NEW YORK – It can be tempting for small business owners, once their income tax returns are filed, to put the whole issue of taxes behind them.
Resist that urge.
Owners who don’t grasp the idea that a company’s tax planning – in reality, overall business and financial planning – is a year-round process may be setting their businesses up for an even tougher time in this difficult economy. They might also miss out on some tax law changes that are designed to help small businesses get through the recession.
“They’ve got to keep their eyes open relative to what’s happening on the budget level,” Barbara Weltman, a tax attorney in Millwood, N.Y., and author of “J.K. Lasser’s Small Business Taxes,” said, referring to business owners.
It’s hard to run a business and keep up with tax law or economic stimulus legislation. That’s a good reason to stay in touch with a tax or financial adviser whose job is to know what changes are coming down. And it’s not just the federal government that’s making adjustments; states are also passing laws, and some, including California, need to raise taxes to close budget deficits.
Some changes in federal tax law for this year are already known. The IRS Web site, www.irs.gov, has a section devoted to the provisions on its home page. Click on “Update on Recovery Tax Provisions for Individuals and Businesses.” Or, you can go straight to changes aimed at small businesses by clicking on www.irs.gov/newsroom/article/0,,id205330,00.html.
Among the small business provisions:
• Companies that incur net operating losses can carry them back five years instead of the usual two, applying those losses against taxes paid in the past and can obtain refunds.
• When making estimated tax payments, businesses are required to pay only 90 percent of their previous year’s taxes, down from the usual 110 percent.
Weltman noted that this change may be a big help to companies. “What this does is improve cash flow,” she said.
• The sharply higher deductions for new equipment purchases enacted for 2008 are being extended into 2009. One of these provisions is the Section 179 deduction, which allows small businesses to deduct upfront the cost of equipment such as computers, furniture, manufacturing machines and vehicles, up to $250,000. The second is the bonus depreciation measure that increases the portion of a purchase price that can be deducted for the first year.
There is also a break for people who invest in small businesses – if they hold their investments for five years, 75 percent of their capital gains will be exempt from taxes.
Some of these provisions are straightforward, especially the carryback and estimated tax changes. But the others are more complex because they depend on strategic business decisions that are made throughout the year – and that probably should be made in consultation with a financial professional such as an accountant or tax attorney whose expertise goes beyond the Internal Revenue Code.
Weltman said owners should be sure the professionals they hire are “more than just tax advisers, that they’re business advisers. . . . Maybe you’re not doing things right with your inventory, maybe you should be warehousing differently. Whatever the issue is, you need someone who can help you.”
Business owners need to take advantage of that help on a continual basis. That means not just calling for advice about big purchases or other strategic decisions, but also scheduling semiannual or, even better, quarterly meetings with their accountants or advisers.
Some owners go further, giving their accountants financial data each month.
You can argue that working closely with an adviser is a good business practice in the best of times. Given the flux in the economy and therefore the evolution in laws that affect small companies, right now it can be critical. It not only keeps your company operating better, it frees you to focus on your customers and employees and preparing your business to benefit from an economic recovery.