SMALL BUSINESS 2005: TAX DEDUCTIONS FLOURISH IN NEW YEAR
There is one deduction, according to Rick Thompson, a tax partner at Sikich Gardner & Co. in Aurora, Ill., that can make a world of difference for many companies with sales under $10 million, and it generally comes into view after the tax year ends.
Companies using the accrual basis for accounting can lower their tax burden with a switch to the cash method, so that sales that were recorded by Dec 31. but were paid in January or later become part of 2006 revenues.
A second winner works best for small companies that had a great year. They can take an immediate deduction of up $105,000 on expenses, like the purchase of a truck, instead of spreading it out over five years.
New this year is a 3 percent deduction — rising to 9 percent after 2009 — from income. Known as the domestic production deduction, it's geared to small businesses because of its local (and not global) slant.
Having a clearer picture of last year's cash flow, says Karen Sanchez, another Sikich Gardner tax partner, is what makes starting tax-deductible small business retirement plans — Simplified Employee Pension Plan (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) — in the new year attractive. So too, is having tax benefits to fund them.
Small Biz Gives: Charity is a big deal for small businesses. Almost nine of every 10 small business owners, according to the latest Wells Fargo/Gallup Small Business Index, say they give money to nonprofit organizations in their communities, and almost six of every 10 say they spent time working at them, too. Eight out of 10 of those surveyed believe their efforts benefited the community more than their businesses. Only 6 percent said they were involved in charity because of the potential business it might bring.
THE NEW MAX
The Small Business Administration's size standards — the highest three-year average a company can have and still qualify as a small business — has changed for the first time in three years to reflect inflation.
WHAT WORRIES SMALL AND MID-SIZED BUSINESSES MOST?
Interest rates
27%
Higher fuel costs
21%
The increasing deficit
18%
Poll of 1,600 small and midsize business CEOs
Source: TEC International
ROTH 401(K)S: GET ‘EM WHILE THEY’RE HOT
Some retirement-planning professionals think that the new Roth 401(k) is too good to be true. It is, after all, the only retirement vehicle created by Congress that not only allows an investor to accumulate tax-free returns, but also permits tax-free withdrawal, observes Barry Milberg, president of ERISA Expertise, a pension advisor and third-party administrator in Blue Bell, Pa., which recently launched a new business, Roth401kinfo.com. Milberg figures that the new plans, which can be marketed for the first time this month, are such a good deal that they will not be renewed after their scheduled “sunset” in 2010.
In the meantime, he says, advisors can make hay selling Roths to small business owners. The plans can be particularly attractive for owners and their highly compensated employees because they can be used to sock away more money than can be done in other retirement plans, which cap contributions by executives based on the participation of lower-paid workers. Even using after-tax dollars (the downside of the Roth plans), owners can come out ahead, according to Milberg's calculator (available at roth401kinfo.com/Analyzer/Roth_analyzer.asp).
The Roth 401(k) can be used as an estate-planning tool, too. Because these accounts do not mandate minimum distributions starting at age 70, as other tax-deferred plans do, well-heeled business owners can use a Roth to convey money tax-free to beneficiaries.