A Checklist for Year-End Tax Planning

Focus on two generous tax breaks likely to shrink dramatically in 2012, then review depreciation options and ensure you’re not inviting IRS scrutiny, says CPA Michael Custer

As the end of the year approaches, small business owners need to meet with accountants or tax preparers to review tax-planning strategies. “Every accountant is going to be sitting with their entrepreneur clients in the next few weeks to see what they can do, both on the business- and the personal-tax side, before the end of the calendar year,” says Michael Custer, a CPA and principal at Kaufman Rossin in Miami.

Because so many small businesses are organized as “flow-through” legal entities such as S-Corps and LLCS  -meaning that business income is reported on the owner’s personal tax return – it is helpful to have the same person do all your tax preparation, Custer  says. “If you don’t have one accountant working on your business and your personal returns, at least watch out and make sure both of your accountants are aware of everything you’re doing. I have inherited situations where this hasn’t happened and I’ve found missed opportunities,” Custer says.

Here are some crucial items owners should include on their checklist:

• Tax and jobs bills passed in 2010 increased the ability for small business owners to deduct new and used equipment purchases under U.S. Tax Code section 179. They allow small companies to deduct the full amount of the purchases upfront, rather than depreciate the cost of such items over many years. The deductions apply to tangible equipment and personal property purchased and put into service in 2011, including computers, furniture, telephone systems, certain vehicles and software, and machinery used for manufacturing, Custer says. Leased equipment also qualifies.

For tax year 2011, the amount of equipment that can be deducted is $500,000, double the figure for 2010, and the total amount of equipment that can be purchased increased to $2 million, from $800,000 previously. The deduction begins to phase out, dollar-for-dollar, after the $2 million threshold because it is targeted specifically at small and midsized companies that typically have limited budgets for capital purchases, Custer says: “If you buy $2.1 million, that hundred thousand in excess reduces your deduction down to $400,000.”

In 2012, the deduction is scheduled to drop to $125,000. In 2013, it’s expected to go back to the 2002 level of $25,000, unless Congress takes action to raise it again.

• A supplement to section 179 allows for “bonus” depreciation for companies that buy more than $500,000 in qualified equipment in 2011. It allows for 100 percent depreciation, up from 50 percent last year, and applies only to new equipment, unlike section 179. Typically, bonus depreciation would be taken after companies reach their $500,000 limit under section 179.

Bonus depreciation allows businesses that have no taxable profits in 2011 to carry a net loss forward to future years if they claim it this year, Custer says. This would make it useful for startups that are investing for the future and companies that have struggled during the recession but see the potential for growth in the coming years.

Keep receipts for purchases, leases, and installations to document that your equipment was paid for and put into service in 2011, Custer says.

• If your company’s financial situation warrants, you can talk to your CPA about accelerating deductions and deferring income into next year, but don’t use these widely discussed strategies if they don’t make sense, Custer says. “Often, companies prepay state and real estate taxes in December, even if they are due in 2012, or conclude a big sale in the next calendar year. But if you’re afraid of losing a sale if you delay it – or you need the cash – don’t let the tax tail wag the dog,” he says.

• On the personal side, end-of-year charitable donations and Roth IRA conversions would be things to think about before the end of the year. And make sure you are not going to be in a position to attract unwanted IRS scrutiny on your personal or business returns. “The IRS is out there, more so now than ever, and its use of technology is increasing,” Custer says. “There has been an increase in exams fueled by computer cross-matching between what’s being reported on business and personal returns and on returns from separate business entities that are all part of the same closely held business.”

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.