Taxes are a necessary evil for business
owners. One problem with business
taxes, though, is that tax laws keep changing at the federal, state and local levels.
Worse, there are constantly new tax proposals that legislative bodies debate, but that
won’t ever become law or are enacted with
significant modifications. With tax laws in a
state of flux, it makes doing business more
difficult.
Often, business owners do not have the
time or the resources to keep track of tax
law changes, real or rumored, and they do
not implement tax-planning strategies on an
ongoing basis. These oversights can hurt
business owners financially and legally in
the long run.
Smart Business spoke with Terry Silver, a
partner in Skoda Minotti’s Tax Planning and
Preparation Department, to learn about tax
changes that might affect business owners
during the 2008 tax-planning period, to gain
some insights into how they can avoid
potentially detrimental surprises and to reinforce the idea that there is no time like the
present to start planning their 2007 tax
strategies.
Are there any federal tax changes of which
business owners should be aware that might
affect their 2007 revenue?
So far in 2007, there have not been a lot of
changes at the federal level. One tax act earlier in 2007 addressed a provision in the law
that affects the purchase of equipment.
Business owners can elect to expense equipment they purchase, rather than capitalize
and depreciate it over a period of time. That
gives business owners an immediate deduction. The rule has been around for a long
time, but the dollar amounts have changed.
Prior to the change, the maximum that owners could deduct for tax years beginning in
2007 was $112,000. For owners who had
spent more than $450,000 for qualified purchases during the year, that amount phased
out dollar for dollar starting at that $450,000
level of purchase. Now, for 2007 tax reporting, the $112,000 figure increases to
$125,000, and the phase-out begins at
$500,000 of purchases. Another thing that
will help business owners is that the $125,000 and the $500,000 thresholds will
both be indexed for inflation for 2008, 2009
and 2010. These items are probably the most
broad-based changes in that piece of legislation.
Another change is the increased deduction
for businesses that engage in domestic production activities. The old deduction was
equal to 3 percent of the lesser of taxable
income or qualified production activities
income. That 3 percent deduction has been
doubled to 6 percent for tax years beginning
in 2007
Taxpayers engaged in research and development should also be aware of the change
that could affect whether such expenses
should be incurred in 2007 or 2008. The
research and development credit was scheduled to expire at the end of 2005, but, late in
2006, Congress extended the credit for 2006
and 2007. As it stands right now, that credit
will go away in 2008, but there is always the
possibility it might be extended again.
Are there any changes at the state level?
There are a minimal number, which relate
mostly to previous legislation. Back in July,
2005, the legislature totally revamped the
state’s tax laws to make Ohio more attractive
to businesses. They decided to phase out the personal property tax and the corporate
franchise tax, respectively, over four to five
years and replace them with a commercial
activity tax. Accordingly, for the 2008 tax
season, business owners will see lower franchise tax rates and a smaller percentage of
personal property will be taxable in the current year. At the same time, the commercial
activity tax rates will continue to be phased
in, so owners will be assessed at a higher
rate during the coming year.
Does it matter what type of entity a business
is when business owners start tax planning?
Yes. For example, if the business is a regular corporation, or C-Corporation, versus a
flow-through entity like a partnership, an S-Corporation or a Limited Liability Company,
the focus is a little different. If the business is
a flow-through entity, there is no tax at the
business level, but the income or loss flows
through to the owner. In those cases, the
owners’ individual circumstances have to be
taken into account. Conversely, with a regular corporation, that is the tax-paying entity,
and the owners have to focus on the circumstances at the business level. Those differences are an important consideration for
business owners when they are doing their
tax planning.
How can business owners stay current on tax
changes and how they might affect different
types of entities?
One of the best ways is to work with professional advisers. They can provide several
beneficial services to business owners. For
example, advisers can monitor new or proposed legislation that can affect business
owners’ tax positions, run numbers on new
changes for them, explain how changes can
affect their companies going forward and
make sure they are in compliance with tax
laws. In short, advisers will help the business
owners avoid surprises that could have a significant adverse impact on their revenues
and taxes.
TERRY SILVER is a partner in Skoda Minotti’s Tax Planning and
Preparation Department, based in Mayfield Village. Reach him at
(440) 449-6800 or [email protected].