1. Don't Skimp on Records
Don't forget that success depends on more than just getting the work done. For tax purposes, it's also critical to keep solid, written records of your business activities. The owners of an auto-parts business on the NH shore, for example, had a lot going on. On top of their fast-paced storefront operations, they ran a fleet of vans that delivered parts to area service stations. Two years ago, they discovered their drivers had been keeping increasingly sketchy records of gas and other vehicle expenses, forcing the owners to estimate their tax deduction.
No surprise here: The tax courts disallowed the deduction. Unfortunately this happens a lot, especially when vehicles are used for business and personal transportation.
My tip: Make sure all your employees are clear about how to account for business activities, what records to keep, and what the tax reporting requirements are.
2. If it Quacks Like a Duck, Don't Treat it Like a Chicken
For several years, the IRS has been gunning for businesses that report payments to independent contractors who might actually be employees. If you get it wrong-improperly classifying your people as independent contractors in hopes of saving money-you could find yourself liable for significant unpaid payroll tax obligations, interest and penalties.
To
qualify as independent contractors, hires must meet detailed IRS guidelines for
their services and performance of duties. When a major case was decided last
December involving a national package-delivery company, the court upheld the
drivers' status as independent contractors because the company was able to show
it had met the behavioral control guideline for having insufficient oversight
for the drivers to
be employees.
My tip: Talk to your accountant first before you classify your help.
3. Don't Assume You Can-or Should-Expense it Right Away
Buying a new computer system, cubicles, or trucks for your business? Thanks to recent IRS rules, you might be able to deduct 100 percent of the cost of those purchases in the year of the purchase.
First, the property must be new, not used. For vehicles, the rules can be complicated, depending on the vehicle's cost, type and weight. Even if certain passenger vehicles qualify for bonus depreciation, you can't depreciate 100 percent. Generally, large work vehicles with no other purpose (such as a utility truck with a cherry-picker), would qualify for 100 percent. Improvements to a leased building are also complex: In general, structural supports, property enlargements, or outside improvements do not qualify, while most interior improvements could. To qualify, the building must be used for nonresidential purposes and be at least three years old.
Expensing rules also have restrictions, and these vary from year to year. If you don't expense your property the first year, you'll need to depreciate it over succeeding years. Most machinery and equipment can be depreciated over five years. Some improvements to leased properties must be depreciated over 39 years. Meanwhile, the law allowing 100 percent first-year expensing is set to expire at the end of 2011, although there has been recent interest in Washington to extend these rules.
Unfortunately most states-including NH-don't follow IRS rules on depreciation. This creates an added layer of complexity and a duplicate set of depreciation records for business owners.
My tip: Check on the rules about what you can and can't write off, and plan ahead.
4. Don't Cut Yourself a Check Without Checking First
Trying to work out how much to pay yourself as a business owner? Tread carefully. The payment of owners can have surprising tax implications.
The IRS likes to see owners take as much salary as possible (because it ramps up the government's share of payroll taxes). But NH sometimes likes to see a smaller amount, but just how much is hard to pin down.
So what gives? There is no defined threshold, and that is part of the problem. There are numerous federal court cases regarding reasonable compensation, but it is dependent on the facts and circumstances of each situation.
Generally, taxpayers should look to comparable businesses for comparative purposes, relative to size, complexity, expertise required and the actual services rendered by the individual, and try to be in the normal range of those businesses. But this is hard to do in a universe of privately held companies. And no two companies are alike. This issue has led to numerous state tax audits, complicated by a long-time lack of guidance on tax reporting. The new rules for 2011 are more taxpayer-friendly but are still uncertain.
Not long ago, for example, the owner of a software development company realized he was going to have a great year and paid himself accordingly. But did he enjoy the resulting state tax bill? Not so much.
My tip: Plan out your compensation ahead of time, and put the plan in writing.
5. Don't Forget About Where You're Doing Business
Does your business have inventory in a warehouse in the Midwest? Or a sales office in Florida? Did you attend trade shows in California?
Businesses are required to file a tax return in every state where they are doing business. But nailing this down can be tricky. Generally, if you have an employee or own or lease property in a state, you're doing business there. However, states have become more aggressive about monitoring out-of-state businesses and are lowering the threshold for what's taxable. In California, for example, if you attended trade shows for more than seven days, you could be liable for state taxes. New York mails taxpayers detailed questionnaires about their activities.
If you are supposed to have filed tax returns in a given state but didn't, you might have to catch up on years' worth of outstanding tax reporting. (Sorry, there's no statute of limitations on unfiled tax returns.)
My tip: Have your accounting firm file in the right places, at the right time. You could save a bundle.
6. Don't Forget: When it Comes to Taxes, Export is Good Business
Do you export goods to foreign countries? Many NH businesses do. If so, you can take advantage of certain tax benefits.
For instance, the IRS will let you make use of a Domestic International Sales Corporation (DISC) to help cut the tax rate on income related to exports. Owners of companies using a DISC have saved as much as 20 percent on their federal tax bill. (Unfortunately, this benefit might expire by 2013.)
In NH, the state allows a deduction against business profits for companies that export goods. A manufacturer in Portsmouth, for example, exporting several million dollars worth of heavy equipment annually to the Near East saved several thousand dollars a year on state taxes. It adds up.
My tip: Have an expert run the numbers to see where you stand.
Remember, when it comes to your business taxes, it pays to plan. Otherwise, you might have to plan to pay.
John Weaver is a senior manager in the Tax Services Group in the Manchester office of BerryDunn, an accounting and consulting firm. Weaver specializes in manufacturing and technology companies in New England. He can be reached at 603-669-7337. For more information, visit www.berrydunn.com.
Current Issue - May 2024