With so much confusion surrounding what’s going to happen with tax rates, business owners are facing more than the usual difficulty when trying to do tax planning for the 2010 year end. And, as a result of the recent election, the tax landscape has become even more uncertain, says Mark Klimek, a member at McDonald Hopkins LLC.
“While the recent elections provide some hope that scheduled tax rate increases will be revised or postponed, most people believe that tax rates are going up, especially for those at higher income levels,” says Klimek. “It is hard to predict exactly where tax rates are going to come out, but there is a good chance that 2010 will be the end of the 15 percent rate on dividends and capital gains, and lower individual income tax rates for high-income taxpayers. In light of this, there are different planning opportunities that business owners should consider given the uncertainty.”
Smart Business spoke with Klimek about strategies business owners should consider for 2010 to prepare for the changes in 2011.
Why should businesses be concerned?
More than anything else, taxes affect the bottom line of the business. In today’s environment, most businesses have cut costs as much as they can. If these businesses can save on taxes, the bottom line of the business can be improved without adversely affecting the business itself, the level of service provided to the customers or the quality of products. The complexity of tax laws often results in business owners overlooking opportunities to save on taxes and improve their bottom line.
What can businesses do now to take advantage of current rates?
The likely increases in tax rates will generally impact individual taxpayers, so businesses structured as S corporations or limited liability companies are more at risk, since the income from these types of businesses is taxed to their owners. One way to prepare for an increase is to consider accelerating income into 2010. While this is the opposite of traditional tax planning, which is to defer income, in an environment of rising tax rates, deferral means that income will be taxed at higher rates in subsequent years.
Instead of accelerating income, a company could consider deferring deductions. Some provisions in recent tax legislation allow for faster depreciation of capital assets that were purchased for the business. A business may want to consider not taking that accelerated depreciation, instead deferring it to a later year. There may be other deductions you could put off until 2011, when you may get a bigger tax break.
C corporations do not, at least for now, appear to be subject to the risk of substantially increased rates in 2011. These types of businesses may want to accelerate compensation payments, such as year-end bonuses to certain employees, to allow the employees to take advantage of lower rates in 2010.
