As the end of the year approaches, one business meeting should definitely make your high-priority list -- an appointment with your accountant. A savvy CPA specializing in small business can outline ways for your company to take advantage of changes in tax law, which could help shave real dollars off your 2005 tax bill.
Smart Answers columnist Karen E. Klein recently asked Paul Schlather, senior tax partner with PricewaterhouseCoopers's Private Company Services Practices, for some yearend tax tips. Edited excerpts of their conversation follow.
What should small-business owners discuss with their tax planners now, before they get overwhelmed managing holiday sales and planning for 2006?
There are always issues that should be looked at periodically, like bonuses and deferred compensation, and deferring income and accelerating deductions for 2005. One item to bring up with your accountant this year specifically is whether or not your small business needs to plan for alternative minimum tax (AMT) liability.
There are some fast-disappearing tax breaks for businesses that are set to expire after Dec. 31, 2005. What should entrepreneurs know about them?
One of the major issues is special "bonus depreciation" that lets a business owner deduct half the cost of new equipment or certain leasehold improvements immediately, typically for significant tax savings, rather than depreciating the entire expense.
The investment must be made this year, however, for off-the-shelf computer software like Microsoft Office (MSFT) or Quicken (INTU). That means companies considering purchasing new software should probably do it this calendar year and get the tax advantage, rather than waiting until January.
What has become of the tax break for the company purchase of a large SUV for business use?
That deduction began in 2003, and it was for vehicles weighing more than 6,000 pounds, like Hummers (GM) or Escalades. In 2004, it was reduced from $100,000, to $25,000, for first-year depreciation -- and that's still available. But with gas prices where they are now, I think most companies are not going to buy them anyway.
Hurricane Katrina legislation offers some tax advantages to private companies. What are those, and to which companies do they apply?
There is a Work Opportunity Tax Credit available to businesses that hire workers displaced by Hurricane Katrina. The credit is 40% of the first $6,000 paid in wages to a displaced worker, up to a maximum of $2,400 per employee. Companies need to act fast on that one, however, because it's only good through 2005.
Another deduction arising from the hurricane legislation applies to the publishing and food industries. Companies in those sectors can donate inventory to nonprofit organizations and deduct double their cost of the items they donate. This doesn't apply only to charities working with Hurricane Katrina victims, by the way, but also to any 501(c)3.
So, if you want to reduce the inventory at your bookstore, and you give away a book that retails for $10 but costs you $2, you can deduct $4 for that donation. The same goes for food companies. Just make sure that you keep records justifying the deductions and that you can demonstrate that the item's fair market value is greater than two times your cost. It's best to get letters from any nonprofits you donate to, explaining that they have used the items you donated to further their charitable work.
What about tax breaks for businesses located in the disaster zone?
For businesses affected by the hurricane, all their tax returns and employee tax filings will be extended to Feb. 28, 2006. Casualty loss limits, which are normally at 10%, will be suspended. So, business owners can fully deduct the expense of any losses that they pay out of pocket. Of course, if they're later reimbursed for those expenses by insurance, they'd have to amend their tax returns to reflect that reimbursement.
Anything else that you'd recommend a business owner ask about in a meeting with his or her CPA?
I'm always out preaching about the fact that if you're a small business and your business is not structured as a "flow-through entity," it should be. That means your business should be an S-Corp, a partnership, an LLC, or other entity that allows company profits to be reported on the business owners' personal tax returns.
It's amazing to me to see how many family-owned companies formed prior to 1980, when tax laws changed, are still operating as C-corps, which limit the amount of proceeds (due to the effects of double taxation) that the business owners receive when they sell or otherwise dispose of the assets of the corporation. If you have a company backed by venture capital, you're almost forced to form a C-Corp, but other companies may want to ask about restructuring if they're in this position -- particularly if they don't plan to dispose of the company within the next decade.
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