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Business Tax Planning - Charting Your Course For 2008
General Business News
September 2008
Business Tax Planning - Charting Your Course For 2008
It's hard to believe that we are fast approaching the end of 2008 and, with the year's end in sight, it's time to do a little planning. What you do now will affect your company's tax bill for 2008, as well as your cash flow for 2009.
The first question in the planning process is to consider the implications of your method of accounting. Does your company report income on the cash basis or the accrual basis? You will recall that cash basis taxpayers typically report income only when the income is received in the form of cash. Accrual basis taxpayers, however, report income when it is earned. For example, if you are on the accrual basis and sell 10 widgets on December 31, 2008, you will report income in 2008 even if you aren't actually paid until 2009. If you recorded income on a cash basis, you wouldn't recognize taxable income until 2009.
Revenue
Once you have determined what accounting method you use, you will be in a position to create a plan to minimize taxable income. Revenue is the single most important factor driving taxable income. Cash basis taxpayers have the most latitude when it comes to management of their top line taxable income. If your strategy is to limit taxable income for 2008, you simply limit your sales activity near year-end. You can also keep your sales activity constant, but delay billing near year-end. By billing late, your customers won't have time to make payments before the end of the year.
Accrual basis taxpayers have only one choice: to limit sales activity near year-end.
In some cases, you may actually want to increase sales and income by the end of the year. If you are expecting to be in a higher tax bracket in 2009, pulling income into 2008 may limit your combined tax for both years. Playing the "rate" game is often an important part of tax planning.
Expenses
While revenue is the biggest driver in taxable income, it is not as easy to control as your expenses. Even though you may have certain fixed expenses, including - to some extent - payroll, expenses are largely in your control. Just like revenue, cash basis taxpayers can choose to pay bills before the end of the year to maximize deductions. Even if cash is tight, paying by credit card can help maximize expenses. Prepaying certain items, like rent, can add significantly to deductible expenses and, therefore reduce taxable income. As with revenue, though, accrual basis taxpayers must have incurred an expense before it is deductible.
If you haven't established a retirement plan for your company, doing so before year-end can pay big dividends. Care should be taken in determining which plan is right for you. While your goal might be to reduce this year's income, you don't want to commit your company to a plan that could break you in the future. Most plans can be established as late as December, but if you are planning to go with a SIMPLE IRA plan, you must establish it before October 1 to get a deduction for 2008.
Fixed asset purchases offer special savings in 2008. Due to tax law changes, you can deduct up to $250,000 in qualifying fixed asset purchases in 2008, instead of the $125,000 limit originally slated for 2008. Additionally, fixed asset purchases that you do not expense will receive bonus depreciation of 50% of cost. These two benefits, coming from tax laws enacted earlier in the year, can be powerful tools that benefit accrual basis taxpayers the most (they can buy in 2008, but pay in 2009). If you report on the cash basis, be sure to either pay cash for your purchase by December 31 or finance it with an entity other than the seller. Also, make sure you put your purchase into service by December 31.
Conclusion
Using the results of the first eight months of your company's tax year, you can get a good idea of your total 2008 taxable income. With that as a basis, you can formulate your plans to reduce taxable income. If you need any assistance, give us a call. We're always ready to help.
Here's hoping for a cool September.
The first question in the planning process is to consider the implications of your method of accounting. Does your company report income on the cash basis or the accrual basis? You will recall that cash basis taxpayers typically report income only when the income is received in the form of cash. Accrual basis taxpayers, however, report income when it is earned. For example, if you are on the accrual basis and sell 10 widgets on December 31, 2008, you will report income in 2008 even if you aren't actually paid until 2009. If you recorded income on a cash basis, you wouldn't recognize taxable income until 2009.
Revenue
Once you have determined what accounting method you use, you will be in a position to create a plan to minimize taxable income. Revenue is the single most important factor driving taxable income. Cash basis taxpayers have the most latitude when it comes to management of their top line taxable income. If your strategy is to limit taxable income for 2008, you simply limit your sales activity near year-end. You can also keep your sales activity constant, but delay billing near year-end. By billing late, your customers won't have time to make payments before the end of the year.
Accrual basis taxpayers have only one choice: to limit sales activity near year-end.
In some cases, you may actually want to increase sales and income by the end of the year. If you are expecting to be in a higher tax bracket in 2009, pulling income into 2008 may limit your combined tax for both years. Playing the "rate" game is often an important part of tax planning.
Expenses
While revenue is the biggest driver in taxable income, it is not as easy to control as your expenses. Even though you may have certain fixed expenses, including - to some extent - payroll, expenses are largely in your control. Just like revenue, cash basis taxpayers can choose to pay bills before the end of the year to maximize deductions. Even if cash is tight, paying by credit card can help maximize expenses. Prepaying certain items, like rent, can add significantly to deductible expenses and, therefore reduce taxable income. As with revenue, though, accrual basis taxpayers must have incurred an expense before it is deductible.
If you haven't established a retirement plan for your company, doing so before year-end can pay big dividends. Care should be taken in determining which plan is right for you. While your goal might be to reduce this year's income, you don't want to commit your company to a plan that could break you in the future. Most plans can be established as late as December, but if you are planning to go with a SIMPLE IRA plan, you must establish it before October 1 to get a deduction for 2008.
Fixed asset purchases offer special savings in 2008. Due to tax law changes, you can deduct up to $250,000 in qualifying fixed asset purchases in 2008, instead of the $125,000 limit originally slated for 2008. Additionally, fixed asset purchases that you do not expense will receive bonus depreciation of 50% of cost. These two benefits, coming from tax laws enacted earlier in the year, can be powerful tools that benefit accrual basis taxpayers the most (they can buy in 2008, but pay in 2009). If you report on the cash basis, be sure to either pay cash for your purchase by December 31 or finance it with an entity other than the seller. Also, make sure you put your purchase into service by December 31.
Conclusion
Using the results of the first eight months of your company's tax year, you can get a good idea of your total 2008 taxable income. With that as a basis, you can formulate your plans to reduce taxable income. If you need any assistance, give us a call. We're always ready to help.
Here's hoping for a cool September.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.
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