Yearend tax planning and projections may be more complicated

(AP) – Many small business owners meeting with their accountants this month and next may find that year-end tax planning and projections for 2008 are a little more complicated than usual because of the uneasy economy.

“We’re finding a lot of clients due to the economy aren’t doing as well as they’ve done in previous years,” said Jeffrey Berdahl, a certified public accountant with Berdahl & Co. in Center Valley, Pa. “We’re not seeing as much of top-line revenue growth.”

For many business owners, that means cash flow isn’t as healthy as they’d like. And so decisions typically made toward the end of the year – for example, whether to buy new equipment or whether to set up a retirement plan – need to be thought through even more carefully.

As always, what businesses do for the balance of the old year needs to be considered in the context of projections for 2008. And no decision should ever be based solely on how much it might lower your tax bill – every step you take should have a sound business reason behind it.

The common wisdom in year-end planning is to try to defer income to the New Year, and accelerate deductions from January into December. If 2007 has been a hard year, and your tax bill is likely to be smaller than next year’s, you might want to consider the reverse, pulling some income into this year, and putting off that computer or other equipment purchase until January.

At the end of the year, many owners go shopping to qualify for a Section 179 deduction, which allows small businesses to deduct up-front rather than depreciate over time the costs of buying certain kinds of equipment, such as cars, computers, manufacturing machinery and office furniture.

But “if you’re going to have a loss or break even, it’s going to be useless” to take the deduction, said Gordon Spoor, a certified public accountant in St. Petersburg, Fla.

Ginger Broderick, whose accounting firm Broderick & Co. is located in New York, said owners might want to pre-bill customers who are willing to pay early. And, she noted, while you need to make many retirement plan contributions by year-end, “you’re not required to pay bonuses in December,” so you might want to move those deductions to January.

But Spoor noted that as you make such decisions, you need to keep your eye on cash flow. “That’s the life blood of a small business,” which often doesn’t have access to lines of credit that larger companies do, he said.

Some companies may find that they need to accelerate income into this year because they need it to keep operating now, Spoor noted. But, he cautioned, “shifting income is a fool’s game; you never know what’s going to happen.”

“You could be shifting into a higher tax bracket next year,” he said. “You don’t have a crystal ball.”

Speaking of crystal balls, there’s often a lot of conjecture at the end of the year about what changes in the tax law might be forthcoming in the new year.

Of course, no one knows what’s going to happen, but Berdahl noted, “we’ll probably have some stability in tax rates – no one is going to pass a tax increase in an election year.”

As you go through the process of year-end planning, you should also take a look at your remaining estimated tax payments – if your tax bill is going to be smaller, maybe you don’t need to make such a big final 2007 payment.

Broderick said businesses that have loans up for renewal should be very careful about their financial positions, or they might find themselves out of compliance with lending agreements and then find they’re denied a new loan.

“If you’re having a bad year, let the banker know in advance,” she advised. “Some bankers may have the ability to push your renewal through” if they know about your problems in advance. (This is one of the reasons why you need to have a good relationship with your banker, Broderick noted.)

If you’ve been meaning to set up a retirement plan, but feel you don’t have the money now, remember that the plans known as Simplified Employee Pensions, or SEPs, don’t have to be set up and funded until the due date of the owner’s tax return.

So, if the owner is filing a Schedule C, Profit or Loss From Business, and plans to obtain an automatic extension of the April 15 filing deadline, he or she has until Oct. 15 to create a SEP, Broderick said.

Small businesses may face more challenges when estimating tax bills for the year, accountants are warning. * Photo by CHRIS SCARNATI