Planning for changes in the tax laws — even when no one is sure what they will be as Congress drags its feet ahead of November’s midterm elections — is the most important piece of advice local accountants and tax professionals recommend for small-business owners.
In a survey for the Las Vegas Business Press, Lori Marrs, a certified public accountant with Marrs Bergquist CPAs; David Mathews, a partner with Stewart Archibald & Barney LLP, and Scott Taylor, a shareholder with Piercy Bowler Taylor & Kern CPAs in Las Vegas, each stressed the importance of planning, especially with so much uncertainty in the air.
“Small-business owners need to be aware that tax planning is by far the most essential fact this year,” said Taylor, who specializes in tax deal structuring planning and consulting, business advisory services, tax preparation, tax review and representation before the Internal Revenue Service. “The reason being is many tax provisions have expired and/or not being reenacted. They need to stay in tune with what is going to happen closer to the end of the fourth quarter. After the election, Congress may extend some of those provisions. I’d say the biggest thing is start tax planning and staying up on what is going on in (Washington) D.C.”
One tax law that could change drastically after the election would be the revival of the Section 179 bonus depreciation for 2014. Before 2013, small-business owners and others using the deduction could take a maximum deduction of $500,000 for qualifying business purchases, such as computers, printers and office furniture, among others. Now, the maximum deduction is only $25,000.
In the past, small-business owners would make those large purchases at the end of the year, But all three accountants said that decision might be unwise this year.
“With business deductions, it’s hard to say,” said Mathews, who leads Stewart Archibald & Barney’s tax department and specializes in tax return preparation and consulting services for businesses, individuals, and not-for-profit entities. “A lot of the tax credits and deductions expired at the end of 2013, and as of yet, have not been extended, modified or really anything done for 2014. I don’t anticipate seeing anything until after the elections. Bonus depreciation has also expired, which allowed a 50 percent deduction for all brand new assets purchased during the year.
“Typically, the case is we don’t hear about it until after it passes until Dec. 31 at midnight. There are a few bills floating around the House to extend the tax provisions, but right now, it’s the roll of the dice. We are not changing the White House this year, but who knows what might happen in the Senate or House.”
Despite the political uncertainty of an election year, creating or contributing to an existing retirement is always sage advice, whether business owners are looking for tax deductions or just ensuring they’ll be comfortable when it comes time to retire.
“The No. 1 thing I recommend to clients is to create or contribute to an existing retirement plan,” said Marrs, who specializes in business and management consulting; corporate partnership and individual tax return preparation and planning; estate, retirement and business succession planning; and estate and trust tax return preparation.
“It depends on whether you are self-employed or incorporated. In general terms, a simple IRA could be created by the small business on behalf of employees or themselves, and employees can contribute up to $12,000 per year into the plan,” she said. “On the employer side, you can add up to a 3 percent match. If over 50, employees or owners can add an additional $2,500 to the plan.
“A 401(k) is a little more complicated. It is costly to implement and it requires an annual return where the simple does not. With a 401(k), employees can defer up to $17,500 with an additional $5,500 if over 50. On the employer side, you can match up to 3 percent.”
Tax planning will also help small businesses be prepared for unnecessary penalties and be ready in case the business ends up owing a lot of money to the IRS. This way, the small-business owners can start paying down their debt and not be surprised with a big payment due on April 15.
“One of my big pointers is to encourage business owners to meet with their accountants and discuss their options,” Mathews said. “One of the biggest benefits of doing that is to figure out what I can do before the year ends to cut down on my tax bill. It also gives you an idea of what your tax bill will look like. If I’m going to owe $10,000, I don’t want it to be a surprise, plus I have six months or longer to pay it.”
Small-business owners also need to plan for marginal tax rates — the percentage taken from your next dollar of taxable income above a predefined income threshold — and managing their alternative minimum tax — a tax imposed by the federal government on individuals, corporations, estates and trusts.
Taylor said it is especially important to plan for marginal tax rates as those flow through to individual tax returns. He also recommended speaking with a tax adviser to help with planning for the alternative minimum tax.
“A lot of that phases out at $200,000 to $250,000 income with higher rates kicking in at $400,000,” he said. “If small-business owners are not managing this, they won’t know when to pay. A lot of people are trying to figure out when they need to pick up income and manage expenses because they are paying higher tax rates.”
The local accountants also had other recommendations:
▶ Taylor warned to be aware that the Nevada sales tax deduction for individuals has expired, and to watch for an extension of debt discharge rules for primary residents. He does expect those statewide measures to be extended eventually.
▶ Marrs recommends having a good bookkeeping system and making sure records are in order, with receipts to back up disbursements to vendors. This will help make life easier in case of an IRS audit. She also encouraged cash businesses to pay all vendors before the end of the year to get all deductions.
▶ Mathews said small-business owners also might consider donating noncash items, such as office equipment, to local nonprofit agencies such as Goodwill of Southern Nevada, Deseret Industries or The Salvation Army of Southern Nevada. He encourages business owners to get receipts for all donations. If an item is valued at $5,000 or more, it must be appraised.