In the rush of running a business day-to-day, business owners may neglect to make time to develop a tax strategy. But failing to create a tax plan can result in the business paying more taxes than it needs to, says Rod Murray, senior vice president and middle market leader at Associated Bank.
“Tax planning ties in to the day-to-day and year-to-year operations of a company,” says Murray. “But it also figures in to the longer-term planning, such as succession planning in family owned and privately held companies.”
Smart Business spoke with Murray about why it is important to determine the impact of your decisions on your company’s tax liability.
What are the tax implications of capital expenditures?
When a company needs to acquire equipment, tax consequences may factor in to the choice of an operating lease or a capital lease or commercial term loan. With an operating lease, payments will flow through the company’s income statement, so it’s an expense item that doesn’t affect the overall leverage of the balance sheet. Consulting with a business banker and tax adviser can help you determine which is the better option for your business.
In previous years, companies were able to write off up to $250,000 of qualifying expenses through Section 179 of the Internal Revenue Code, subject to a phase-out if the business had capital expenditures exceeding $800,000. That expensing limit was scheduled to drop to $25,000 for 2011, but the Small Business Jobs Act of 2010 allows eligible companies to expense up to $500,000 of qualifying Section 179 property in both 2010 and 2011. In addition, the act raises the capital expenditures limit to $2 million and expands the definition of Section 179 property.
How can bad debt and operating losses impact a company’s tax situation?
The silver lining to bad debt is that companies can deduct it from their gross income when figuring taxable income. If the business extends money to a client, supplier, employee, or distributor for a business reason and, after attempts to collect, the receivable becomes worthless, that bad debt may be deducted in part or in full. In addition, if a company’s deductions for the year are more than its income, it may have a net operating loss, which can be deducted from income in a year other than that in which it occurs.
What other tax deductions and credits should businesses be aware of?
If a company has hired one or more unemployed workers between Feb. 3, 2010, and Dec. 31, 2010, it is eligible for the new hire retention credit. Businesses may be able to claim a general business tax credit of up to $1,000 per worker when they file their 2011 tax returns.
Businesses can also shelter some of their income with contributions to a qualified retirement plan. If a company has 100 or fewer employees, it may be able to claim a tax credit for a portion of the costs of starting a SEP, SIMPLE or qualified plan. The credit equals 50 percent of the cost to set up and administer the plan and educate employees about it, up to a maximum of $500 per year for each of the first three years of the plan.
The small business health care tax credit can also benefit businesses with 25 or fewer employees. The credit is worth up to 35 percent of a small business’s premium costs. It phases out gradually for companies with average annual wages of $25,000 to $50,000 and for those with between 10 and 25 full-time-equivalent workers.
Finally, the Work Opportunity Tax Credit has been extended through Aug. 31, 2011. This credit provides eligible employers with a credit of up to 40 percent of the first $6,000 of first-year wages of a new employee if the employee falls into one of 12 targeted groups that have consistently faced significant barriers to employment, such as felons and Supplemental Security Income recipients.
How can foreign tax credits impact a business?
Legislation enacted in August 2010 incorporates international reform measures, many of them focused on foreign tax credits. In a move to limit the use of foreign tax credits by U.S. corporations with foreign operations, corporations will no longer be able to split creditable foreign taxes from the foreign income they are associated with. This provision applies to foreign income taxes paid or accrued in tax years beginning after Dec. 31, 2010.
The legislation also ended the foreign tax credit for covered asset acquisitions. Beginning after Dec. 31, 2010, corporations are prevented from claiming foreign tax credits when they engage in covered asset acquisitions such as qualified stock purchases or acquisition of an entity that is treated as a corporation for foreign tax purposes but as a noncorporate entity for U.S. purposes.
In addition, foreign tax credits claimed on a deemed dividend are limited to the amount that would have been allowed on an actual dividend, applicable to U.S. property acquired by a controlled foreign corporation after Dec. 31, 2010.
Finally, the 80/20 rules, applicable to U.S. corporations for which at least 80 percent of gross income is from a foreign source and is attributable to the active conduct of foreign trade, have been terminated. However, dividends and interest paid by existing 80/20 corporations are grandfathered in under the act.
How can an employer sort through all of these credits?
An experienced financial professional can assist in getting you the tax planning help you need through an experienced and knowledgeable CPA. Now is the time to talk with a financial professional to develop a comprehensive plan that maintains the flexibility to adapt to your company’s changing circumstances.
Deposit and loan products are offered by Associated Bank, N.A., Member FDIC and AB-C. Equal Opportunity Lender. Neither Associated Banc-Corp nor any of its affiliates give tax or legal advice. Please consult a financial, tax or legal professional for information specific to your situation.
Rod Murray is senior vice president and middle market leader at Associated Bank. Reach him at (312) 565-5271 or Rodney.Murray@associatedbank.com.