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Tax season is over and for (some) entrepreneurs, August is vacation time. But for Scott Berger, a CPA with accounting firm Kaufman, Rossin & Co. in Boca Raton, Fla., this month is the ideal time for small companies to do a midyear tax checkup. With half a year of receipts, entrepreneurs can evaluate where business stands in 2012 and do accurate projections for the rest of the year, Berger says. With potential tax hikes on the horizon for 2013, he notes, it’s important to identify money-saving deductions in the coming months. I spoke with Berger recently about the steps small businesses should take. Edited excerpts of our conversation follow.
How tough is it to get your clients focused on a tax conversation at midyear?
Oh, most of them are thinking about summer, they feel like they’ve just finished last year’s taxes, so it’s a challenge. But there’s so much uncertainty about what’s going to happen this year with taxes, and in the economy and the world in general, there’s no time like the present.
What are you telling your small business clients to do now?
Be organized. Look at business income and organize deductions. Typically, they wait until the end of the year to clean up their books and records, but it’s much better to see what the numbers look like periodically. This is a great time for a business to think about whether it can expand, whether it should be accelerating income, if it’s interested in selling companies, or it plans on making major purchases. All these things have tax implications, and right now we have time to plan and implement that we don’t have in December.
What does a midyear tax checkup accomplish?
First, it establishes whether you are running a profit or a loss, and that helps you manage cash flow much better. If you’ve got a partnership or an S-Corp, we have to make sure you have basis to take a loss. Basis is your economic investment into the business. If you don’t have basis as an S-Corp shareholder, you cannot personally take a business loss on your tax return. It’s a worst-case scenario to get caught after year’s end unable to take a loss, especially if your spouse works or you have other business income that could be offset.
If you are profitable for the first six months, you want to make projections for the rest of the year and look for ways to reduce your tax liability. You might accelerate expenses or make revenue deferrals into next year. You might invest in growth and expansion and look for business credits you can take advantage of. We might find that there are losses inside of investment portfolios that can offset profits on a flow-through tax return. If you’re inclined, you might give more property and goods or cash contributions to charity.
What advice are you giving about the scheduled expiration of George W. Bush-era tax cuts and other tax breaks at the end of this year?
Small businesses are not terribly concerned about that at this point; they’re more worried about economic uncertainty in general. But professionals are looking to see if there are opportunities for certain clients to accelerate income and collections. We’re even talking about postponing deductions: They may be worth only 15 percent or 20 percent today, but if tax rates go up as expected, those deductions could be worth 30 percent or more next year, depending on an individual’s tax bracket.
Another thing that can be affected is an installment sale. If a company is going up for sale or in the midst of a sale, it might want to close the sale this year. If it’s had an installment sale, it might elect out of that for tax purposes and recognize all the income from the sale this year even though it doesn’t get all the cash this year.
What about taking deductions for capital items under Section 179?
The current limit for purchases of tangible personal property, like equipment, furniture, and fixtures, is at $139,000 for 2012. It’s scheduled to go back down to $25,000 next year, but it’s always up for grabs whether Congress will let that happen. Many legislators feel it’s a way to stimulate the economy. But companies should determine if they qualify for a Section 179 deduction that allows them to deduct the full expense in the current year rather than depreciate it over time. It’s important to figure that into your decisions about whether to make significant capital outlays this year.