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A Year-End End to 2004 Tax Savings
Tax planning primarily involves the timing and method by which a sign operation’s income is reported and its deductions and credits claimed. The bottom-line for year-end tax planning is to time income to fall in years when it will be subject to the lowest tax bite and to time deductible expenses to fall in years when they will offset income subject to a higher tax rate.
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Record Essentials
By separating different types of income (e.g., general receipts from gains resulting from the sale of assets), either the sign business or its owner will pay a lower rate of tax on capital gain and, perhaps, sidestep Social Security (self-employment) tax payments on certain income items.
Every professional must break down the sign operation’s expenses as well. In many closely-held sign businesses, this will involve breaking out deductible business expenses, capital purchases and personal expenses.
There is a multitude of computer software designed to help businesses of all sizes track financial activity. This software can assist both the sign operation’s owner and its tax advisor by providing timely financial information throughout the year.
Timing is Everything
Many sign businesses, especially those using the cash method of accounting, can legitimately prepay some business expenses. With the cash method of accounting, most expenses are deductible in the year they are paid for. All that is required may be a business purposes for the prepayment (e.g., locking in a price, anticipating a scarcity, etc.).
Year-end tax planning might also benefit from delaying income until next year. Remember, however, leaving checks uncashed or receipts in a drawer until January won’t work. All income actually received during the tax year is taxable under the constructive receipts rule. Delayed billing, foregoing advance payments or sluggish collection efforts, are all legitimate methods of delaying income.
Tax Planning for Low Income Years
Keep in mind that a loss from theft or embezzlement is generally deductible for the tax year in which the loss is discovered. No deduction may be claimed in the year of discovery if there exists a claim for reimbursement for which there is a reasonable propspect of recovery.
If a sign operation sustains a loss from a disaster in an area subsequently determined by the President of the United States to warrant federal assistance, a special timing rule exists to help cushion the loss. The election to deduct a 2004 disaster loss in 2003 must be made before the due date of the 2004 tax return (April 15, 2005 for individuals; March 15, 2005 for corporations). The loss is claimed by filing an amended 2003 return.
Planning for Lingering Tax Write-Offs
A similar, and also temporary, increase in the first-year “bonus” depreciation allowance, from 30 percent to 50 percent of the cost of qualifying business property will also have an effect on tax planning. Planning may enable the few sign operations that exceed the Section 179 limits to achieve even greated benefits. Planning to use 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, can increase the maximum first-year write-off..
In another area, the owners of many closely held, incorporated sign businesses now have an option when taking profits from their businesses. Compensation will still be deductible at the corporate-level, 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 a method other than compensation to reduce the incorporated 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.
Tax Credits, Not Deductions
What qualifies as a general business tax credit? 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. 2.) A Pension Start-Up Credit. For tax years after 2001, if a sign professional 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.
Planning a New Structure for the Business With certain exceptions, a corporation operating as an S corporation, does not pay federal corporate income taxes. Instead, S corporate income, losses, deductions and credits “pass through” to the owners to be reported on their tax returns. Thus, S corporation income generally is taxed only once to the shareholders unlike regular ‘C’ corporation income, which is taxed twice once to the corporation and again to the shareholder as dividend income. Don’t forget that dividends paid from an incorporated sign business are temporarily taxed at a rate of only 15 percent.
Like a corporation, a limited liability company (LLC) provides its owners with protection from personal liability for business debts and obligations. But most LLC owners can choose to have their businesses treated as partnerships for income-tax purposes. Partnership treatment means:
Tax Planning Basics Remember, however, the tax law requires that a transaction be "closed" or completed before the end of the tax year. With many of the recently enacted tax cuts scheduled to expire after this year or after the 2005 tax year, now is the time to think about and plan those moves that will reduce the sign operation’s annual tax bill; reductions that will be seen not only on April 15, but in future years as well.
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