Business Development Articles Industry Alert Hot Shots Photo Gallery Message Boards Visit Our Advertisers: Advance Corp, Braille-Tac™ Div. Alcan Composites CADlink Technology DMS- LED Displays Epson Explan Sign Products International Sign Assoc. JetUSA Laminator.com SIGN.com Saw Trax Mfg, Inc. SGIA Specialty Graphics Imaging Assoc Sheffield Plastics Inc. SignPro Systems Sign Tracker TLC Sign and Banner UL University US Banner Corp USSC- Sign World USA Wasatch Woodland-Sign Letters/Metal Letters

Many sign operations, for instance, will benefit from a significant increase in the amount allowed to be expensed or immediately written-off under the Section 179 expensing election from the present $25,000 level to $100,000. The doubling of the amount of equipment purchases, from $200,000 to $400,000 eligible to be expensed under Section 179, before a phase-out occurs will also help. Admittedly, few small sign shops will routinely acquire more than that amount of equipment in any tax year.

An increase in the first-year “bonus” depreciation allowance, from 30 percent to 50 percent of the cost of qualifying business property will also help tremendously. A few sign professionals will achieve the maximum benefit by using Section 179 expensing first on purchases of used assets and assets with lengthier depreciable lives, while saving the bonus depreciation for any qualifying purchases not picked up by Section 179.

In another area, many closely held sign businesses have traditionally tried to extract funds in the form of compensation, rather than as dividends. They now have a new option to plan for: compensation will still receive a corporate-level tax deduction while dividends will not. Compensation, however, will continue to be taxed at rates as high as 35 percent at the individual level while dividends will now be taxed only at 15 percent.

One planning strategy might involve finding some method other than compensation to reduce the incorporated sign operation’s tax bill ­- retirement plan contributions and interest deductions are two options. This simple strategy, combined with a return to paying dividends to shareholders, might offer the best of both worlds. And, yes, such strategies are legal.

Basic Tax Planning Basics
When thinking about any type of tax planning, every sign professional should keep in mind that although the IRS may occasionally disagree, the courts strongly back every taxpayer's right to choose the course of action that will result in the lowest legal tax liability. Thus, as the end of the tax year fast approaches, every sign professional will be faced with several different options as to how to complete certain taxable transactions.

Since the tax law requires that a transaction be "closed" or completed before the end of the sign operation's tax year, now is the time to think about those moves that will reduce the annual tax bill not only this year, but in future years. That process is labeled "tax planning."

At it’s most basic, tax planning is a process of looking at various tax options in order to determine when, whether and how to conduct business -- and personal -- transactions so that taxes are reduced or even eliminated.

The Year-End Strategy
Our tax system has graduated rates that increase along with the income of the sign business at various tax rates. Thus, one strategy for saving taxes means reducing the tax bracket of the sign operation. Remember that strategy for getting the most from the new 15-percent tax rate for dividends, finding another way to reduce corporate level income ­- and taxes?

Obviously neither a sign business nor any business owner can literally reduce their federal income tax rate. They can, however, take actions that will have a similar effect. For example:

• Choosing the optimal form of organization for the business (such as sole proprietorship, partnership, corporation or S corporation). Although not a year-end tax planning strategy, this option deserves attention in the overall tax planning process especially in light of the new 15 percent tax rate on dividends paid by incorporated sign businesses.
• Structuring a transaction so that payments received are classified as capital gains. Long-term capital gains earned by non-corporate taxpayers are subject to lower tax rates than other income.
• Shifting income from a high-tax bracket individual (such as you, the business owner) to a lower-bracket individual (such as your child). One fairly simple way to accomplish this is by hiring your children. Another possibility is to make one or more children partners in the business, so that net profits are shared among a larger group.

The goal is usually to reduce taxes this year. To be really effective, however, the tax bracket should be consistent year after year. If income is up this year, but expected to be down next year, a sign professional might want to postpone assets sales or other unusual transactions that might generate a profit until next year. At that time, the additional profits won't be quite as likely to put the operation into a higher tax bracket.

Depending on their individual circumstances, there are a number of legitimate strategies that a sign professional can employ before year's end to balance things so as to remain in the same bracket this year, next year and for many years thereafter. Those basic year-end savings strategies include:

Delaying Collections
Delay year-end billings or processing of credit card receipts until late enough in the year that payments won't come in until the following year.

Delaying Capital Gains
If the sign professional is planning to sell assets that have appreciated in value, delay the sale until next year -- if this can be accomplished without significantly reducing the price.

Accelerate Payments
Wherever possible, prepay deductible business expenses, including rent, interest, taxes, insurance, etc. But also keep in mind that the tax rules limit tax deductions for some prepaid expenses.

Accelerate Large Purchases
Close the purchase of depreciable personal property or real estate within the current year.

Accelerate Operating Expenses
If possible, accelerate the purchase of supplies or services or the making of repairs.

Accelerate Depreciation
Elect to expense or immediately write-off the cost of new equipment instead of depreciating it. Remember the new Section 179 tax rules now permit every sign business to immediately deduct as an expense up to $100,000 in expenditures for new equipment.

Naturally, what any owner or manager can do depends a great deal on the accounting method used by the operation. A cash basis sign operation, for example, deducts expenses as paid and receipts become income when received -- or made available. An accrual-basis sign business realizes income when billed and expenses when incurred -- regardless of when paid for.

Tax Credits Not Deductions
A tax credit is defined as a dollar-for-dollar reduction in the amount of tax that a sign business owes. Unlike deductions that reduce the amount of income that is subject to taxes, a credit reduces the actual amount of tax owed. And, yes, Virginia, there are still tax credits in our tax rules.

What qualifies as a general business tax credit?

Disabled Access Credit
Years after the passage of the Americans With Disabilities Act, any eligible small business is entitled to a nonrefundable, disabled access income tax credit for expenditures incurred in making a business accessible to disabled individuals.

The amount of this credit is 50 percent of the amount of eligible access expenditures for any year that exceed $250, but that do not exceed $10,250. And, an eligible small business is defined as any sign business that either (1) had gross receipts for the preceding tax year that did not exceed $1 million or (2) had no more than 30 employees.

Pension Start-up Credit
For tax years after 2001, if a sign business begins a new qualified defined benefit or defined contribution plan (including a 401(k) plan, SIMPLE plan or simplified employee pension plan, they can receive a tax credit equal to 50 percent of the first $1,000 in startup costs.

Reducing Taxable Income
By beginning that tax planning process now, many sign business owners can legitimately deduct benefits that would otherwise be classified as nondeductible personal expenses. No sign business owner should, for instance, overlook the possibility of purchasing health insurance, investing for retirement or providing perks like a company car through the business. But perks, particularly those that benefit the owner of a closly-held business or operation, require advance planning.

The Restrictions On Tax Planning
Despite any rumored changes to our tax rules, every sign professional should immediately begin thinking how to reduce their 2003 income tax bills using the rules now in effect. Tax planning should be undertaken immediately, perhaps with professional assistance from your accountant or tax adviser.