The biggest mistake many small-business owners make when it comes to taxes is waiting until March or April to start thinking about them.
Taxes should be an ever-present consideration, a factor in most business decisions, and not a once-a-year event. Yet accountants report that some of their clients pay little attention to taxes until they are ready to work on their returns, and that is what leads to so many unpleasant surprises at this time of the year.
“When we get to April, our solutions are very limited,” said Jeffrey Chazen, a tax partner at the accounting and consulting firm Richard A. Eisner & Co. LLP in New York. Dec. 31 is also too late, Mr. Chazen said. “It’s an ongoing planning process.”
Mr. Chazen has had clients who didn’t consider their taxes as they managed their cash flow. Some, thinking they had money to spare, sank it into new equipment or inventory and then discovered they didn’t have enough to pay the government.
Steven Botwinick, a certified public accountant in Rochelle Park, N.J., said some of his clients ended 2003 without having taken advantage of the big jump in what’s known as the Section 179 deduction. It allows a small business to deduct upfront, rather than amortize over years, up to $100,000 of the cost of many kinds of new equipment. For 2003, equipment bought on or after May 5 qualified for the deduction, which increased from $25,000 under the tax-cut legislation last year.
Some business owners can salvage some deductions despite a lack of planning. For example, those with SEPs, or Simplified Employee Pensions, still can make contributions that are deductible on their 2003 returns. But the dawdlers, if their plans include stocks or mutual funds, have missed out on the substantial gains Wall Street has enjoyed during the past year.
Still, these owners have until the filing date of their returns — April 15, or if they have filing extensions, Aug. 15 — to make the contributions.
The problem for many owners is that they are so immersed in building the company or meeting with customers — particularly as business improves in a healthier economy — they don’t think about taxes, or they aren’t aware of changes in the tax law that might benefit them. The antidote is to work with an accountant or other tax professional who can help focus an owner on some of the tax issues that can affect his or her company.
Cheryl Pimlott, tax manager for Rothstein Kass, a Roseland, N.J.-based accounting and consulting firm, suggests that owners meet with a tax professional four times a year, or at least twice a year.
Planning will help you make the major decisions such as the ones that Mr. Botwinick’s clients, who didn’t get to take the Section 179 deductions, missed out on.
Ms. Pimlott noted that with changes in the tax law, “it’s a great time to do planning for this year.”
She advised owners of corporations to consider whether they want to switch to a different type of corporation.
For example, the lowered tax on dividends might make a traditional C corporation more appealing, and lower income-tax rates might make an S corporation, which treats income in a fashion similar to a partnership, more attractive.
But planning also will help you achieve much in the way of day-to-day tax savings.
Ms. Pimlott noted that many company owners fail to keep track of their business auto usage or fail to keep good records for other expenses. Although some of these expenditures can be reconstructed later, chances are that poor record-keeping will end up costing a small-business owner at tax time.
Planning helps here in two ways: With periodic prodding from your accountant, you are more likely to keep better records and pay more attention to the expenses you need to keep track of. But planning also means a different kind of mind-set, one that will help you run your business in a more systematic, ordered way.
As Mr. Chazen put it, “you should be looking at your tax bill as you go through the year.”