This year was a tough year for many small businesses.
But as the calendar year comes to a close and businesses anticipate their 2009 tax bills, area certified public accountants say strategies can help small business owners save tax dollars or reduce a loss.
New and expanded tax incentives
“With the recent American Recovery and Reinvestment Act of 2009 [“The $787 billion business opportunity,” Marketplace, May 12], Congress extended or added some beneficial tax incentives for businesses,” says Bruce Bain, partner in Clifton Gunderson LLC in Oshkosh. “One of them is bonus depreciation. Small business can deduct 50 percent of the cost of an asset in the first year they acquire it rather than depreciate that asset over its life.”
Bain says the old law allowed that, if a new asset had a five-year life, 20 percent of the cost could be deducted in the first year. Under this act, 50 percent can be deducted in the first year, plus 20 percent of the remainder, he says. “That’s an extension of the same bonus depreciation that was available in 2008.”
To take advantage of the new law, the business owner must place the asset into service in 2009, not just purchase it, Bain says. So time is short to take advantage of this at this time of the year.
“Ultimately, the owner has to decide if the purchase makes sense from a business standpoint rather than just for tax purposes,” he says.
Another similar deduction, section 179, allows the taxpayer to expense new or used purchases of up to $250,000, rather than depreciate them.
“Businesses really need to seek their tax adviser to be sure their assets qualify,” says Bain. “Generally, it’s tangible personal property rather than real estate. There are other limitations as well. You can’t create a loss with the deduction. Someone with some income could reduce their income by expensing these assets.”
Pat Ness of Schenck S.C. in Appleton says another change that will benefit small business owners is the expansion of the work opportunity credit.
“The government’s been pretty proactive in putting tools in place to take advantage of things,” he says. “The work opportunity credit is not necessarily new, but they’re widened who qualifies for them. They are credits businesses can get for hiring a certain demographic of people. The new one this year is workers age 18 to 26 who didn’t have a job in the last six months.”
The business is eligible for a tax credit for a certain portion of the new employee’s wages. Ness says there are other eligible demographics, and the credit is limited to 2009 and 2010.
John Wieland, partner in Malkowsky, Hergert and Wieland LLP in Oshkosh, says a new business must be aware of the type of business it is — LLC, C corporation, S corporation or sole proprietorship — because each has different tax advantages.
“One of the usual things is that if you have a cash-basis business and you have some bills outstanding, pay them before the end of the year so you can deduct those expenses,” he says. “If you are a sole proprietor or just starting up a business, it’s better to have records broken apart as a separate business and not mingled in with your personal items. If people are going to be going to a tax preparer, it will cost them less if they have their records cleaner.”
Small business owners also need to know some of the basics on taxes, says Craig Meyer, vice president and owner of Watertax Inc. in Appleton.
“Some of the basics I look at for business owners to know is what’s an allowable expense and what’s not,” he says. For instance, under meals and entertainment, only 50 percent of a business meal at a restaurant can be deducted.
“Focusing on depreciation is another big one,” he says. “A lot of business owners leave that out of their quarterly statements. It’s an additional expense — that’s not a cash expense but a paper expense — that can greatly reduce income. When you’re planning for taxes, get as close as you can get” to what your final result will be.
Bain says other credits focus on investing in renewable energy production, such as wind to produce electricity.
“Another credit that’s been around for a while but being renewed annually is the research and development credit,” he says.
Losses
The sad reality is that a lot of businesses will be showing losses for 2009.
“If a business has a loss for the year, depending on the type of business it is, there is an option of carrying back a loss to previous years where there was an income and getting a refund,” says Wieland.
In previous tax years, that carryback could be for two years, but it has been extended to five, Bain says.
“If the business paid taxes in the last five years, they can carry a loss [from 2009] back and recoup their taxes they paid in a prior year,” he says. “The rule hasn’t changed for carryover. You can still carry a loss ahead for 20 years. You have to elect to do one or the other, or you can carry back a portion and carry ahead the rest to a point where you expect you will have or have had income.
“If the business is a cash-basis business and has low income this year and if they can finish up some jobs and get them billed early and try to collect them before the end of the year, they should try to get closer to zero and eat up some of the loss rather than push it into next year.”
Ness says a small business needs to recognize what basis it has in the company to understand whether a client is able to take a big loss or to take advantage of such things as bonus depreciation that could create an even bigger loss.
“We need to look at it and say, ‘Is there a way to create basis, to go back and try to get more basis?’” he says. “It’s important to understand what your basis in the corporation is because that determines what kinds of losses you can take. It doesn’t pay to create the big losses if we can’t take them against other income. If there is no basis in a flow-through entity, losses become suspended. The owner might want to back off because loss might be suspended because of basis issues.”