I am talking to so many business owners who are taking advantage of these slower sales times by reducing old inventory or furniture and fixtures to raise cash .. Check out the tax advantages...
Selling Assets to Raise Cash
With the recession dragging on for many businesses, there is often a need to raise cash. Selling unneeded assets can be a quick way to do so. However, there are tax considerations to keep in mind. Here are some points to consider:
If you took the Section 179 expense election on the asset in the year purchased, your basis in the asset may be zero. That means anything you receive for the asset would be taxable income. Check your tax return for the year the asset was acquired to determine the amount expensed and your remaining basis. (Most accountants expense the entire cost of an asset, if possible.) You should also be aware that converting an asset on which the Section 179 expense election was made to personal use can result in recapture (immediate income) of at least a portion of the amount expensed.
If you sell tangible personal property that you depreciated, any amount you receive in excess of your basis and up to your original cost will be “depreciation recapture” and taxed as ordinary income. For example, Madison Inc. purchased a backhoe for $60,000 some years ago. It took depreciation of $42,720 on the equipment, reducing its basis to $17,280. Madison sells the backhoe for $40,000. Madison has a gain of $22,720 ($40,000 less basis of $17,280), all depreciation recapture and all taxed as ordinary income. Now assume Madison sells the equipment for $75,000. The total gain is $57,720 ($75,000 less basis of $17,280). All the depreciation of $42,720 is recaptured and taxed as ordinary income, and the amount in excess of Madison’s original cost, $15,000, ($75,000 selling price less $60,000 cost) is taxed as long-term capital gain.
If you acquired the asset by means of a trade-in, your basis will depend on the basis of the equipment traded in as well as any additional cash put up and depreciation taken on the new equipment. This can get complicated. Check with your accountant.
An installment sale of equipment can actually backfire. You must recapture all depreciation in the year of sale, even if you’ll receive payments over time. For example, you sell a machine for $5,000, $1,000 payable up front, the rest over four years. The machine cost you $8,000, but it’s fully depreciated (i.e., your basis is zero). You’ll have $5,000 of taxable income in the year of sale. That could mean paying taxes of $2,000 (at 40%, combined federal and state), while only getting $1,000 in the first year. After taxes, your cash flow would be negative for the first year. (See below for a discussion of an asset with an outstanding liability.)
Selling off obsolete inventory can generate some cash and some tax savings. You generally can’t get a deduction for that inventory until it’s sold or scrapped. For example, you paid $100 for 8 valves. If you accounted for them correctly, you never deducted the $100. Auction them off for $20 for the lot and you’ve got $20 cash and an $80 loss you can take on your tax return. The loss could produce $32 in tax savings (depending on your bracket). If you’re doing an auction or a sale, talk it up and consider selling current goods at the same time.
Talk to your tax adviser. He or she should be able to review your situation and suggest which assets can be sold with the best tax effect.
Wednesday, September 15, 2010
Tuesday, May 11, 2010
Lowering Your Liability
Lowering Your Liability
What if you were sued for an accident on your property? Or you were found at fault in a major traffic accident? An umbrella policy could help you keep you covered.
Umbrella liability insurance is relatively affordable and can be easily coordinated with your existing insurance policies.
As far as insurance goes, an umbrella or excess liability policy goes the extra mile. If you’re looking to bolster key policies, an excess liability policy can provide you with additional coverage at reasonable rates. Excess liability basically extends the coverage of your underlying policies, which might include general liability, commercial or business Auto policies, and possibly employers liability.
Here’s how it works: Let’s say you have a $1 million business auto policy with hired and non-owned auto coverage, which protects you if you have an employee using his or her personal vehicle to run a business-related errand. In addition, you have a $1 million excess liability policy. Unfortunately, the employee has an accident on the way to the office supply store, hitting another vehicle causing injury to a third party and your business is held liable. If the injured person is awarded $1.5 million in damages for hospital and other expenses your business auto policy covers the first $1 million and the excess liability covers the remainder.*
The real value of an excess liability is that, with one policy and for a relatively small premium, you can add coverage on top of a number of underlying policies. It won’t cover more specialized policies, such as professional liability or errors and omissions policies, but it does cover those key areas of common, general liability.
There are no hard-and-fast rules regarding the pricing of excess liability coverage, but it is typically inexpensive, depending on the type of business you own. An office-based business might pay, for example, between $350 and $500 per year for each $1 million in coverage.
When you put it in perspective, an excess liability policy is really about peace of mind. Furthermore, the premium is generally low and it may be a tax-deductible business expense.
What if you were sued for an accident on your property? Or you were found at fault in a major traffic accident? An umbrella policy could help you keep you covered.
Umbrella liability insurance is relatively affordable and can be easily coordinated with your existing insurance policies.
As far as insurance goes, an umbrella or excess liability policy goes the extra mile. If you’re looking to bolster key policies, an excess liability policy can provide you with additional coverage at reasonable rates. Excess liability basically extends the coverage of your underlying policies, which might include general liability, commercial or business Auto policies, and possibly employers liability.
Here’s how it works: Let’s say you have a $1 million business auto policy with hired and non-owned auto coverage, which protects you if you have an employee using his or her personal vehicle to run a business-related errand. In addition, you have a $1 million excess liability policy. Unfortunately, the employee has an accident on the way to the office supply store, hitting another vehicle causing injury to a third party and your business is held liable. If the injured person is awarded $1.5 million in damages for hospital and other expenses your business auto policy covers the first $1 million and the excess liability covers the remainder.*
The real value of an excess liability is that, with one policy and for a relatively small premium, you can add coverage on top of a number of underlying policies. It won’t cover more specialized policies, such as professional liability or errors and omissions policies, but it does cover those key areas of common, general liability.
There are no hard-and-fast rules regarding the pricing of excess liability coverage, but it is typically inexpensive, depending on the type of business you own. An office-based business might pay, for example, between $350 and $500 per year for each $1 million in coverage.
When you put it in perspective, an excess liability policy is really about peace of mind. Furthermore, the premium is generally low and it may be a tax-deductible business expense.
Putting the Brakes on Negative Cash Flow
Putting the Brakes on Negative Cash Flow
Once cash flow starts to turn negative, it can be hard to get back in the black. Part of the issue is being armed against a negative cash flow tide. Having the information you need can help you take strategic steps regarding cost cutting, shedding customers, salaries and holding the business together as the tide rises.
First and foremost, says Dr. Charles W. Mulford, CPA, Director of Research at research firm Cash Flow Analytics, LLC, you need knowledge, in the form of a daily flash report or other consistent combination of daily and monthly reporting systems. “While most cash flow drivers aren’t measured well on a daily basis, certain drivers can change daily,” he says. “In particular, a careful A/R and A/P aging can provide an early indication of near-term cash flow trends. For some firms, daily sales orders and pricing trends can also give clues to near-term cash generation. Key components of operating expenses, like employee counts and advertising or other key operating expense orders, might also be reviewed often during the month.”
Declining Cash Flow Red Flags
Certainly, any business should have a cash flow model in place that simulates the business and allows cash flow forecasting that highlights early identification of shortfalls while there is still time to take remedial action, Mulford says. “There are also some fairly specific ‘red flags’ that can indicate the onset of short- or long-term cash flow issues,” he adds. They might include:
an inability to clear a revolving credit line when normally it is cleared;
the sudden use of overdraft financing when it hadn’t been used in the past;
an increasing need to push on vendors for longer terms;
declining gross margin;
an unexplained stall in sales;
projected growth for a firm with a negative “growth profile” (combination of operating cushion and growth-related working capital needs that require cash infusions to accommodate growth);
planned higher and continuing capital expenditure needs, and slowing working capital turnover (especially inventory and accounts receivable); and
high deferred tax liabilities and the implication for higher income taxes for a firm with declining capital expenditures.
If you’re experiencing a number of these issues, it may be time to speak with your financial or business advisor about the tactics you can employ to turn back a negative cash flow tide. “Consider the things you can do both for the short- and long-terms,” he says. “There are ways to shore up cash flow right now, but you need to think further out, such that cash flow becomes stronger not just in the next six months, but for years to come.”
Taking Strategic Steps
Mulford offers several strategic steps that might be worth considering in the near term and for stronger cash flow over time.
In the short term:
consider seeking significant discounts for early payment that significantly offset the financing costs of those funds;
utilize A/R factoring;
cut sales/promotion costs by focusing on current customers;
look for opportunities for prepaid sales (deferred revenue); or
consider short-term cuts in advertising or R&D.
For the long-term:
invest in labor-saving equipment financed with long-term capital to boost gross margin or lower SG&A (tax benefits will serve to reduce tax payments);
consider supply chain initiatives that lower inventory needs or push more inventory onto suppliers; or
consider an R&D joint venture that may give up some top-side in return for current cost sharing.
Going forward, Mulford envisions an economy typified by “sub-par growth, and slowed by gradually rising inflation, interest rates and, likely, higher taxes. It will be a difficult operating environment, but not one that precludes success. If you refuse to relax and relentlessly focus on the drivers behind cash flow, you can fight back against a negative cash flow.” Mulford outlines the drivers as:
An operating cushion—Gross margin, SG&A and, for tech firms, R&D.
Working capital—“Not just receivables, inventory and payables,” he says, “but prepaids, accruals and deferred revenue.”
Taxes paid—Take advantage of any and all federal and state tax credits and benefits.
Capital expenditures—If other costs can’t be reduced, consider lowering cap ex.
Once cash flow starts to turn negative, it can be hard to get back in the black. Part of the issue is being armed against a negative cash flow tide. Having the information you need can help you take strategic steps regarding cost cutting, shedding customers, salaries and holding the business together as the tide rises.
First and foremost, says Dr. Charles W. Mulford, CPA, Director of Research at research firm Cash Flow Analytics, LLC, you need knowledge, in the form of a daily flash report or other consistent combination of daily and monthly reporting systems. “While most cash flow drivers aren’t measured well on a daily basis, certain drivers can change daily,” he says. “In particular, a careful A/R and A/P aging can provide an early indication of near-term cash flow trends. For some firms, daily sales orders and pricing trends can also give clues to near-term cash generation. Key components of operating expenses, like employee counts and advertising or other key operating expense orders, might also be reviewed often during the month.”
Declining Cash Flow Red Flags
Certainly, any business should have a cash flow model in place that simulates the business and allows cash flow forecasting that highlights early identification of shortfalls while there is still time to take remedial action, Mulford says. “There are also some fairly specific ‘red flags’ that can indicate the onset of short- or long-term cash flow issues,” he adds. They might include:
an inability to clear a revolving credit line when normally it is cleared;
the sudden use of overdraft financing when it hadn’t been used in the past;
an increasing need to push on vendors for longer terms;
declining gross margin;
an unexplained stall in sales;
projected growth for a firm with a negative “growth profile” (combination of operating cushion and growth-related working capital needs that require cash infusions to accommodate growth);
planned higher and continuing capital expenditure needs, and slowing working capital turnover (especially inventory and accounts receivable); and
high deferred tax liabilities and the implication for higher income taxes for a firm with declining capital expenditures.
If you’re experiencing a number of these issues, it may be time to speak with your financial or business advisor about the tactics you can employ to turn back a negative cash flow tide. “Consider the things you can do both for the short- and long-terms,” he says. “There are ways to shore up cash flow right now, but you need to think further out, such that cash flow becomes stronger not just in the next six months, but for years to come.”
Taking Strategic Steps
Mulford offers several strategic steps that might be worth considering in the near term and for stronger cash flow over time.
In the short term:
consider seeking significant discounts for early payment that significantly offset the financing costs of those funds;
utilize A/R factoring;
cut sales/promotion costs by focusing on current customers;
look for opportunities for prepaid sales (deferred revenue); or
consider short-term cuts in advertising or R&D.
For the long-term:
invest in labor-saving equipment financed with long-term capital to boost gross margin or lower SG&A (tax benefits will serve to reduce tax payments);
consider supply chain initiatives that lower inventory needs or push more inventory onto suppliers; or
consider an R&D joint venture that may give up some top-side in return for current cost sharing.
Going forward, Mulford envisions an economy typified by “sub-par growth, and slowed by gradually rising inflation, interest rates and, likely, higher taxes. It will be a difficult operating environment, but not one that precludes success. If you refuse to relax and relentlessly focus on the drivers behind cash flow, you can fight back against a negative cash flow.” Mulford outlines the drivers as:
An operating cushion—Gross margin, SG&A and, for tech firms, R&D.
Working capital—“Not just receivables, inventory and payables,” he says, “but prepaids, accruals and deferred revenue.”
Taxes paid—Take advantage of any and all federal and state tax credits and benefits.
Capital expenditures—If other costs can’t be reduced, consider lowering cap ex.
Tuesday, March 16, 2010
Keeping Morale Up in a Down Economy
Keeping Morale Up in a Down Economy
According to the 2008 Management Action Programs Inc. (MAP)/Vantage Research study undertaken in late 2008, some 75% of companies saw a drop in employee morale, tied closely to the economy. “Low employee morale, regardless of its cause, is infectious, and company leaders must take proactive steps to improve their employees’ outlook,” says Lee Froschheiser, president and CEO of business consultancy, MAP. “Interestingly, the majority of the CEOs who have experienced a drop in their employees’ morale have also rated revenue growth as their number-one priority. But to support growth objectives, these business leaders need their employees to be fully aligned with the goals.”
During the time since that survey was completed, not much has changed, notes Froschheiser. “I suspect that, based on the work we’re doing with companies, as the economy has bottomed so has morale. It may not be getting worse, but employees are apprehensive and want to make sure their jobs aren’t in jeopardy, which adds to the morale problem.”
The first step in tackling this issue is acknowledging it exists, he adds. Make it clear to your people that you understand the issue and what created it. The next step is motivating the workforce, which inspires confidence and increases productivity. While business leaders can’t control the impact the economy has on their employees’ overall lives, there are steps they can take to boost confidence in their organization and inspire productivity.
Pay Attention to the “Little” Things
In many cases, paying attention to what you might think of as little or mundane things can make a big difference for employees. Froschheiser outlines a few key tactics:
Keep communicating—“If you’re having any issues, don’t keep quiet about them,” he says. “Let employees know exactly where your company stands. It’s when employees don’t know what’s going on that the rumor mill starts. The more they know, the less they’ll have to guess.”
Give recognition—Whenever possible, let employees know how their job performance is affecting the company. When they’re doing the everyday things right, it helps to point that out. “One rule of thumb that’s always worked for me,” says Froschheiser, “is that every time you tell someone something they’re doing wrong, tell them four things they’re doing right.”
Celebrate all successes, even small successes—Anything matters. You might have a deal that closed or even completed a tough inventory. “People just want to know things are going to be O.K.,” he says. “In that case, recognizing every milestone, regardless of size, can become important.”
Help employees understand priorities from a company perspective—In this economic environment, companies are asking people to do more with less. That can create anxiety and even lead to burnout. Froschheiser advises sitting down with your staff and creating “A lists” of critical tasks. If people know what matters most to the success of the organization—and understand that they’re not expected to be perfect at every task, it can reduce pressure. “You don’t want to tell anyone they shouldn’t do the absolute best job every time, he notes, “but you also need to be realistic about what people can achieve.”
Provide balance—It can be difficult for employees to separate from their responsibilities, so business owners and managers need to force the issue. You might tell someone to work at home for a day or enforce an office-wide day off. “People get wired and tired and when that happens, can make mistakes,” states Froschheiser. He advises looking for signs of burnout, like less responsiveness and enthusiasm, reduced participation, lack of engagement and increased infighting. “If you see those things, nip them in the bud by helping employees back off from work, even for a little while. It helps them put things back in perspective and recharge their batteries.”
Be calm in the storm—No matter what, employees need to see that you, as the leader, believe that the decisions you’re making are the right ones and that the company is remaining on the path to profitability. If you project stability, employees will follow your lead and feel less apprehensive.
“Money talks, especially in a hard-hit economy, but a bonus or financial incentive isn’t the only conversation on the table,” Froschheiser states. “Savvy CEOs are generating energy within their companies by being transparent about their successes and failures, and keeping the lines of communication open. They are challenging employees to set higher goals, empowering their hires, glorifying their works, and demonstrating their role in the company’s future. These tactics may seem fundamental, but these basic strategies really do work.”
According to the 2008 Management Action Programs Inc. (MAP)/Vantage Research study undertaken in late 2008, some 75% of companies saw a drop in employee morale, tied closely to the economy. “Low employee morale, regardless of its cause, is infectious, and company leaders must take proactive steps to improve their employees’ outlook,” says Lee Froschheiser, president and CEO of business consultancy, MAP. “Interestingly, the majority of the CEOs who have experienced a drop in their employees’ morale have also rated revenue growth as their number-one priority. But to support growth objectives, these business leaders need their employees to be fully aligned with the goals.”
During the time since that survey was completed, not much has changed, notes Froschheiser. “I suspect that, based on the work we’re doing with companies, as the economy has bottomed so has morale. It may not be getting worse, but employees are apprehensive and want to make sure their jobs aren’t in jeopardy, which adds to the morale problem.”
The first step in tackling this issue is acknowledging it exists, he adds. Make it clear to your people that you understand the issue and what created it. The next step is motivating the workforce, which inspires confidence and increases productivity. While business leaders can’t control the impact the economy has on their employees’ overall lives, there are steps they can take to boost confidence in their organization and inspire productivity.
Pay Attention to the “Little” Things
In many cases, paying attention to what you might think of as little or mundane things can make a big difference for employees. Froschheiser outlines a few key tactics:
Keep communicating—“If you’re having any issues, don’t keep quiet about them,” he says. “Let employees know exactly where your company stands. It’s when employees don’t know what’s going on that the rumor mill starts. The more they know, the less they’ll have to guess.”
Give recognition—Whenever possible, let employees know how their job performance is affecting the company. When they’re doing the everyday things right, it helps to point that out. “One rule of thumb that’s always worked for me,” says Froschheiser, “is that every time you tell someone something they’re doing wrong, tell them four things they’re doing right.”
Celebrate all successes, even small successes—Anything matters. You might have a deal that closed or even completed a tough inventory. “People just want to know things are going to be O.K.,” he says. “In that case, recognizing every milestone, regardless of size, can become important.”
Help employees understand priorities from a company perspective—In this economic environment, companies are asking people to do more with less. That can create anxiety and even lead to burnout. Froschheiser advises sitting down with your staff and creating “A lists” of critical tasks. If people know what matters most to the success of the organization—and understand that they’re not expected to be perfect at every task, it can reduce pressure. “You don’t want to tell anyone they shouldn’t do the absolute best job every time, he notes, “but you also need to be realistic about what people can achieve.”
Provide balance—It can be difficult for employees to separate from their responsibilities, so business owners and managers need to force the issue. You might tell someone to work at home for a day or enforce an office-wide day off. “People get wired and tired and when that happens, can make mistakes,” states Froschheiser. He advises looking for signs of burnout, like less responsiveness and enthusiasm, reduced participation, lack of engagement and increased infighting. “If you see those things, nip them in the bud by helping employees back off from work, even for a little while. It helps them put things back in perspective and recharge their batteries.”
Be calm in the storm—No matter what, employees need to see that you, as the leader, believe that the decisions you’re making are the right ones and that the company is remaining on the path to profitability. If you project stability, employees will follow your lead and feel less apprehensive.
“Money talks, especially in a hard-hit economy, but a bonus or financial incentive isn’t the only conversation on the table,” Froschheiser states. “Savvy CEOs are generating energy within their companies by being transparent about their successes and failures, and keeping the lines of communication open. They are challenging employees to set higher goals, empowering their hires, glorifying their works, and demonstrating their role in the company’s future. These tactics may seem fundamental, but these basic strategies really do work.”
Business tax planning starts now
Business Tax Planning Starts Now
Most major indicators show the national economy is in the early stages of recovery from a prolonged recession. Addressing tax-related business options now, and doing adequate planning with your tax advisor, offers many potential tax benefits and expanded opportunities.
Immediate Opportunities to Explore
Here are some specific strategies to consider that include taking advantage of recently introduced or revised tax deductions and credits.
Expanded Net Operating Loss (NOL) tax relief for business—Recent legislation, the American Recovery and Reinvestment Act of 2009 (ARRA), expanded the NOL carryback period from two to five years for smaller businesses. In November 2009, the Worker, Homeownership, Business Act became law and expanded that carryback provision to apply to larger businesses as well. Essentially, this enables your businesses to deduct recent losses from taxes paid in previous profitable years and generate significant tax refunds. (For more information, see “Tax Implications,” in this issue.)
Section 179 Expense Elections still attractive—While the Section 179 (Internal Revenue Code Section 179) expense election limit is lower for 2010 than in recent years, it still offers considerable tax savings opportunities for companies planning to purchase new equipment.
Section 179 allows a company to expense the first $134,000 of furniture and equipment placed in service by December 31, 2010. This deduction is reduced by one dollar for each dollar spent above $530,000. For more information, consult related IRS instructions.
Reduced time frame for S Corporation Built-in Gains Tax—The time period for built-in gains tax that applies to C Corporations converting to S Corporations has been reduced from 10 years to seven years. If you have considered converting your C Corporation to an S Corporation, now may be time to reexamine that option.
Increased Domestic Production Activities deduction—For 2010, the Domestic Production Activities deduction increases to 9%, up from 6% for 2009. The deduction is available to clothing, goods and food manufacturers, as well as farmers and some other businesses. The deduction is based on:
taxable income derived from qualified production activities, or
taxable income for the year (not counting the deduction).
The deduction cannot exceed 50% of W-2 wages allocable to domestic production gross receipts. For more information, consult related IRS resources.
Expanded target group for Work Opportunity Tax Credit—Workforce expansion follows early phases of economic recovery, and the Work Opportunity Tax Credit (WOTC) provides an opportunity to attain tax credits while also hiring needed employees.
As part of the ARRA, the WOTC was expanded to include unemployed veterans and disconnected youth among target groups. The credit covers targeted workers hired after Dec. 31, 2006, and before Sept. 1, 2011. The WOTC equates to about 40% of the first $6,000 paid in wages, with a credit limit, per employee, of $2,400. Consult related IRS resources for more information.
Questions to Consider
Are you aware of various “green” tax credits and benefits available? During the past several years, the federal government has introduced a variety of tax credits and incentives to promote greater energy efficiency and less reliance upon fossil fuels. Some of those credits apply to renovations of existing buildings or construction of new facilities, as well as the installation of equipment for generating alternative fuel, such as wind or solar power. Credits exist as well for purchases of hybrid vehicles or vehicles that use alternative fuels. The U.S. Department of Energy lists various credits.
Additionally, ARRA provisions include tax benefits to encourage greater use of public transportation, car-pooling, and bicycle transportation by company employees. Employers may offer mass transit passes to employees for a value up to $230 per month, without it being considered a taxable employee benefit. For car-pooling and vanpooling services, that same $230 per month credit applies, if the vehicle seats at least six people, and is used 80% of time or more for employee transportation. At least 50% of the seating capacity must be occupied for employee trips. Bicycle commuters are also eligible for a $20 per month nontaxable fringe benefit. For more information, consult this related IRS article. State and local governments may offer additional incentives too, so you might be missing opportunities with the ever expanding “green” tax benefits available, so plan to discuss with your CPA early in 2010.
Are you effectively monitoring inventory? Are the accounting methods for recording and assigning value to inventory appropriate, accurate, and consistent? Also, are you carrying inventory that is damaged or obsolete? Writing off that damaged or obsolete inventory yields tax savings.
Are you addressing bad debts? How much money is owed to your company? Ensure that you are making appropriate efforts to collect on overdue accounts. If you’re unable to collect your receivables, write off such debt as uncollectible. The IRS generally allows you to deduct such debts, provided you have documentation (telephone logs, letters, correspondence, contracts with collection agencies, etc.) to prove you tried to collect those obligations. Recordkeeping is key in substantiating bad debt deductions.
Will you need to focus on hiring and retaining employees? The need to hire more workers follows the early phases of economic recovery. Federal and state credits may help you in meeting staffing needs.
Now is a good time, too, to either implement or enhance a retirement plan as a means of attracting and retaining employees. Various qualified pension plans allow employees to defer some compensation, with a relatively small match by the employer. Existing plans can be made more appealing by either raising the employer matching percentage or the percentage of earnings an employee may contribute. Eligibility requirements can be correspondingly adjusted to require longer vesting periods. Consult a benefits advisor to determine which plan may work best for your business.
How do state and local tax laws affect your business? Tax regulations vary immensely among states and localities. Where you have a physical business presence or sell products or services presents tax questions. Where a company logo or other intangibles are used may be the basis for tax nexus, too. Being aware of state and local tax laws enables you to gauge the cost of conducting business in various localities. It also helps you recognize various incentives, credits and other opportunities. State tax laws are becoming increasingly complex. Have you had a “state and local tax check up” with your state tax advisor?
Have you thought that Research & Development Credits (R&D) are just for big businesses? R&D credits aren’t just for new product development efforts launched by large corporations; they may also apply to small business activities pertaining to a new function, performance, reliability or quality of a business component. Check them out with your tax professional to see if your company qualifies for a R&D credit. There are some complications to the law in this area so it is paramount to discuss the topic with a qualified tax or financial professional.
As you know, each year brings many complicated tax law changes and related business opportunities. Schedule a time early in the year to consult with your tax or financial advisor about the best strategies for this year and beyond.
Most major indicators show the national economy is in the early stages of recovery from a prolonged recession. Addressing tax-related business options now, and doing adequate planning with your tax advisor, offers many potential tax benefits and expanded opportunities.
Immediate Opportunities to Explore
Here are some specific strategies to consider that include taking advantage of recently introduced or revised tax deductions and credits.
Expanded Net Operating Loss (NOL) tax relief for business—Recent legislation, the American Recovery and Reinvestment Act of 2009 (ARRA), expanded the NOL carryback period from two to five years for smaller businesses. In November 2009, the Worker, Homeownership, Business Act became law and expanded that carryback provision to apply to larger businesses as well. Essentially, this enables your businesses to deduct recent losses from taxes paid in previous profitable years and generate significant tax refunds. (For more information, see “Tax Implications,” in this issue.)
Section 179 Expense Elections still attractive—While the Section 179 (Internal Revenue Code Section 179) expense election limit is lower for 2010 than in recent years, it still offers considerable tax savings opportunities for companies planning to purchase new equipment.
Section 179 allows a company to expense the first $134,000 of furniture and equipment placed in service by December 31, 2010. This deduction is reduced by one dollar for each dollar spent above $530,000. For more information, consult related IRS instructions.
Reduced time frame for S Corporation Built-in Gains Tax—The time period for built-in gains tax that applies to C Corporations converting to S Corporations has been reduced from 10 years to seven years. If you have considered converting your C Corporation to an S Corporation, now may be time to reexamine that option.
Increased Domestic Production Activities deduction—For 2010, the Domestic Production Activities deduction increases to 9%, up from 6% for 2009. The deduction is available to clothing, goods and food manufacturers, as well as farmers and some other businesses. The deduction is based on:
taxable income derived from qualified production activities, or
taxable income for the year (not counting the deduction).
The deduction cannot exceed 50% of W-2 wages allocable to domestic production gross receipts. For more information, consult related IRS resources.
Expanded target group for Work Opportunity Tax Credit—Workforce expansion follows early phases of economic recovery, and the Work Opportunity Tax Credit (WOTC) provides an opportunity to attain tax credits while also hiring needed employees.
As part of the ARRA, the WOTC was expanded to include unemployed veterans and disconnected youth among target groups. The credit covers targeted workers hired after Dec. 31, 2006, and before Sept. 1, 2011. The WOTC equates to about 40% of the first $6,000 paid in wages, with a credit limit, per employee, of $2,400. Consult related IRS resources for more information.
Questions to Consider
Are you aware of various “green” tax credits and benefits available? During the past several years, the federal government has introduced a variety of tax credits and incentives to promote greater energy efficiency and less reliance upon fossil fuels. Some of those credits apply to renovations of existing buildings or construction of new facilities, as well as the installation of equipment for generating alternative fuel, such as wind or solar power. Credits exist as well for purchases of hybrid vehicles or vehicles that use alternative fuels. The U.S. Department of Energy lists various credits.
Additionally, ARRA provisions include tax benefits to encourage greater use of public transportation, car-pooling, and bicycle transportation by company employees. Employers may offer mass transit passes to employees for a value up to $230 per month, without it being considered a taxable employee benefit. For car-pooling and vanpooling services, that same $230 per month credit applies, if the vehicle seats at least six people, and is used 80% of time or more for employee transportation. At least 50% of the seating capacity must be occupied for employee trips. Bicycle commuters are also eligible for a $20 per month nontaxable fringe benefit. For more information, consult this related IRS article. State and local governments may offer additional incentives too, so you might be missing opportunities with the ever expanding “green” tax benefits available, so plan to discuss with your CPA early in 2010.
Are you effectively monitoring inventory? Are the accounting methods for recording and assigning value to inventory appropriate, accurate, and consistent? Also, are you carrying inventory that is damaged or obsolete? Writing off that damaged or obsolete inventory yields tax savings.
Are you addressing bad debts? How much money is owed to your company? Ensure that you are making appropriate efforts to collect on overdue accounts. If you’re unable to collect your receivables, write off such debt as uncollectible. The IRS generally allows you to deduct such debts, provided you have documentation (telephone logs, letters, correspondence, contracts with collection agencies, etc.) to prove you tried to collect those obligations. Recordkeeping is key in substantiating bad debt deductions.
Will you need to focus on hiring and retaining employees? The need to hire more workers follows the early phases of economic recovery. Federal and state credits may help you in meeting staffing needs.
Now is a good time, too, to either implement or enhance a retirement plan as a means of attracting and retaining employees. Various qualified pension plans allow employees to defer some compensation, with a relatively small match by the employer. Existing plans can be made more appealing by either raising the employer matching percentage or the percentage of earnings an employee may contribute. Eligibility requirements can be correspondingly adjusted to require longer vesting periods. Consult a benefits advisor to determine which plan may work best for your business.
How do state and local tax laws affect your business? Tax regulations vary immensely among states and localities. Where you have a physical business presence or sell products or services presents tax questions. Where a company logo or other intangibles are used may be the basis for tax nexus, too. Being aware of state and local tax laws enables you to gauge the cost of conducting business in various localities. It also helps you recognize various incentives, credits and other opportunities. State tax laws are becoming increasingly complex. Have you had a “state and local tax check up” with your state tax advisor?
Have you thought that Research & Development Credits (R&D) are just for big businesses? R&D credits aren’t just for new product development efforts launched by large corporations; they may also apply to small business activities pertaining to a new function, performance, reliability or quality of a business component. Check them out with your tax professional to see if your company qualifies for a R&D credit. There are some complications to the law in this area so it is paramount to discuss the topic with a qualified tax or financial professional.
As you know, each year brings many complicated tax law changes and related business opportunities. Schedule a time early in the year to consult with your tax or financial advisor about the best strategies for this year and beyond.
Net Operating Loss Carryback Option Extended
Net Operating Loss Carryback Option Extended
Under a revenue procedure recently issued by the IRS, many businesses can use losses incurred during the economic downturn of 2008-09 to reduce income from prior tax years. The provision allows businesses to elect to carryback a net operating loss (NOL) for a period of three, four or five years, or a loss from operations for four or five years, to offset taxable income in those preceding taxable years. The procedure applies to taxpayers that incurred an NOL or a loss from operations for a taxable year ending after December 31, 2007, and beginning before January 1, 2010 (it had previously been limited to an end date of January 2009).
A net operating loss typically occurs during a period in which a company’s allowable tax deductions are greater than its taxable income, resulting in a negative taxable income, which generally happens when a company has incurred more expenses than revenues during the period. The NOL carryback procedure can be used to recover past tax payments or reduce future tax payments.
An NOL or loss from operations carried back five years may offset no more than 50% of a taxpayer’s taxable income in that fifth preceding year. This limitation does not apply to the fourth or third preceding year. The relief provided under the Worker, Homeownership, and Business Assistance Act of 2009 differs from similar relief issued earlier this year in that the previous relief was limited to small businesses. The current relief is applicable to any taxpayer with business losses, except those that received payments under the Troubled Asset Relief Program.
Under a revenue procedure recently issued by the IRS, many businesses can use losses incurred during the economic downturn of 2008-09 to reduce income from prior tax years. The provision allows businesses to elect to carryback a net operating loss (NOL) for a period of three, four or five years, or a loss from operations for four or five years, to offset taxable income in those preceding taxable years. The procedure applies to taxpayers that incurred an NOL or a loss from operations for a taxable year ending after December 31, 2007, and beginning before January 1, 2010 (it had previously been limited to an end date of January 2009).
A net operating loss typically occurs during a period in which a company’s allowable tax deductions are greater than its taxable income, resulting in a negative taxable income, which generally happens when a company has incurred more expenses than revenues during the period. The NOL carryback procedure can be used to recover past tax payments or reduce future tax payments.
An NOL or loss from operations carried back five years may offset no more than 50% of a taxpayer’s taxable income in that fifth preceding year. This limitation does not apply to the fourth or third preceding year. The relief provided under the Worker, Homeownership, and Business Assistance Act of 2009 differs from similar relief issued earlier this year in that the previous relief was limited to small businesses. The current relief is applicable to any taxpayer with business losses, except those that received payments under the Troubled Asset Relief Program.
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