The Least Wonderful Time of the Year
Does this year’s tax season have you reaching for heavy-duty pain relievers? We offer 4 tips that will help you make next year nearly headache-free
You still have your fingers wrapped around the aspirin bottle, don’t you? This time of year tends to leave many an entrepreneur dizzy, in a cold sweat. No, it’s not flu season; it’s tax season. And like most small-business owners, you’ve received your final 1998 figures from your accountant, and you’re still reeling. Although you can’t prove it, you’re certain that IRS officials have conspired to redirect all your profits into the hands of the government by means of an overwhelmingly complex tax code and its latest tricky amendments.
The good news: Last year’s damage has been done, and you are of the proper mindset to plan next year’s tax strategy, while the wounds are still fresh and the aspirin’s close by. It’s the only way to make the best of your gains and losses come next April. Once you stop treating your taxes as a chore to be put off until the last minute and begin planning for next year, you’ll be on your way to lightening that IRS burden and growing your net profits.
1. Leave a paper trail
The most effective weapon any small-business owner can wield at tax time is an organized, detailed record of all financial transactions, including accounts receivable, accounts payable, and all other expenses and income. Ironically, it’s the one armament most often neglected or enlisted only at the last minute. “That’s the Achilles’ heel of the small-business person,” says Fred Daily, tax attorney, a professor at the Golden Gate University School of Taxation, and author of Tax Savvy for Small Business (Nolo Press, 1998). If you’re not in the habit of noting every dollar you spend on your business – including the $5 for a cab ride back to the office after meeting with your accountant – you’re missing important deductions that can add up to hefty sums. And if the IRS ever comes knocking, a meticulous record will prove invaluable.
2. Stay abreast of new regulations
Federal and state tax laws change so often that even accountants have trouble keeping up. But then, you’re paying that number cruncher to know this stuff. Your job? Check in with your accountant every month or so to grill her about any code changes that may have occurred, ask her how they could affect you, and find out what you can do now to take advantage of them or reduce the damage they might do. The Section 179 deduction rule, for example, was amended last year so that the maximum deduction for business-related purchases rose from $18,500 to $19,000. That’s a good thing to know about when you’re deciding whether to upgrade your business equipment.
Familiarity with the laws will also help you be ready if a previous allowance becomes more restrictive, says Jerry Eichenberger, CPA and tax principal of West Des Moines, Iowa-based Humiston, Skokan, Warren & Eichenberger. In 1998 the tax code was amended to prohibit the deduction of interest related to contested tax liabilities – a situation small businesses are well acquainted with, he says: “Your tax return is supposed to be your first offer, in our opinion, and sometimes the government counters that offer.” Eichenberger advises that if you should find your account at odds with that of the IRS, you should pay what you think your final tax liability will likely be. “You’re not admitting to the IRS’s figures; you’re just stopping the interest meter from running.”
3. Make the most of your pension plan
Offering good pension or retirement benefits is an excellent way for small-business owners to attract the best employees, but the plans can be expensive; that’s why you’ll want to make the most of the tax savings associated with them. If you plan to start a 401(k), a Keogh, or any pension plan other than a simple IRA for 1999, it must be set up in the taxable year, or by December 31, 1999, says Jacob Weichholz, a partner at Ernst & Young LLP. (An IRA, by contrast, can be set up and contributed to until April 14 of the next year.) Although it’s true that you’re not required to make contributions to the new plan until April 14, 2000, doing so earlier, even when that might hurt your pocketbook a little, will be advantageous in the long run. Sure, keeping cash in the till is good, but tax-deferred savings are almost always better.
4. Give – but do it sensibly
Plan your business’s charitable donations well in advance instead of writing tons of checks on December 31, says Mary Kay Foss, CPA, and partner at Danville, Calif.-based Marzluft, Giles, Tulis & Foss. A retail business that sells perishable goods, for example, should try to donate its excess immediately to a qualified organization. If your business is seasonal, give some stock away during your slow period. Simply check with your accountant to make certain the organization you’re donating to qualifies according to the Internal Revenue Code, and then obtain a statement from the charity explaining how it plans to use the goods. “If it meets IRS requirements, you’ll definitely get the cost and maybe even more,” says Foss. If your donations throughout the year wind up exceeding the maximum allowed, you may carry leftovers forward for another five years. And think twice before writing out a check; you’re better off donating shares of a stock you own that are of equal value, advises Eichenberger. As long as you’ve held the stock for more than one year, you’re entitled to deduct the full fair market value of the stock, even if you paid only a fraction of that price.