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Year-End Tax Planning Moves For Businesses

November 09, 2009

Given the state of the economy over the past year, tax planning is more important than ever. Here are a few savvy year-end moves to consider:

Time income and deductions for best results. To time things right tax-wise, you need to project what tax bracket your company will be in next year. If it appears you’ll land in a higher one, accelerating income into this year can save you taxes because you’ll be taxed at the lower rate.

Conversely, if you believe you’ll wind up in a lower tax bracket next year, deferring income will save taxes. Even if you expect to be in the same bracket, deferring income may be beneficial because it allows you to also defer taxes.

If your business uses the cash method of accounting, you can defer income by delaying billing notices as you approach year end. If you use the accrual method, you can delay shipping products or delivering services until the new tax year, as long as you’re careful not to disrupt customer relations.

In addition, an accrual-based corporation can take a deduction for its current tax year for a bonus not actually paid to its employee until the following year if:

• the employee doesn’t own more than 50% in value of the company’s stock;

• the bonus is properly accrued on its books before the end of the current tax year; and

• the bonus is actually paid within the first 2 ½ months of the following tax year.

The 2009 deduction won’t, however, be allowed if the bonus is paid by a personal service corporation to an employee-owner, by an S corporation to any employee-shareholder, or by a C corporation to a direct or indirect majority owner.

For employees whose bonuses were deferred, that bonus won’t be taxable income until the following year.

In addition, businesses should consider making expenditures that qualify for the business property expensing option, which is up to $250,000 for assets bought and placed in service this year. The maximum expensing amount will drop to $134,000 for assets bought and placed in service next year (higher expensing amounts apply in certain specialized situations). Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus write off generally won’t be available next year.

And, depending on your situation, you may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

To the extent possible, defer tax on advance payments. Do your customers make advance payments for products or services that aren’t delivered or performed until a later year? (Examples may include license fees, subscriptions and warranty contracts.) If so, you may be able to defer some of the tax on that income.

Under the tax code, you may defer tax on advance payments to the extent they’re reported as deferred revenue on your audited financial statements or are otherwise substantiated in accordance with IRS rules.

Look to increase your basis. Many shareholders in S corporations assume that they can deduct their share of the company’s losses. But that deduction is limited to their tax basis. Thus, if you’re an S corporation shareholder, ensure you have sufficient basis in your stock by year end to deduct any losses. Your tax basis is adjusted each year, increasing for income recognized, loans or capital contributions, and decreasing for losses recognized, distributions or loan repayments.

If you anticipate a business loss this year and your tax basis is insufficient, you can boost your basis by increasing your capital contributions or making a loan to the corporation by year end. The corporation might also make a deemed dividend election on its 2009 federal income tax return. (Caveat: The latter technique is available only if the business previously operated as a C corporation and has accumulated earnings and profits from its C corporation years.)

The tax basis rule also applies to other “pass-through” entities, including partnerships and limited liability companies (LLCs). But it’s generally a bigger obstacle for S corporations because a shareholder’s basis isn’t increased by corporate debt, while a partner or LLC member may be entitled to a share of the entity’s debt obligations.

The good news is that you may carry forward any disallowed deduction to future years. Also bear in mind that the rules regarding deduction of losses are complex and there are other areas to consider, including passive activity and at-risk rules.

To maximize the benefits of strategic tax planning and avoid missed opportunities, you should consult your tax advisor at your earliest convenience.

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