Ask a financial expert about the biggest pitfalls that small businesses encounter at tax time, and they'll probably point to a lack of planning. Last ditch efforts, like paying off expenses and putting money into a retirement account, may moderately reduce tax liabilities, but proper and timely planning throughout the year can yield superior returns. You don't need to be a CPA to help clients chart a course.
Window Of Opportunity
The recently signed Economic Stimulus Act of 2008 is a good example of a prime use-it-or-lose-it tax-saving opportunity. Hopefully, the tax rebates written into the stimulus package will encourage consumer spending, some of which will likely flow to smaller companies. However, forward-thinking small business owners can get a real boost if they capitalize on select provisions that have been designed specifically for them.
The legislation doubles the limit on expenses that small businesses can deduct from annual income to $250,000 in 2009 from $128,000 in 2008, with a total cap of $800,000. It also gives companies a 50 percent bonus deduction on new equipment that would normally have depreciated over many years. These incentives to make new capital investments put money back in the hands of small-business owners, and can facilitate plans to expand operations or invest in productivity.
The Work Opportunity and Welfare-to-Work tax credits in the stimulus package are intended to encourage employers to hire economically disadvantaged people from one of nine targeted groups, such as veterans, high-risk youth and recipients of public assistance. If the new hires meet certification rules, an employer can earn a tax credit ranging from around $1,000, to nearly $10,000 per individual.
An employer should also consider hiring his or her own teenage children. The kids get an opportunity to learn meaningful skills that will serve them well in the future and put some cash in their pocket, while the business owner gets a tax deduction. The IRS allows reasonable wages paid to minor children to be deducted the same as any other business expense. An owner can pay kids tax-free up to $5,350 each year. Business owners can increase that payment by another $4,000, and make a deductible IRA contribution. The money stays in the family, and income-tax liability is reduced.
Saving On Your Carbon Footprint
Going green can save more than the environment. Small business owners who take steps to be more eco-friendly can help the environment, decrease energy costs and qualify for substantial tax savings. For example, a business with annual energy costs of $25,000 can save an estimated $7,500 per year based on a 30-percent reduction in energy use, according to the EPA. Building owners and tenants can also receive a deduction of up to $1.80-per-square-foot for reducing the energy used to heat, cool, ventilate and light a workplace by installing more efficient systems. Additional deductions are also available for businesses that increase their use of solar power.
The IRS increase for business mileage deductions to 50.5 cents per mile in 2008 may somewhat offset rising gas prices. However, purchasing or leasing a Honda Civic, Nissan Altima or Ford Escape hybrid can result in substantial savings at the pump, and yield a tax credit of around $2,000 to $3,000.
An individual in a high-income tax bracket who owns a privately held business may be wise to consider taking cash this year in dividends in lieu of a year-end bonus. Currently, dividend payouts are taxed at 15 percent, which is lower than the typical 35 percent income-tax rate for high wage earners.
Fit The Bill
It's a good idea to periodically review a client's business ownership status. There is a big difference in the amount of taxes required of sole proprietors, partnerships, S-corps and C-corps. Changing status from, say, a sole proprietorship to an S-corp, may greatly reduce the business' tax liability.
Advisors can serve their small-business clients well by making sure tax considerations are an integral part of financial planning year-round. In turn, you'll probably earn their gratitude and loyalty.