Rose Report: Issue 3

Plan Now, Save Later

Ask any accountant or financial adviser to characterize the current tax environment, and chances are they’ll use the word “uncertain”. Dozens of tax rules expired at the end of 2011, Bush-era tax cuts are set to expire this year, and a presidential election that will influence tax law regardless of which candidate wins is fast approaching. All of these factors mean the future of tax policy is murky, but business owners don’t have the luxury of putting off their personal and corporate tax plans. In fact, if they haven’t started already, they should start planning now.

Although drawing up an annual tax plan is often viewed as a year-end task, getting started in October—when three-quarters of the year’s financial statements are on the books—is critical to ensuring that there’s enough time to assess all options and save as much money as possible. Personal income and corporate taxes are among the biggest expenses incurred by business owners, so preparing in advance is key to minimizing that cost.

To develop a comprehensive tax plan, business owners need to have company’s financial statements and personal earnings statements through September or October on hand, as well as projection of company financial results and personal earnings for the remainder of the year.  They also need documentation of the federal and state taxes they’ve paid. With this information, they can begin to outline the foundation of their plans.

While many rules remain undetermined, there are still policies that businesses can keep in mind while planning ahead, including the limit on writing off fixed assets. In 2008, the federal government significantly increased the cap on the amount spent on qualified business assets—such as computers and furniture—that a company is allowed to write off. Because the economy was tanking, the government expanded the tax break to encourage financial growth among businesses. But the cap has since been lowered from its peak in 2008 of $500,000. This year, the limit is $139,000, and for 2013, it’s set at $25,000. Those figures could still change, but assuming the cap will be lower in 2013, companies can strategize with their financial advisers to buy more qualified assets in 2012, since there’s a tax incentive to do so.

Businesses that have shareholders should also consider distributing annual profits as dividends. As Sidney Kess, a lawyer and CPA, explained in the New York Law Journal: “While the dividends are not deductible by the corporation, they are taxed at favorable rates for individuals.” And companies should take advantage of this policy now, since next year, the rate for such dividends is set to increase. While the rate is currently 15 percent, dividends may be taxed as regular income—at up to 35 percent—after 2012.

There are many other ways a tax advisor can help companies save money, including adjusting bonus and retirement plans to make sure they’re tax efficient. But it won’t be possible for business owners to get the most value out of tax planning if they don’t start early enough. After initially meeting with advisers in October, business owners will need to review their plans at least once more before year-end to make sure they’re on track with any changes to the tax rules.

Though there remains a lot of uncertainty surrounding the nation’s tax policies, at least one thing is definite: Business owners who procrastinate on tax planning can end up overpaying, incurring penalties, and in extreme cases, jeopardizing the financial health of their companies.