The old adage is true: time does fly. Here we are halfway through 2007, and you've already done plenty with your business this year, and have plenty more to do. But have you considered your 2007 income taxes?
Hard as it may be to face next year's tax so soon after getting last year's filed, you really should take some time now to consider what you can do to better manage your tax burden in 2007. There are many things that businesses can, and often do, do at year-end and later to try to reduce taxes. But waiting until the last minute to implement these strategies can mean they're not dealt with as efficiently as they might, if you were to put some thought into them now.
For example, business owners often find themselves at year-end wondering if they should buy additional vehicles or equipment in order to get some more write-offs. This can be quite effective, since Section 179 of the Internal Revenue Code allows taxpayers to immediately expense (rather than depreciating over time) up to $125,000 of fixed assets purchased in a given year and used in trade or business, even if they were put in service the last day of the year.
Obviously, that can be quite an advantage, but you've got to know the rules. For example, if you've already purchased more than $500,000 in qualifying fixed assets during the year, the Section 179 deduction will phase out. If your asset purchases for the year seem likely to approach that limit, you may want to consider whether you should hold off on further acquisitions, to avoid changing a planned $125,000 write-off into depreciation that stretches years.
Section 179 is also limited in how it applies to certain vehicles (as are all forms of depreciation) so if you're looking at a new car for your business, you need to consider those limits. With cars, you also need to consider the actual business use, since it is only that business use that you can deduct. If your company provides cars for your employees, non-business use can be taxable compensation to them, and you need to know how that will affect your payroll taxes and reporting.
And if you do end up taking depreciation on your new assets, did you know that if more than 40 percent of those assets were bought in the last quarter of the year, the depreciation will be calculated on a different method? That may be good or it may be bad, but you need to know the effect.
With all these limitations and rules on depreciation and expensing, you need to know how your asset purchases will affect your tax picture. You also need to consider the overall economic effect. Is it worth buying $10,000 of new computers you don't really need just to get a $3,000 reduction in taxes? You can see why it might be difficult to make the right decisions if you wait until the last week of the year.
Another great tax-planning device involves qualified retirement plans. Not only do these plans encourage savings for you and your employees, not only are they a tax-deferred investment that can help those savings grow faster, they are also one of the few things you can actually do to help cut your taxes even after your tax year is over.
Contributions to qualified retirement plans can generally be made anytime up until the due date of the business tax return, including extensions. Imagine making an expenditure in September 2007 that you get to deduct in 2006.
But again, if you wait until the last minute to look into these plans, you may find that you're not properly considering all the options. There are many different types of plans out there, and you need to select the one that's right for your business today, and for where it'll be tomorrow, in terms of who must be covered, and to what extent contributions by the business are required or voluntary. Waiting may also leave you realizing that, although putting money aside for your retirement is attractive, your cash flow just won't let you do that and settle your tax liability as well (even given the extra time for extensions).
So you might want to look into the various options for qualified plans now or, if you already have a plan, start planning how you're going to fund it. There can be some benefits in getting that funding done early, since the earlier your money is in plan investments, the more potential there is for tax-deferred growth.
Once more this comes with a warning. Funding the plan too early, without knowing what the required contributions may eventually be, can mean that you may have to correct those contributions later. You also need to make certain that you're complying with all the requirements for funding your plan, that the timing for contributions is correct, and that contributions for all employees are being done pro-rata.
The above apply to most businesses, but there are other possibilities that can be more specialized. The Domestic Production Activities Deduction (which encompasses not just manufacturing but also construction, agriculture, engineering, architecture, etc.) has risen from 3 percent to 6 percent in 2007. To properly take the deduction requires gathering some specific information, and starting to put that information together now can put you in better shape at year-end and avoid problems. Use of the Research and Development Credit can also benefit from some planning.
Of course, to do any of this, you need a good understanding of where your business is today. So by far the most important thing you can do during the year to help control your taxes is to make certain that your books and records are up to date, and that you know your profit and loss and cash flow situation. With these under control, you'll be better able to work with your advisors to find the best ways to reduce your tax burden.
Kirk Gardner is a partner in Reno with the CPA firm of Kafoury, Armstrong & Co. Contact him at 689-9100 or kgardner@kafoury.com.
