The scouts have it right: Be prepared!
That is especially true when it comes to paying taxes to Uncle Sam.
“No one wants to think about it this time of year but this is actually the best time to start organizing if you haven’t already,” said Michael Coletti of WeiserMazars LLP. “It’s never too early to start preparing for tax season.”
That said, accounting and tax experts have weighed in on what businesses should know and what steps they can take heading into the end of the year that will benefit them come April crunch time.
The tax laws are constantly changing so businesses should seek advice on how those changes may affect their bottom line.
“We’re in a lame duck session so we’re not expecting any big legislative changes before 2015,” Coletti said. But he added other measures have already been implemented by the Internal Revenue Service.
One such measure, Coletti said, is the reduction to bonus depreciation, or what’s known as Section 179. It allows businesses to take a depreciation deduction on certain assets in one year rather than over a longer period of time. The allowable deduction for 2014 is $25,000, down from $500,000 in 2013.
Another big issue now deals with the tax extenders, which as their name implies, allows extensions for or renewals to certain credits and tax breaks. According to Brian Brager, Senior Consultant, Tax Credit Co., two of the credits most beneficial to companies are WOTC (Work Opportunity Tax Credit) and R&D (Research & Development). They “are currently on hiatus, although they have continued to be retroactively renewed in past years,” Brager said.
Final determinations on these extenders have not yet been made, he said, adding that “folks are upset that we’re getting close to year end and companies/individuals are going to be affected in their tax planning if Congress doesn’t solidify soon.”
About 55 tax provisions affecting both businesses and individuals that expired in 2013 may come up for Congressional review by the time the new session convenes next year. Companies should prepare for the possibility that these extenders won’t be in place for the upcoming tax filing.
Other tax breaks, such as credit for employer-provided child care, are due to expire on December 31 and are not likely to be extended. “Businesses should take full utilization of credits and incentives before that happens,” Coletti said.
Another big change, Brager said, is that the ASC method (Alternative Simplified Credit), which provides incentives for R&D spending, is being allowed on amended returns. “This is very significant for taxpayers who have not previously claimed the R&D credit,” he said.
Get ahead of the game
Because regulations are constantly changing and companies and their tax advisors have other obligations that require their attention, Brager recommended checking with your tax adviser twice a year to discuss tax credits and incentives.
“In thinking ahead about company growth involving a building improvement, relocation or a substantial increase in staff, it is certainly worthwhile to discuss before these activities take place, so that people know how to maximize their tax benefits,” he said.
If you haven’t already done so, Coletti suggested meeting with your company’s tax advisor soon to make sure you’re not missing any deadlines or opportunities.
“It’s my job to put those opportunities on the table for my clients,” said Coletti. “It’s also my job to go to my clients with questions for them especially because they might not be aware of changes in rules and regulations. This enables us to evaluate and properly plan together for the maximum benefit.”
Lots to consider
No matter what your company does or what service is offered, the primary goal is maintaining a successful business and earning a profit. The details of preparing for tax season often hover under the radar until those IRS notices start arriving. Kenneth Hofsommer of Hunter Group CPA LLC provided some examples of what you should consider as a business owner:
Regarding the Affordable Care Act:
- Is your business set up to gather the data required?
- Are you or will you be in compliance since they extended the deadline for businesses until 2015?
- Have you calculated your Full Time Employee Equivalents, and do you know how?
- Are you aware that the individual mandate was not extended?
- Do you realize the individual penalty is the higher of $95 or 1 percent of Adjusted Gross Income?
Regarding IRS issued Repair Regulations:
- Did you adopt the safe harbor de minimis expensing rule (related to the acquisition or production of property) for 2014 by December 31, 2013?
- Have you determined if your business needs to change and/or adopt any new accounting methods for the current year under the regulations?
Regarding foreign assets:
- Do you have any foreign assets, and are you in compliance with the required filings?
- Are you aware of the newest program offered by the IRS to become compliant with the filing requirements?
“Always remember that we don’t know what you know,” said Hofsommer. “Tell your tax preparer anything you think may be valuable or applicable to your tax and financial situation.”
Timing is key
Alyssa Lebovic, of Keller and Lebovic CPAs, said one of the most important goals in minimizing overall taxes is to pay close attention to the peaks and valleys of income from one year to the next.
“If you anticipate one year having lower net income after expenses (the valley) than the two years around it (the peaks), try to increase the taxable income in the valley year by reducing taxable income in the peak years,” said Lebovic.
This is accomplished by pushing income from the high years into the low year and shifting expenses from the low year into the higher income years.
“Business owners tend to have more control when it comes to when expenditures are made, and when income is billed and accordingly collected, than individuals might. But a quick or more detailed discussion and potentially an actual tax projection with your accountant might be well worth the cost if it would save you tax dollars over a multi-year period,” she said.
Because tax rates are graduated for both business and personal taxes, expense deductions are worth more in highly taxed years than they would be in lower income years, Lebovic explained. “By shifting income into lower years, you’re causing those incremental shifted dollars to be taxed at lower tax brackets.”
Lebovic added that there’s a non-tax reason, especially for businesses, to try to smooth out peaks and valleys from one year to the next: you will look more attractive to banks and other lenders if you want to apply for financing down the road.
“Lenders prefer to see the stability of slow but steady growth over (seemingly) unpredictable high and low years,” Lebovic said.
One of the most important things for supporting any tax deduction is proper documentation. Sorry, but the IRS isn’t going to take your word for it. With that in mind:
- Do you have the proper written documentation to support expenses such as business meals and entertainment? Some of the items for supporting such deductions include the paid receipts, the time and place of the expense, the business purpose of the expense, and in some cases the business relationship of the persons involved. Keep records of the who, what and why for all expenses, said Hofsommer.
- Do you have proper documentation supporting your business mileage? A log is a good idea, showing the date, the business purpose, odometer reading and miles driven. As with meals and entertainment, keep records of the who, what, why and, of course, all applicable receipts. If you are doing a lot of volunteer work, you can’t deduct anything for your time, but you can keep receipts for non-reimbursed expenses and keep a mileage log, said Lebovic. “You only get 14 cents per mile, but it does add up.” Don’t forget other out of pocket expenses like printing flyers, art supplies, building supplies, postage, phone calls, etc., she added.
- Do you have the records to support the cost basis for any assets sold during the year? Do not assume your broker or financial advisor has them, especially if you have changed brokerages since the purchase date or sold part of the holding in earlier years.
- You need written documentation for all cash gifts. Any gifts of $250 or greater require a written statement from the organization. It should state at a minimum the date and amount of the gift and whether it was cash. Hofsommer said any property given should have a full description of it. There also should be a statement on whether any services or goods were received in exchange for the contribution and their value.
“As with everything, be prepared and don’t wait until the last minute. The bottom line is that a company has to be the pusher in these circumstances to make sure that their accountants are looking into these things for them. If not, they need to seek outside help so that they don’t leave money on the table,” suggests Brager.
Taxes don’t have to be a burden, they can be a planning opportunity. If you’re not doing this kind of planning with your accountants, you may have outgrown them,” advises Lebovic.