Horror stories

guest commentary by David Potts

The greatest horror story ever is that hard working small business owners who aspire to better themselves working 50 or 60 hours a week for years, have to contend with their government, which claims to operate with their best interest, seizing a large part of their success (i.e. tax their profits) and transfers it to pay bureaucrats who might work 40 hours a week with better benefits than any small business could afford that then create obstacles for these small businesses to surmount.

Additionally this same government continually pays incentives to some people not to work and puts more people to work in China and Mexico than in the United States under the banner of free trade.

As with modern horror movies, there will continue to be a coming series of horror stories in the near future because of huge budget deficits and lackluster job growth.

But in any horror story, while many of the characters are slaughtered the protagonist survives. In order to be the protagonist and survive and prosper, as a small business owner or professional you need to learn survival skills. Tax planning to reduce and manage your income tax burden is one such skill.

But, tick, tock … 2011 is fast coming to a close and time is running short to arrange your business affairs to minimize your 2011 tax burden.

Previously I’ve discussed 100% Bonus Depreciation and the current liberal limit for the Section 179 Deduction for 2011, but we need to pick up the pace. In brief, here are a couple of more tax strategies for your consideration.

S Corp. “basis”
One terrifying event that occurs to some S corporation stockholders is that the business will lose money and because the stockholder lacks “basis” in their stock on Dec. 31, the loss cannot be deducted in the current year. Basis for S corporation stockholders is a moving target and is created through the stockholder’s investment in the corporation, retained profits, and shareholder loans to the corporation and basis is reduced through events such as operating losses and distributions to shareholders.

If your current year loss exceeds your stock basis, then the loss will be disallowed for the current year and held in suspense until your stock basis increases. If this thought raises the hair on the back of your neck, meet with your CPA in time to calculate and project your stock basis at year end. If your basis is insufficient to cover your losses your CPA can guide you to take corrective action. If that corrective action involves borrowing money from a bank so you can loan it to your corporation, you might want to talk with you CPA and banker now so there is time for you banker to recover from the horror of your company losing money and find a way to approve and process the needed loan.

Tax shelter
A tax shelter that the IRS blesses is a retirement plan. Retirement plans come in various shapes and sizes and certain features and benefits, depending upon the plan, might be favorable to your specific situation.

But most retirement plans will require that you establish the plan before Dec. 31, 2011, even though the contribution to the plan can be deferred until the due date of your income tax return (including extensions). Again it depends on the plan. But if you can afford it you might be able to shelter up to $54,500, if you’re old enough.

Wouldn’t it be horrible to find yourself living as an elderly man or woman dependent on Social Security? But don’t be stupid. Find an expert to help you decide on the right type of retirement plan for you and your business. Two months isn’t much time to research, learn, and decide on what retirement plan fits you. Get started now.

It is horrific that most small business owners work more hours and endure more stress than the average worker and when they reach a certain level of success the federal government hijacks their profit and they get very little benefit from this transfer of wealth.

But life is what it is and fair is only a feeling. Your determination to succeed demonstrated by your hard work will help you survive this horror story. To increase your odds of survival, be proactive. With tax planning you can reduce your income tax burden by significant amounts.

As the year end approaches I will continue to offer ideas to reduce your income taxes. But in the context of a bi-weekly commentary I can barely touch the surface of tax savings ideas. My best advice is to get with a competent CPA and begin your tax planning as soon as possible.

If you don’t want to pay a CPA to help you lower your income tax burden, you can and will pay the government. And you can be sure your government will appreciate the additional revenue. There are still lots of people who depend on the government to keep them out of work.

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

Also, feel free to e-mail topic suggestions or questions to [email protected]