Five tips for a better tax day: overlooked tax-savings strategies.
As we're well into the busy holiday season, thinking about taxes probably isn't your main priority right now. But according to the tax professionals editors of Hardware Retailing talked to recently, better tax planning is one New Year's resolution you should definitely make.
ACCORDING TO STUART SOBEL, A RETIRED INTERNAL Revenue Service (IRS) manager, and Gary Pittsford, a financial planner who works with independent home improvement retailers, proper planning could help you land more tax savings come April. Read their advice for lowering your tax burden. After all tax day isn't so bad if you receive a refund. Please note that the following tips are suggestions. It is important to always speak with a qualified tax professional to develop the appropriate tax strategy for your particular operation.
Stuart Sobel is the president of Tax Media Network. Sobel has more than 45 years of taxation experience, 30 of those working with the Internal Revenue Service. Sobel regularly speaks at businesses and universities, and he hosts nationally syndicated radio programs and webcasts. View his website at www.taxmedianetwork.com.
Gary Pittsford is president and CEO of Castle Wealth Advisors, a firm specializing in succession planning and financial services for independent home improvement retailers. He has more than three decades of comprehensive, fee-only financial advisory experience and is a Certified Financial Planner. View his website at www.castle3.com.
(1) Think Like It's Tax Day, Everyday
If you wait until tax season, many times it's too late to take advantage of opportunities that could have offered significant savings.
Stuart Sobel (SS): "Tax planning is like fire prevention, while tax preparation is like arson investigation."[c] Get preventative. Consider working with a tax planner or CPA instead of a basic tax preparer. These tax professionals can advise you on everything from tax reform to working with the IRS. A tax preparer is usually a "historian" of the past rather than a tax "saver" for the future.
Gary Pittsford (GP): Many business owners do not take full advantage of deductions and tax planning because they do not ask enough questions, they don't know which questions to ask or they don't know who to ask.
(2) Utilize Deductions and Credits
It's important to understand the difference between a deduction and a credit. Credits are typically worth more than deductions, because a deduction is a percentage based off a contribution, while tax credits are awarded dollar for dollar.
SS: There are two very significant tax credits that occurred in 2011, as a result of either hiring veterans or hiring the long-term unemployed. Hiring qualified veterans can offer a credit as high as $9,600, and hiring the long-term unemployed offers a credit as high as $4,000. Be diligent in your research; these credits do have restrictions, such as length of employment and proper certification.
GP: Unfortunately, there aren't a lot of tax credits for businesses. The biggest tax benefit most retailers can take advantage of is depreciation on equipment they purchase and interest deductions.
(3) Evaluate Your Business Classification Regularly
One of the most important tax decisions you make as a business owner is what form of organization you file under. There isn't a single best classification, but it's important to research the options and review your operation annually. Over time, your business may be better suited to a different classification.
SS: You have to weigh the benefits and drawbacks. Many retailers choose to classify as an S Corp., thinking they don't have to report salaries, but in reality, when the owner of an S Corp. doesn't file anything on line 7 of Form 1120S (officers' compensation), it sends up a red flag to the IRS, and that business will often get examined. Examinations can result in additional tax penalties and interest. Retailers can also form an LLC, but LLCs are typically more beneficial from a liability standpoint than a tax-reduction standpoint.
GP: How yon classifiy your business depends on your goal for the business. For example, if you file as a C Corp., you may pay higher taxes in the long run, because when you try to sell your company, the corporation and the stockholders will be required to pay taxes.
(4) Strategize Depreciation
There are a several ways to think about capital depreciation, and it all comes down to whether you are the buyer or the seller.
SS: (On buying capital assets) Eventually, tax rates are going up, no matter what happens politically, so I suggest looking at the tax savings today as opposed to a greater tax benefit by spreading out the deduction over the life of the assets. Today you might be in a 15-percent tax bracket; tomorrow you might be in a 25- or 35-percent bracket and be eligible for more of a tax break. Similarly, you can choose to carry a net operating loss back and get a refund, or elect to carry the loss forward when the tax benefit (carry-forward) could be higher and apply toward the future. With rates going up, think about the future.
GP: (On selling capital assets) When it comes to paying capital gains tax on the profits you receive from selling assets, you are typically better off paying the capital gains tax as quickly as possible. If you sell an asset for one lump sum, then you want to pay the tax this year, rather than spreading it out over five or 10 years, when the capital gains tax will likely rise. Additionally, if yon plan to make gifts of stock in the company to children who will be taking over, you should consider doing it this year. The gift tax exemption in 2012 is $5 million per person, and in 2013, there is a good chance that it will be reduced to $1 million per person.
(5) Don't be Afraid to Ask for Help
We all know the IRS inserts a penalty for missed deadlines/mistakes, but what many people don't know is that the government often works with businesses to abate those fines.
SS: Of the total accounts receivable due to the IRS, on average, 36 percent is actual tax and 64 percent is interest and penalties. Most people don't realize penalties are a subjective determination by the IRS. Just because you get a notice that you've made a mistake doesn't mean the government won't work with you. Typically, if you acknowledge the mistake, it is the first time it has happened and you show yon are taking steps to fix the problem, they'll work with you.
Visit www.irs.gov and type "Audit technique guides" into the search bar for free videos and handbooks discussing tax issues relative to specific businesses, including retail establishments and check out www.nrha.org/2012taxadvice for Gary Pittsford's video in which he offers helpful end-of-the-year tax advice.
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|Title Annotation:||BUSINESS & FINANCIAL|
|Date:||Dec 1, 2012|
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