Tax Planning for Businesses in a Down Year

In light of the holiday season's arrival, we want to first start by talking a little bit about charitable contributions. A few reminders...for your charitable contribution to be deductible in 2009 your check must be mailed on or before December 31, 2009. A pledge to a church or any other organization made in 2009 is not deductible until paid. One great way to increase the bang for your buck with your charitable contribution is to donate appreciated stock. If you've owned the shares for over a year (long-term in nature), then you can deduct the full value of the stock and pay zero taxes on the appreciation of said stock. The alternative is to sell the stock, pay capital gains tax, and then donate the money. In this scenario, you get hit with a tax bill and the charity receives less. If you have stock that has fallen in value, then do not donate this stock because you will lose the ability to deduct the loss on your return. The better strategy in this case is to sell the stock and then donate the proceeds. Whatever charitable cause that may be near and dear to your heart this holiday season is ready for your contribution. While making these contributions, keep in mind the above reminders and gifting methods.

Now, let's shift our focus to end of year tax planning for businesses and business owners. There's not doubt that the recession has hit many small businesses hard; as such, it requires a closer examination of some end of the year decision making. If your S Corporation is anticipating a taxable loss this year, it is important to contact your CPA promptly. These losses are only deductible on your personal return if you have adequate "basis" in your S Corporation. If you do not have sufficient basis, there are steps that can be taken to correct the issue, but they must occur before the end of the tax year. Again, please contact your CPA as the steps to correct this lack in basis are complicated and require precise actions.

Another area that planning in a down year might change is how closely-held corporations decide to pay year-end "bonuses". Since your corporation can deduct a bonus, but not a dividend, year-end "bonuses" are traditionally paid to a shareholder/employee in the form of a bonus in order to take the deduction where it has the largest tax benefit. However, in light of the recessionary times, if your corporation is operating at a current loss and/or has net operating loss carryovers to the current year, then little or no tax benefit will be realized by paying these year-end "bonuses" as bonuses. Instead of structuring the year-end "bonus" payment as a bonus, it would be prudent to consider making the payment in the form of a dividend to a shareholder/employee. In this case a dividend taxed at a maximum rate of 15% will generally save taxes. On the other hand, if your corporation has thrived and is currently in a high tax bracket, then a bonus would likely save taxes. The key here is to know your corporation's situation and plan accordingly.

Lastly, as business owners look to their future and the future of their employees, establishing a retirement plan might be appropriate. It is important to remember the following deadlines in this effort. Calendar year taxpayers who wish to establish a qualified plan in 2009 generally adopt the plan no later than December 31, 2009. However, a SEP may be established by the due date of the tax return (including extensions), and a SIMPLE plan must be established no later than October 1, 2009.

In economic times that are tight, planning your finances and having your financial house in order are more important than ever. If you feel that you have work to do and need an experienced guide, please contact us and we will be glad to see if we can meet your needs.

Happy Thanksgiving!

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