It’s back! What's back you might ask? Now think about it - what haven't we had to do the last two years that we normally had to do in the past? What is it we avoid doing every year until the last minute? What is it we spend a lot of time gathering data for, not because we want to, but because we have to?
Have it figured out yet? Does the word "tax" come to mind? After all we've been hearing for the last six months, the word "tax" better be on everyone's mind going forward. But it's not only the word tax you need to consider; you have to add the word "planning." And now you know what's back: tax planning!
If tax planning ever had to come back in earnest, 2010 is the year for it. On both the "pay less tax side" and the "pay more tax side," this is the time to start planning ahead to make sure you get all the benefits you have coming to you from the changes and new rules, while at the same time minimize the new and increased taxes that are coming your way.
Higher taxes ahead
Through 2009, most contractors reduced their tax bite because of lower income levels and/or by applying operating loss carryovers created by bonus depreciation or Section 179 Deductions. The Section 179 (up to $250,000 write-off for 2010) is still with us for 2010, but disappears for 2011.
Starting in 2010, the new health care bill provides both hiring incentives and tax incentives for small companies offering insurance to their employees. Starting in 2011 and beyond, however, the bill adds new taxes on high-income earners.
Beginning in 2011, new budget proposals reinstate the 39.6% tax bracket, while at the same time imposing limits on itemized deductions and exemptions. Capital gain rates also increase to 20%. None of this is good if you hope to make more money by adding your "flow-through" entity income to your W-2 income.
Now, let's keep in mind the good stuff is related to hiring people and offering insurance. The bad stuff is a result of:
- business picking up, causing you to run out of tax deductions because you used them up in the past;
- not buying any new or used equipment;
- and becoming, in general, more efficient because you learned how to run your business with less cost.
Add in a couple of W-2s and it will be easy to hit the $250,000 mark when all these new taxes kick in.
You also have to consider that we are talking tax books, not your company books. These are two different things. If you want a very big surprise someday, just rely on your books to estimate your taxable income!
They are even messing with the death tax. Initially, we go from zero estate tax in 2010 to a 55% rate for any taxable estate over $1 million. After some hard negotiations, we are at a 45% tax rate with a $3.5 million exemption. Ouch!
Steps to reduce your tax burden
You get the point here, I hope. If your income goes up or your estate value increases, you are going to pay for the government deficit created by our friends in DC.
Here is what you need to do to review your tax situation:
- Get a current understanding of your income tax position.
- Decide if flow-through entities (LLC or Sub S) still work for you, or if a C-corp is better suited to reduce your tax burden.
- Plan out and estimate your "taxable" income for 2010 and 2011. Update as necessary.
- Make sure you are getting the tax benefits from the jobs bill or insurance incentives.
- Review your estate tax situation. That includes your life insurance policies and how they are structured.
Getting a handle on your tax position is a must if you see your business starting to pick up due to new business opportunities. It is also a must if you plan to sell your business once the economy improves.
Garry Bartecki is the managing member of GB Financial Services LLP and VP Finance for the Associated Equipment Distributors. He can be reached at (708) 347-9109 or firstname.lastname@example.org.