Sunday, November 27, 2005

Small Business Tax Planning Part 2

Businesses may take these tax moves before the end of 2005 if they are on a calendar year end. On of the major tax actions a small business can make is to purchase new equipment for an immediate reduction in year 2005. This process of “expensing” is allowed up to $105,000 and is subject to a dollar for dollar reduction for purchases over $420,000. The equipment must however be put into use before the end of the year.

The income tax rules for depreciation include conventions that determine how much depreciation a small business can claim in the first year, thus it is important to time your purchase to reap the best tax benefit. The two types of conventions are “half-year” and “mid-quarter” conventions. The half year conventions applies to all property that you begin using during the year as if it was placed in service at the mid point of the year regardless of when it was actually placed in service. The mid –quarter convention is used if the cost of the equipment placed in service during the last three months is more than 40% of the total equipment placed in service for the year. The half year convention can no be used if the mid-quarter rule applies. As you can see it is important to know the cost of all the equipment placed in service for your business to ensure that you reap the benefits of the half-year convention. So if you are thinking about purchasing additional equipment before the end of 2005, speak to your tax advisor to map out a strategy for depreciation.

Other small business tax moves to make before the end of 2005 are:

Delay or accelerate income (billings) to accomplish you tax planning goals
S-Corp and partnerships’ owners can increase their basis by making a capital contribution or loaning the company money before the end of 2005. If a loss is expected these owners can deduct those losses up to their percentage basis in the business.
Sole Proprietors should setup retirement plans before the year end to lower their taxable income.
Paying dividends to stockholders (including yourself) will qualify for a reduced tax rate. These dividends reduce the risk of taxes on accumulate earning and may alleviate any payroll compliance issues relating to excessive executive pay.

One of the most important areas to uncover tax saving is through the creation of a budget. It is important for small business owners to speak with their accountant or tax advisor and setup a budget to ensure that the business goals are met and there is adequate cash flow to reach those goals.

Until next time

Brian N. Stovall
Consultant – Accounting and Business Advisory
The Brico Group, Inc.
Small Business Consulting and Outsourcing

Sunday, November 20, 2005

Year End Tax Planning For You And Your Small Business Part I

As the year 2005 comes to a close, there is no better time than the present to begin to evaluate your tax situation. The fall is the best time of the year to assess your tax liability and make the necessary transactions to maximize your tax savings for the year. For a typical small business owner, your personal tax situation and company’s tax situation may overlap. In the coming days we will take a look at various year end tax saving ideas for yourself and your business. The first post will deal with individual tax saving strategies and the next with tax savings for your business.

Individual Tax Saving Strategies

Let’s first deal with retirement plan contributions and health saving accounts. This is a great time to maximize your retirement plan contributions to lower your taxable income and invest more for retirement. If you are a business owner it is also a good time to setup a retirement plan if you don’t already have one set up. If your business is a sole proprietor, consider setting up an IRA to lower your taxable income. Health savings accounts (HSA) are another way to lower your tax bill for 2005. Consider setting up a HSA because you can deduct contributions to the account and the account earns interest. These earnings are tax –deferred until withdrawn and any amounts used to pay medical expenses are withdrawn tax free. If amounts are withdrawn after the age of 64 and not used for medical bills, these will be treated like an IRA.

If you invest in mutual funds, it is a good idea to determine whether the mutual fund will pay a dividend that will occur early in the next year but considered paid in the year 2005. The year end dividend can make a difference in the amount of tax you pay for the year 2005. If the mutual fund has an automatic reinvestment of dividends option, those dividends reinvested will be taxable as a long term capital gain. These gains will qualify for tax relief as long as they are considered long term. Short term capital gains will not qualify as tax relief and will be considered as “ordinary dividends.” To get the best tax advantage, it will be good to wait till after the dividend to buy additional shares and to buy those shares in 2005. Also it is important to opt to take the dividend in cash instead of reinvesting it.

Speaking more on gains and losses, a great way to minimize your tax liability is to match your gains with your losses for the year. Try to avoid short-term gains which are usually taxed at up to 35% as opposed to long-term gains of 15%. If possible try to reduce short-term gains with short-term losses (up to $3000). Some ways to accomplish this are to sell an investment that you have accumulated a loss on in the year that you have a large capital gain, selling an investment that has generated a loss and repurchasing the same security or a similar security within 30 days, and if you have losses selling another investment as a gain and immediately repurchasing it.

Another way to minimize your tax bill is to either accelerate deductions and/or defer income. Great ways to accelerate deductions are the following:
· pay state estimated taxes in December as opposed to the January due date. The payment must be reasonable estimate of your tax liability.
· Paying your property taxes in 2005 instead of in installments due in 2006
· Bunching “threshold expenses” into one year. These expenses include itemized deductions, medical expenses and dues.
· Purchasing large items subject to state sales taxes that may give you a larger deduction that your state income tax deduction

Ways to defer income for 2005 are:

Selling investments that will produce a gain at the end of the year to defer payment of taxes to another year
Deferring receipt of a year-end bonus till next year to defer payment of taxes (other that the withheld portion). Only works for bonuses that are not contractually due in 2005
Waiting till next year to exercise stock option sells
If self employed, delay cash inflows until the end of December. Consider billing customers until the end of December.

These are just a few personal tax moves for you to make in 2005. In the next post we will uncover additional tax saving for small business owners and how those strategies may affect their personal tax situation. As with any suggestions on tax planning, check with your tax advisor for more specific suggestions and strategies for your own tax situation. Until next time, happy tax planning.

Brian N. Stovall
Consultant – Accounting and Business Advisory
The Brico Group, Inc.
Small Business Consulting and Outsourcing

Friday, November 18, 2005

Benefits of a Small Business Network

Have you ever considered having a network for your small business? You may respond to this question, “Sure I have several contacts of colleagues in my field who I can work with to build my client base.” Well as a small business owner that is all well, in good but for our purposes today I am talking about a small business computer network.

When people hear the term network, especially when they are dealing with computers, they tend to think of a conglomerate of computers linked together by means of a mega-server stored in the company server room – and that is a good example of a network. However, for a small business owner, having a computer network is just the same as a large, enterprise network – only smaller.

Here is the deal, the criteria for determining if your small business is “eligible” to setup a computer network is simple – if you have more than one computer in your office, you are indeed a candidate to create a small business network. A two pc network may seem small in comparison to a large enterprise network however; the functions it provides are similar and powerful.

For our purposes today, I will highlight two possible network architectures that you can use for your small business. The two the most popular small business networks are a peer-to peer and a traditional network. The main differentiation between the two is the use of a server (will explain what exactly a server is in a moment). In a peer-to-peer network what you have is two computers connected together by means of a crossover cable (a crossover cable is similar in appearance to a Cat5 network cable). The crossover cable enables users of the two connected computers to share files, documents, etc. However, security is an issue with the peer-to-peer network. The reason being is that with a peer-to-peer all the files are shared between the two computers. Therefore, anyone using PC number 1 can see all the files and documents on PC number 2. That is not a good situation if you have files on PC number 2 that you do not want the user of PC number 1 to see.

With that in mind, we discuss the traditional network. With a traditional network, files, documents and resources are shared by means of a server. A server is where all the files, documents, etc that are needed by everyone are stored and shared out. Personal files can also be stored on a server. Different access levels can be granted to each file, document or whatever for that matter which makes a traditional network a far more secure option.

In my next blog, we will go into depth about the two kinds of network and even provide some network planning and setup tips.

Til’ next time…Blog on!
Brian J. Winston
CTS Consultant
The Brico Group, Inc.