Small-business owners are having a tough time trying to figure out the best year-end tax strategies for 2008 as the global financial meltdown turns conventional planning wisdom on its head.
Many also are unaware of new federal tax rules -- some beneficial to small businesses -- that were part of this year's economic stimulus and emergency bailout bills. And in California, they have to keep track of a long list of potentially costly changes, including accelerated estimated tax payments next year, passed by legislators attempting to plug the state's massive budget shortfall.
"It's hard to plan," said Lynda Darna, controller at RP & Associates Inc., a 37-employee firm in Hermosa Beach that develops custom promotional merchandise for Patron Spirits Co., Remy Martin & Co. and other large companies.
Last week, Darna and owners Richard and Lisa Lopez Pola were keeping an eye on the economic team being assembled by President-elect Barak Obama, looking for clues to next year's tax climate.
As is the case at businesses large and small this year, sales at RP & Associates are down. The 10% decline, to $27 million, is modest, but RP & Associates and other businesses are unsure how revenues will hold up next year.
Even companies' tax accountants are unsure when to expect tax hikes or whether valuable deductions should be taken this year when losses are clear or, instead, saved for a possibly worse 2009.
The uncertainty has put many small-business owners on edge and made year-end tax planning more important than ever, experts said.
"We are definitely seeing a heightened level of anxiety," said Blake E. Christian, a certified public accountant and tax partner in the Long Beach office of Holthouse, Carlin & Van Trigt.
Here are some of the topics that tax experts are talking about with their small-business clients:
Defer deductions and accelerate income. This is the opposite advice traditionally given to taxpayers. In the past, it has usually been wise to try to postpone year-end income until the next tax year and pull deductions into the current tax year.
"With the probability of a tax increase, in some cases we are actually accelerating income and may be deferring deductions," Christian said.
Higher deduction for expenses. A new federal rule allows businesses to immediately double the maximum deduction they can get when they treat the purchase of new property bought this year as an expense, rather than depreciate it and take smaller deductions over time.
The rule applies to computers, software, office furniture, delivery vans, drapes, fire extinguishers and other types of items as well as leasehold improvements such as repaving your parking lot.
The Section 179 expense election rule allows up to $250,000 worth of items bought this year to be deducted as an expense. Next year, the level is set to fall back to $125,000. The threshold for the phase-out of the deduction is set to drop to $500,000 next year from $800,000 this year.
Bonus depreciation deduction. A new federal rule allows an additional 50% deduction of the cost of certain property this year, said Jennifer Taccini-Lavenson, an L.A.-based tax director with PricewaterhouseCoopers' Private Company Services practice.
For example, she said, if you put $500,000 of new property into service this year, half the cost will qualify as an immediately deductible expense under the Section 179 rule. And half the remaining $250,000 can now also be counted as an expense and deducted this tax year.
"You can deduct a very significant amount of all your new property additions in 2008," she said. "If they are under $250,000, you can potentially deduct full price."
Deduction for losses. Given the economic slowdown, more small-business owners are expected to suffer losses. Generally, federal rules allow deductions for those losses to be taken in the current year and carried back for up to two years to offset income, Christian, the CPA, said.
California has no carrying-back provision, although Christian said state law would change in 2011 to more closely match federal rules. The state has suspended its deduction for net operating losses this year and next but has exempted small businesses -- those with net income of less than $500,000.
Another caveat: If the small business is not a sole proprietorship but an S-corporation, partnership or limited liability corporation, a small-business owner must have put in enough personal money or have a financial liability in the business to claim the loss. Christian's example: If your S-corporation has a $100,000 loss but the corporation was set up two years ago with a bank loan or line of credit and a shareholder is not liable for payment, that shareholder may not be able to claim the full loss.
Debt forgiveness. Forgiven debt has to be counted as income, Taccini-Lavenson said. "If a credit card company agrees to accept less than full payment and forgive the rest, the business must pick up the forgiven portion as income," she said.