Tax Planning in 2009
Tax planning in 2009 presents some unique challenges for entrepreneurs. It's been a rough year financially for many small businesses, and common tax strategies may not apply this time around. And there's a lot of uncertainty, both about next year's economic outlook and about legislation that may pass late this year. It's always a good idea to meet with your accountant before year's end, says John Evans, a partner at accounting and consulting firm BDO Seidman who specializes in small and midsize businesses. This is a time to go over your firm's performance so far this year, estimate revenues for the rest of the year, and set projections for next year. Make sure that your business is primed to take advantage of the same tax deductions you took last year, if they're still applicable.Explore any regulations that may have changed, and whether you now qualify for new deductions or no longer qualify for a deduction your business took in the past.A life or business change, such as a change in your business structure or in your marital status, can alter what's in your best interest this tax year. It's also a chance to discuss tax strategies and what makes sense for 2009 tax planning. "Take a look at your current 2009 tax status and make some guesses about where you're going to come out," Evans says. "Do tax planning that makes business sense. Don't do something just to get a tax break when it doesn't make sense for your business." For instance, common wisdom holds that companies should defer receivables until after yearend. But this year, some clients who owe you money may not be around in 2010—and collecting all outstanding receivables promptly is probably your best strategy, Evans says. Here are some additional issues you might raise with your CPA: Net operating loss tax provisions. The American Recovery & Reinvestment Act of 2009 enabled small businesses reporting net operating losses for 2008 to offset those losses against income they earned in the five prior years. (Typically, a net operating loss can be carried back for only two years.) It's likely that similar carryback provisions will be extended to tax year 2009, says Dean Zerbe, national managing director of Houston-based specialty tax consultancy alliantgroup and a former senior tax counsel to Senator Charles Grassley (R-Iowa). "That's a real money-in-the-pocket opportunity for small businesses, and they need to take advantage of it right away," Zerbe says. If the tax break is extended as expected, he says, small business owners should "put in refund claims immediately, in tandem with their accountants." Stale inventory and bad debt. If you have inventory in your warehouse that has declined in value this year, you may be able to take a deduction for the loss. You must document that loss before the end of the year. You must also document deductions you take for bad debt that can't be collected. Keep records of your best efforts to collect on old debt, including telephone call logs, copies of letters you sent, and other efforts you made to get the money, including hiring a collection service. Bonus depreciation. The stimulus bill also extended through tax year 2009 the first-year depreciation of 50% of the cost of new equipment purchased and put into service this year. This bonus provision is in addition to normal depreciation and tax deductions available under Section 179 of the tax code. It applies to purchases of tangible personal property such as equipment, computers, telephone systems, and office furniture. "Someone who likes to gamble and who was planning to buy a piece of equipment in 2010 might make that purchase in December," Evans says, to take advantage of the bonus depreciation. "But it's a tough thing to do with the economy still uncertain and the full shape of the recovery still unknown," he acknowledges. For export manufacturing firms. Look into the IC-Disc (Interest Charge-Domestic International Sales Corporation) program. Because it involves setting up a separate domestic entity to act as your firm's commissions agent, it is a fairly complicated and costly strategy. But firms that have at least $300,000 to $400,000 in export sales should consider it, Zerbe says. "If you directly export or if you supply a company that exports product overseas, there's a big tax advantage involving treating earnings like dividends," he explains. "We've had companies take advantage of IC-DISC and double their after-tax profits." R&D tax credits. Large corporations get billions of dollars annually in tax credits for research and development, but few small and midsize firms do the same. "It's not just for huge companies working on government projects. It's also for companies that are making things greener, cleaner, quicker, or cheaper." At least ask your accountant whether your firm might be eligible for this tax break, Zerbe advises. Tax increases. It is expected that the top two individual income tax rates, currently at 33% and 35%, will roll back to their 2000 levels of 36% and 39.6% when the Bush tax cuts expire at the end of 2010. The top capital gains rate will rise to 20% from 15%. But it's also possible that the health-care reform bill currently being debated in Congress could be paid for partially by surcharges on top income earners, Zerbe says. While most small business owners don't fall into the top tax brackets, some entrepreneurs do and might think about accelerating income this year, rather than deferring it into next year, he says. Sales and use taxes. Many small business owners will show a business loss on their 2009 tax returns. But they might have to pay sales, use, and other miscellaneous transactional taxes, says Doug McCubbin, alliantgroup's managing director. "About 51% of state revenue comes through transactional taxes. There's a trend where states are stepping up their audits of transactional taxes and looking at new laws that would expand taxation on service companies, since many companies are adding service models to their product sales," McCubbin says. Small businesses that have expanded their sales into multiple states should review their compliance with state sales tax collection policies, he says.