WITH the economy in terrible shape, owners of small businesses could use a break. The tax code offers many to choose from, including some recent additions, and others may be on the way.
Businesses received a batch of concessions late last year, when several measures that expired in 2007 were extended to cover 2008, said Barbara Weltman, a lawyer and author of “J. K. Lasser’s Small Business Taxes.” These include a 20 percent credit on research expenditure and a provision that allows businesses that lease office or other space to recover the costs of improvements over 15 years instead of 39.
A separate break, introduced as part of the Economic Stimulus Act of 2008, was a doubling, to $250,000, of the amount of equipment and other purchases that businesses could write off immediately, instead of a bit at a time through depreciation formulas, she noted.
The figure may go even higher. J. D. Foster, a researcher in tax and entitlement policy at the Heritage Foundation in Washington, pointed to “a consensus in Congress to extend and expand small-business expensing.”
It would help redress an inequity that pervades the taxation of business, he said: the fact that income is generally taxable immediately, while many costs — the other side of the ledger — must be deducted only over time, often a very long time.
A more liberal expensing regimen “seems to be something that has broad consensus politically and is certainly helpful for small businesses,” Mr. Foster said. Just how valuable a benefit it is in a time like this, though, is debatable.
“It doesn’t do any good if you don’t have enough income to use the deduction,” he pointed out.
Ms. Weltman agreed, saying that the same applies to many other breaks. Doing even less good for small business are changes in some states that are seeking ways to shore up their depleted treasuries. She advised vigilance for “piddling kinds of tax increases that can impact small business.”
One change to federal tax rules that could be useful in today’s climate, especially for businesses that were on a winning streak before slamming head-on into the recession, is found in the stimulus package now snaking its way through Congress.
A provision would allow businesses that had a loss last year to offset it against profits earned as far back as five years. Businesses could immediately recoup tax paid on the profits that the 2008 loss wiped away.
“Ordinarily when a business suffers a net operating loss, it can carry back the loss two years,” Ms. Weltman explained. Lawmakers “want to extend that to five years, so if you have a very big loss, you’re going to be able to get a refund now. They’re trying to let businesses get some money back so they can use it to survive.”
The amount that can be carried back is limited to 90 percent of the loss; the rest is forfeited. This piece of the provision is known as “Rangel’s wrinkle,” she said, a reference to Representative Charles B. Rangel, the New York Democrat who is chairman of the House Ways and Means Committee, the panel that oversees budget matters.
Deductions and accounting devices won’t prevent some businesses from being unable to pay their full tax bill. As with individual taxpayers, the Internal Revenue Service is willing to show businesses some leeway, a spokeswoman for the agency said. Debt collections may be postponed if matters have gone that far, and leniency may be granted when payments are missed under installment agreements.
Whether or not they get a hand from Congress or the I.R.S., owners of small businesses can give themselves a break by structuring their affairs in a tax-efficient way. Fred Freifeld, an accountant in South Florida, tells fledgling entrepreneurs that they can reduce their liability by incorporating, but that doing so can also make tax matters more complicated, with more kinds of taxes to pay and more frequent payments.
Small-business owners must make payments of estimated personal and, if relevant, corporate income tax, as well as self-employment tax, the equivalent of Social Security and Medicare taxes paid by employees and employers. That requires discipline and, of course, cash, which can be hard to come by when a business is new or operating in a weak economy.
“Don’t get behind the eight ball as far as taxes go,” Mr. Freifeld said. “You’re not used to estimated tax payments; you’re used to being an employee and having taxes withheld. Taxes have to be paid quarterly, and there are penalties if you don’t. A lot of times people who start their own businesses don’t think about it.”
IT is not as though business owners have nothing else to occupy their thoughts. The complexities of taxation and a concentration on other aspects of running a business may mean that new tax breaks are not as beneficial as these owners hope.
“The tax code is a pain in the neck,” Mr. Foster said. “My sense is that small-business people have very little time or inclination to follow the threats or opportunities developing in Washington. If there were a proposal to reduce tax rates on small businesses, it would be more eye-catching.”
Source: http://www.nytimes.com/2009/02/08/business/yourtaxes/08entre.html?ref=smallbusiness
