Just because the tempo of business is beginning to slow with the approaching holidays and end-of-year festivities, your business planning shouldn’t take a holiday. The key to that planning is having a discussion with your accountant to decide what financial decisions you should make before the end of the year and what actions you can afford to defer. Having that conversation takes on a special urgency this year because of pending changes in the tax code that can have a significant impact of your financial well-being.
The cat-and-mouse game that has been roiling Congress recently as the Republicans tussle with Democrats over whether or not to extend the Bush-era tax cuts adds a frisson of uncertainty as the end of the year approaches. It also makes a number of business decisions something of a crapshoot, particularly when it comes to the question of when to report income.
The fate of tax rates
“There’s a lot of uncertainty now because of tax rates,” Kathryn Byrne, partner-in-charge of the Pennsylvania office of WeiserMazars, told BusinessNewsDaily.”You really have to think about your situation. Three things may happen. One, nothing happens, in which case the rates go up. Two, Congress leaves Bush tax cuts in place and it’s the status quo. And three, Congress splits, leaving lower-income cuts in and ending them for high-end earners.”
The conventional wisdom, Byrne said, is to defer income and accelerate deductions. Uncertainty is standing conventional wisdom on its head these days, she said, and a lot of people are now accelerating to get a jump on possible hikes in the tax rate on income next year.
What business purchases should you make?
Now is the time for business owners to discuss with their accountant what business purchases they should make to lower taxable income. They should take a close look at cash flow to make sure that the purchases are not going to kneecap other costs such as marketing, payroll and paying down a line of credit.
Section 179 is a tax code that allows expensing of asset purchases if a business owner spends up to $2 million to buy new assets. If a business purchases $2 million in assets, the owner can deduct $500,000 of those purchases. But the deduction is expiring and the assets must be purchased and placed in service by Dec. 31, 2010.
“Fixed asset purchases for business can range from equipment, computers, chairs and vehicles,” said Audrey Godwin, founder of The Godwin Group, an accounting and consulting firm. “I usually advise clients to purchase those assets that they will actually use that will have a return on the investment for the purchase. Otherwise, just buying assets for the tax deduction can start a vicious cycle of using current cash flow to fund tax deductions instead of business growth activities like marketing.”
Set up your retirement plan
Retirement plans , including some 401(k) profit-sharing plans and defined benefit plans must be set up and adopted prior to end of the year for calendar year taxpayers. These plans can serve as a means for deferring income tax on business profits and need not be funded until 2011, said Brian Hoffman, a partner at Citrin Cooperman & Company. The paperwork for many of these plans, however, needs to be adopted prior to the year-end.
“Key questions include ‘how much do I want to contribute to the plan?’ and “who is or might become eligible for employer contributions?” Hoffman said. “You will be a census of your employees, indicating age, years of service and compensation in order to facilitate the discussion with your CPA. Missing the Dec. 31 deadline can mean that a significant deduction for a 2010 plan contribution is irrevocably lost.”
Renew your business insurance
Another task that should be on your year-end checklist to discuss with your accountant is the renewal of business insurance . Having the right insurance coverage may spell the difference between surviving a calamity and losing your business. Lawsuits, thefts or accidents can wreak havoc on the company — or even shut it down for good. In the past 20 years, employee lawsuits have risen 400 percent, with the most common lawsuits being filed against businesses with 15 to 100 employees, said Brian Smith, an InsuranceEdge advisor with American Express OPEN.
“In the course of a year, a lot can change in a business and in the marketplace, which can significantly impact the type and amount of insurance needed,” Smith said. “Taking the time each year to assess insurance, rather than simply renewing it, helps to keep coverage aligned with business needs. An added incentive for business owners this year is free-falling premiums. According to the Council of Insurance Agents and Brokers, insurance rates on average declined by 5.3 percent for the first quarter of 2010 and 6.4 percent in the second quarter — and the trend doesn’t seem to be letting down.”
You can bank on it
Your year-end conversation with your accountant shouldn’t end when you leave his office, said Bruce Gold, a principal at Abrams Little-Gill Loberfeld, a CPA and business advising firm. While that information is still fresh in your mind, you should share it and your plans for next year with your banker.
“Something people overlook all the time is their relationship with their banker,” Gold told BusinessNewsDaily. “Keeping a good relationship with your banker is the most important thing you can do. They’re worried too about what is happening. Too many clients only think about accountants for tax matters. I think it’s important that we think about ourselves as business advisors first. You have to have a holistic approach.”
- Keeping Count: An Accounting Primer for Small Businesses
- Choosing an Accountant: Advice from Small Business Owners
- Accountant vs. Bookkeeper: Small Business Financial Differences