Taxes are a necessary evil for business owners. One problem with business taxes, though, is that tax laws keep changing at the federal, state and local levels. Worse, there are constantly new tax proposals that legislative bodies debate, but that won’t ever become law or are enacted with significant modifications. With tax laws in a state of flux, it makes doing business more difficult.
Often, business owners do not have the time or the resources to keep track of tax law changes, real or rumored, and they do not implement tax-planning strategies on an ongoing basis. These oversights can hurt business owners financially and legally in the long run.
Smart Business spoke with Terry Silver, a partner in Skoda Minotti’s Tax Planning and Preparation Department, to learn about tax changes that might affect business owners during the 2008 tax-planning period, to gain some insights into how they can avoid potentially detrimental surprises and to reinforce the idea that there is no time like the present to start planning their 2007 tax strategies.
Are there any federal tax changes of which business owners should be aware that might affect their 2007 revenue?
So far in 2007, there have not been a lot of changes at the federal level. One tax act earlier in 2007 addressed a provision in the law that affects the purchase of equipment. Business owners can elect to expense equipment they purchase, rather than capitalize and depreciate it over a period of time. That gives business owners an immediate deduction. The rule has been around for a long time, but the dollar amounts have changed. Prior to the change, the maximum that owners could deduct for tax years beginning in 2007 was $112,000. For owners who had spent more than $450,000 for qualified purchases during the year, that amount phased out dollar for dollar starting at that $450,000 level of purchase. Now, for 2007 tax reporting, the $112,000 figure increases to $125,000, and the phase-out begins at $500,000 of purchases. Another thing that will help business owners is that the $125,000 and the $500,000 thresholds will both be indexed for inflation for 2008, 2009 and 2010. These items are probably the most broad-based changes in that piece of legislation.
Another change is the increased deduction for businesses that engage in domestic production activities. The old deduction was equal to 3 percent of the lesser of taxable income or qualified production activities income. That 3 percent deduction has been doubled to 6 percent for tax years beginning in 2007
Taxpayers engaged in research and development should also be aware of the change that could affect whether such expenses should be incurred in 2007 or 2008. The research and development credit was scheduled to expire at the end of 2005, but, late in 2006, Congress extended the credit for 2006 and 2007. As it stands right now, that credit will go away in 2008, but there is always the possibility it might be extended again.
Are there any changes at the state level?
There are a minimal number, which relate mostly to previous legislation. Back in July, 2005, the legislature totally revamped the state’s tax laws to make Ohio more attractive to businesses. They decided to phase out the personal property tax and the corporate franchise tax, respectively, over four to five years and replace them with a commercial activity tax. Accordingly, for the 2008 tax season, business owners will see lower franchise tax rates and a smaller percentage of personal property will be taxable in the current year. At the same time, the commercial activity tax rates will continue to be phased in, so owners will be assessed at a higher rate during the coming year.
Does it matter what type of entity a business is when business owners start tax planning?
Yes. For example, if the business is a regular corporation, or C-Corporation, versus a flow-through entity like a partnership, an S-Corporation or a Limited Liability Company, the focus is a little different. If the business is a flow-through entity, there is no tax at the business level, but the income or loss flows through to the owner. In those cases, the owners’ individual circumstances have to be taken into account. Conversely, with a regular corporation, that is the tax-paying entity, and the owners have to focus on the circumstances at the business level. Those differences are an important consideration for business owners when they are doing their tax planning.
How can business owners stay current on tax changes and how they might affect different types of entities?
One of the best ways is to work with professional advisers. They can provide several beneficial services to business owners. For example, advisers can monitor new or proposed legislation that can affect business owners’ tax positions, run numbers on new changes for them, explain how changes can affect their companies going forward and make sure they are in compliance with tax laws. In short, advisers will help the business owners avoid surprises that could have a significant adverse impact on their revenues and taxes.
TERRY SILVER is a partner in Skoda Minotti’s Tax Planning and Preparation Department, based in Mayfield Village. Reach him at (440) 449-6800 or firstname.lastname@example.org.