Prep Work Makes Tax Sense

Getting prepared before the end of the year is the best advice local accountants have for small-business owners who want to make sure they get all they’re entitled to get in year-end tax relief.

“Planning, planning, planning. We tell them to get their ducks in a row,” said Wesley D. Murtishaw of Scarbrough & Murtishaw Certified Public Accountants.

Regina Young, a Fayetteville CPA whose firm specializes in small business accounting, likes to sit down with her clients at least once a year to look at financial information and plan ahead. She compares it to an annual physical examination. The meeting can include the company’s lawyer, investment counselor, banker and insurance agent.

“That’s what we like to see in the ideal world,” Young said. “We like to see a team approach to it.”

Small-business owners may not plan such an annual meeting to avoid the hourly charges of the professionals involved, but Young believes the potential savings are worth the costs. The group can address a variety of issues affecting the business that any individual service provider might not think to consider.

“It really helps us to help them, and then nobody is surprised,” Young said, adding that the meeting can happen anytime during the year but should be scheduled annually.

During the fourth quarter, Young advises her clients to be aware of the status of their business and what its numbers might look like by year’s end. For instance, she said, they may want to look at their inventory to see if there’s been shrinkage or if it needs to be reduced before the end of the year.

“If a company takes a $50,000 inventory hit, that can really affect the tax situation,” she said.

Business owners may want to look at selling off equipment or parts of the business that aren’t productive before the end of the year to reduce the company’s tax burden.

On the other hand, they may want to consider buying equipment the business needs before the end of the year, Young said. She cautions that equipment that isn’t useful to the company should never be purchased just for tax purposes.

A business also can look at its cash flow and determine if December billings might need to be delayed some to reduce actual cash at year’s end, Murtishaw said.

Businesses operating on a cash basis rather than an accrual basis for year-end taxes “have an advantage” in being able to manipulate their cash holdings at year-end, Murtishaw said.

Knowing whether the company taxes are filed on an accrual basis or a cash basis is important for business owners at this time of year, Young said. Operating on an accrual basis means that the company’s accounts receivable and payable are calculated along with cash on hand, inventory, etc. to determine the tax liability. Some of the possible tax-savings options for a company that figures year-end financials on a cash basis don’t apply to a company operating on an accrual basis, Young said.

But either way, small-business owners should have a retirement plan set up. It’s important that money is being set aside for the business owner’s retirement, because relying on the value of the business for retirement can be risky, Young said.

“Things can happen,” she said.

An investment adviser can also help determine the best kind of retirement program for the company’s employees. Although she’s a CPA, Young said she gets advice from an investment adviser for her firm’s retirement program.

New in 2002

There are a few tax law changes that affect small businesses because of the Sept. 11, 2001, terrorist attacks. Murtishaw pointed out that a change in the tax code allows businesses to carry any net operating loss back five years to get credit on the tax liability for previous years. The old code allowed that retroactive deduction for only two years.

Murtishaw pointed out that the tax liability is “zeroed out” for the year the loss occurs and the negative amount is credited to positive year-end financials from prior years.

“There’s also some nonconventional energy credits that were about to expire and have been restored,” he said. The credits are linked to alternative fuels and specific energy-saving equipment.

Some tax credits for research and development expenses that were also about to expire have been restored too.

There’s a new deduction for businesses providing daycare services for their employees. Murtishaw said the new addition to the tax code allows a company to deduct 25 percent of its expense for the daycare, up to $150,000.

There are also some changes in the way depreciation is calculated. Young explained that the Internal Revenue Service now allows business owners to deduct up to $24,000 of the cost of a new piece of equipment rather than depreciating the entire costs under Section 179.

The economic stimulus bill signed in March allows 30 percent of a new asset’s cost to be written off in the year the asset is placed in use. The remaining 70 percent is recovered through regular depreciation. New assets eligible are those that are normally depreciated over 20 years or less.

There are also changes in the tax laws on retirement savings that should be reviewed, Young noted.

Some changes in retirement savings limits and restrictions that can affect taxes this year came under the Economic Growth and Tax Relief Reconciliation Act of 2001. Many of them start this year with changes accumulating over the next few years. They include:

n The small business retirement plan credit allows a small business with 100 or fewer employees to take a credit of up to $500 for creating a new retirement plan during 2002. (Existing plans are not eligible for the credit.)

n The maximum amount of contributions to retirement plans has increased. Permissible 401(k), 403(b) and Simplified Employee Pension plan contributions increase by $500 per year now, then by $1,000 each year until reaching a $15,000 per year in 2006. The contribution to a SIMPLE plan increases to $7,000 in 2002, then by $1,000 each year thereafter, reaching a maximum of $10,000 in 2005.

n Small-business owners can borrow from their retirement plans in the same manner as other employees in 2002. The amount that can be borrowed from a plan depends on each plan’s vesting requirements. The practice of owners borrowing against plan funds was prohibited in prior years to prevent an owner’s misappropriation of retirement funds.