach year-end. For the accrual method,
you can delay shipping products or delivering services until the next year. - Accelerate deductions. In a high-income
year, if you are a cash-basis taxpayer, make
estimated state tax payments before Dec. 31
and deduct them this year rather than next
year. If you don’t have ready cash, consider
charging the expenses on your bank credit
card. The rules are more complicated for
accrual taxpayers, but deduction acceleration and deferral is still possible. - Cash in on the manufacturers’ deduction.
Section 199 presents companies with opportunities to invest in their businesses and get
tax credits. In 2010, when fully phased in, the
deduction will be 9 percent of the lesser of
taxable income or ‘qualified production activities’ income, which goes beyond the traditional definition of manufacturing to include
construction, engineering, agricultural processing and computer software production. - Restructure your business. Are you a sole
proprietor, a C corporation, a LLC or an S corporation? S corporations can reduce the
Medicare tax by keeping low salaries and
increasing distributions of company income. - Get a cost segregation study. Are you
maximizing your depreciation schedules? If
you recently purchased or built a facility or are remodeling an existing space, certain
buildings may qualify for shorter depreciable
lives than the typical 27 or 39 years (using the
straight-line method). Cost segregation studies identify property components and costs
that can be depreciated over five to seven
years. This allows you to increase current
deductions. There are limitations, though,
such as if your business is subject to AMT. - Know the depreciation rules. You’ll generally want to use the Modified Accelerated
Cost Recovery System (MACRS) rather than
the straight-line method of depreciation. This
gives you a larger deduction in the early years
of an asset’s life. As you make capital purchases, consult your adviser to learn how the
asset should be depreciated and what tax
advantages the scenario could present. - Manage inventory. Inventory methods
can affect taxable income. At year-end, you
must calculate the dollar amount of inventory. Your taxable income will be lower if the
cost of merchandise sold is higher than the
value of inventory. Remember, inventory is
taxed, so the less you have the better. - Maximize tax credits. The Work Upportunity and Welfare-to-Work credits were
revived for 2006, combined into a single credit in 2007 and extended through Sept. 30,
2011, and expanded to include additional
qualified groups, such as disabled veterans. - Write off bad debt. Bad debts are treated
as ordinary losses that can be deducted if
they are not business related. Loans made to
closely held corporations may be considered
not business related. When not repaid, they
can be reclassified as nonbusiness bad debt,
which is treated as a short-term capital loss. - Consider qualified deferred compensation plans. Benefits like pension, profit sharing and 401(k) plans attract and retain the
best employees, and you can get tax deductions for your contributions to their accounts. - Offer fringe benefits. Group life insurance (up to $50,000), health insurance, parking and employee discounts are all examples
of fringe benefits. The benefits are tax-free to
the employees, and the business can avoid
payroll taxes on those amounts. - Transfer your business wisely. It goes
without saying that a well-thought-out exit
strategy is a critical part of tax planning.
JAY WILLIAMS is senior vice president of The Huntington Investment Company. Reach him at [email protected] or (330) 498-5006.
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