Between the organization, documentation and planning, preparing taxes often feels like another job. For small business owners, tax planning can add even more to their plates.
As another year comes close to an end, financial planners remind small businesses to make sure they plan for taxes early in the year and to stay in touch with their planners.
Of course, tax deadlines for businesses are different than individual income tax deadlines.
“Deadlines depend on how the businesses are taxed,” says Kurt Heling with Alberts and Heling CPA’s LLC. “If they are structured as an S-Corporation for example, their due date is March 15, basically 2.5 months after the year-end.”
Many challenges can arise when it comes to tax planning, but the uncertainty of government regulations adds another dimension, Heling says. If a small business owner needs to file for an extension and misses the deadline, it can set tax planning back.
Section 179 of the United States Internal Revenue Code was extended last year at the last minute. This allows a taxpayer to deduct the cost of certain types of property on their income taxes as an expense.
“One of the big ones with respect to these tax extenders is Section 179 depreciation, which is basically being able to write off equipment up to $500,000 in the year you buy it,” Heling says. “If they (Congress) don’t extend it, it goes back to $25,000, which is a pretty big deal, and last year it went right down to the wire before it finally passed.”
Terri Lillesand, tax shareholder with Schenck S.C., says when these laws are not resolved, it has an effect on the small business owner when it comes to planning taxes, but it also has an effect on the IRS.
“It’s hard to do tax planning when you don’t know what the tax law is going to be,” Lillesand says, “which in turn, puts the IRS a few weeks behind since they have to update numerous forms.” Heling also says there have been years where it got passed retroactively in January versus December, which raises the question, “How do you plan for this?”
“So far, they have always extended it but you never know exactly what that threshold is going to be,” Heling says. “You never know if it’s going to be the same as it was the year before, so that kicks in some of the uncertainty.”
Lillesand says not knowing about certain extenders that are expired adds uncertainty to how taxes should be planned for small businesses.
“We do not know about these extenders yet since they expired at the end of 2014, and we still do not know what is going to be the tax law for 2015,” she says.
For nonprofit businesses, tax planning can pose unique challenges.
Heling says situations often come up where nonprofits may have an income tax. The abbreviation is UBIT, which stands for Unrelated Business Income Tax.
“An example of this would be when someone donates a parcel of land to the nonprofit and instead of building on that land, they decide to sell that land and get money,” Heling says. “Now you potentially have capital gains from an unrelated business activity that you have to pay taxes on.”
From a tax planning standpoint, Heling says nonprofits don’t end up with a lot of taxable situations, but can accrue some.
“My best advice is they should be talking with tax professionals as well throughout the year, since this is becoming a specialty niche area,” Heling says.
The key to executing productive tax planning is communication. Heling says frequent communication with a tax professional is a great way to plan your taxes and to avoid any last-minute problems.
“The best thing I can stress is to have the conversation with your accountant or tax planning person,” Heling says. “You should have the conversation of ‘here’s where we are at for the year, and here’s what we should be doing.’”
Lillesand also says you need to look at multiple years when planning taxes, instead of just the current year to plan spending, income and other criteria that goes into tax planning.
“Globally, you cannot look at 2015 alone, you have to look at more than one year to figure out what’s best for the person, considering time value of money in regards to tax brackets.
Just looking at one year could potentially give you a wrong answer,” she says.