Conduct Your Year-End Review
Now is the time to take action to save on 2007 taxes and to budget for 2008.
There are only 13 days left before the end of the year, and many of these days are taken up by holidays, holiday activities, and other events that can limit the time you have for planning your budget for 2008 and managing your year-end tax planning for 2007. (See Part 2).
Budgeting
Project the expenses you'll have in the coming year, taking into account anticipated hikes in these and other expense categories:
- Wages. Increases of close to 3.8% are anticipated (with variable pay bonuses as high as 12%), according to data from Hewitt Associates. However, increases could average even higher, depending on city and industry. For example, in Washington, DC, the projected increase is 4.9%, Houston, 4.9%, and New York City, 3.9%. The harder it is for your company to find and retain talented workers, the more you'll have to pay. Important: Don't forget the rise in the federal minimum wage to $6.55 per hour on July 24, 2008 (and any applicable state increases).
- Health insurance. The average hike in health care costs for businesses in 2008 is pegged at 8.7%, says Hewitt Associates, but many small businesses could see even greater increases.
- Energy. Industrial electricity prices are expected to rise only 1% in 2008, according to the Energy Information Administration. Heating oil prices will be up to almost 12% compared with last winter's prices. At the gas pump, who knows?
Taxes
You probably have a good idea whether 2007 will prove profitable for you (although the holiday season can have a big effect on your bottom line). If you expect to be in the black this year, then consider using the following tax strategies: - Defer income (if you are on the cash method of accounting) by waiting to send out invoices until late in the year, so payment will be received (and be taxable) in 2008.
- Accelerate deductions (if on the cash basis) to maximize deductions for 2007. Pay outstanding bills before year end, make any needed repairs, stock up on supplies, and prepare expenses. Caution: Prepayments are currently deductible only if they relate to benefits for up to 12 months; paying for a three-year subscription will give you a deduction for one-third of the cost this year.
- Award bonuses. Authorize and pay them before year end to increase the deduction for payroll costs as well as to increase W-2 wages (the limitation used for the domestic production activities deduction, which is 6% of qualified domestic production activities income in 2007). Businesses using the accrual method of accounting can deduct year-end bonuses for rank-and-file employees in 2007 as long as they are paid by March 15, 2008. But bonuses to S corporation shareholders and more-than-50% C corporation shareholders are deductible only when actually paid.
- Buy equipment. Upgrade grade existing machinery and equipment or buy additional items and, instead of depreciating the cost over five or seven years, or even longer periods, deduct the cost in 2007--elect to expense these costs up to $125,000 (called a Sec. 179 deduction). The dollar limit applies whether equipment purchases are financed in whole or in part, but is reduced when total purchases for the year exceed $500,000.
- Decide on a retirement plan. If the company does not yet have a 401(k) or other qualified plan in place for 2007, you need to sign the paperwork for most types of plans by December 31, for them to be effective for this year. You then have until the extended due date of your 2007 return to make your contributions for the year.
- Pay out dividends. If you have a corporation, the dividends paid out to owners will be taxed to owners at no more than 15% and are not subject to payroll taxes; they are not deductible by the corporation. You may want to retain earnings so they will be available for expansion or other business goals in the future.
Looking ahead. Decide on the company's benefit programs for 2008. These can include qualified retirement plans (including 401(k) plans), health coverage, and flexible spending arrangements for medical costs and dependent care expenses. Sign plan documents in 2007 so employees can make applicable elections to begin in 2008.
Strategies for troubled businesses. If 2007 has not been profitable, act now to take advantage of losses from a tax perspective. For example, reduce the final estimated tax payment for 2007 (due on December 15, 2007, for corporations, and January 15, 2008, for owners)--use the cash as needed now. Other ideas:
- Ensure sufficient basis to use tax losses. Owners of S corporations, partnerships, and limited liability companies (pass-through entities) can only deduct their share of losses to the extent of basis. For example, an S corporation shareholder's losses are limited to basis in stock and loans he/she made to the corporation. If expecting a large loss, consider loaning more money to the business to boost basis and utilize the tax loss this year. Or rework third-party loans to the corporation that have owner's guarantees to make the owner primarily liable (and able to treat this debt as his/her basis).
- Prepare for an early refund request. Your estimated taxes for 2007 may entitle you to a refund, which you can request after the close of the year. Corporations, for example, can file for a quick refund after December 31 using Form 4466 and receive it usually with 45 days.
Important: Schedule a meeting with your accountant as soon as possible to go over your tax picture and devise tax-saving strategies for your business.
Barbara Weltman, author of several books including her most recent, 1001 Deductions & Tax Breaks 2009
www.barbaraweltman.com
Copyright 2008. All Rights Reserved.
