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Small-biz tax planning
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October 4, 1999: 9:39 a.m. ET
Small business owners should take steps this fall to minimize tax payout
By Staff Writer Shelly K. Schwartz
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NEW YORK (CNNfn) - For the small business owner struggling to stay afloat, taking time out to do some pre-emptive tax planning doesn't often land high on the list of fourth-quarter priorities.
Many shrink at the thought of spending a crisp autumn day with estimates and tax forms -- or worse yet, shelling out much-needed cash for an extra consultation with their financial planner.
But as we enter the home stretch of 1999, tax advisors say now is the time for upstarts to take action -- while there's still time to do something about it.
"If they take the steps now, with the proper planning, it can be done," said Erik Monnie, a certified tax preparer and president of BTB Tax Service, in San Jose, Calif. "It depends on what tax bracket you are in, of course, but we've saved clients several thousand dollars -- easily."
Getting started
With some basic financial tricks of the trade, experts say the average small business owner can keep "several thousand dollars" a year extra out of the hands of the Internal Revenue Service. All it takes is some careful number crunching and a good sense of timing.
Here's how to get started:
First, break out the calculator and last year's tax forms. Then, pull together this year's receipts, expenses and billing statements.
Since 1999 isn't over yet, of course, you'll want to use your year-to-date calculations to project out what your income will likely be for the full year. If business is picking up or slowing down, factor that into the equation as well.
Now, compare last year's income, expenses and taxes with this year's projections.
"You should try to project a snapshot of how you think things will look at the end of the year," said John N. Evans, a certified financial planner with Arthur Andersen accounting firm. "Maybe you'll find that your expenses are way down from last year, and you aren't looking at as many write-offs. Taking a look at this now eliminates the element of surprise."
Some businesses that find they haven't claimed enough expense write-offs, go out and buy that office printer or computer they've been waiting for. Others might decide that the time beef up their advertising campaign -- which is generally tax deductible -- is now.
"You have to do what makes sense from an economic standpoint, but if you have been really wanting to ramp up your business and you were planning to begin advertising next year, for example, you might want to consider starting your campaign at the end of this year so you offset that cost using pre-tax dollars," Evans said.
Lastly, he noted, small businesses that plan to hire a tax professional to do their calculations for them should still go through the process of projecting their own numbers first.
"It's an easier way to meet with a [tax adviser] because now you are organized and you can hand them your number to minimize the time they need to spend doing the basics," Evans said. "If you go in prepared then you can get a lot more value out of your one-hour consultation."
It'll also save you money, since you may be able to shave off an hour or more off your consultation.
Common strategies
One of the easiest ways to cut your small business tax bill down to size is to make the calendar year work to your advantage.
For companies with steady profits and a healthy cash flow position, you may want to push end-of -year invoices into the New Year. That ensures you won't get paid until 2000 and the income those invoices generate won't get taxed until next year either.
Also, as Evans suggest, you can buy that new computer you've been needing if your projections show you're short on write-offs.
Brian O'Neil, an enrolled agent in Alameda, Calif., said small businesses owners can expense office equipment as a tax write-off as long as you buy it, and put it into use by Dec. 31. This year, the IRS's limit on expense deductions is $19,000, he said.
"That can be a good tax planning tool for small businesses - especially if you get a computer or something that you were planning to buy (in the coming year anyway)," O'Neil said.
On a related note, you can also accelerate your expense payments -- checks you write to contractors and suppliers. If you've got a contractor hired for a job that begins early next year, for example, you may want to cut that check before the clock strikes 12 on New Year's Eve.
"For the business owner that may mean prepaying some expenses or purchasing extra office supplies (for the tax write-offs)," Monnie said.
One word of caution though: Before you go making accelerated expense payments and postponing your billing cycle, you should always double check to be sure your cash flow position is solid.
"I've heard horror stories where people delayed billings in November and December until the following year and in the meantime the [client] goes bankrupt," Evans said. "You may have done some great tax planning, but you've created another problem. Like they say, cash is king."
Retirement
Lastly, an effective way to trim your taxable income is to maximize the allowable contribution for your retirement account in a simplified employee pension, or SEP, plan. That's pre-tax money the government allows you to use.
Technically, if you are a sole proprietor, you have until the April 15 filing deadline to
contribute
to your prior year retirement account, but the sooner you begin moving money into your retirement plan the better.
(Click here for a story on small business retirement plans)
"Essentially, what you are doing is getting more money into a tax deferred account as soon as possible so any interest earnings are generated tax free," O'Neil said.
"They should start [tax planning] right now," O'Neil said "It's not too early at all."
The pay-off
For small business owners strapped for cash, it's all too easy to push pre-season tax planning aside.
But, when you consider the savings it could yield, experts say it's wise to at least do your own number crunching to make sure you're not paying Uncle Sam more than he needs.
"Almost anybody could save a few thousand dollars in taxes," O'Neil said. "A lot of people are reluctant to sit down with a tax planner, thinking they don't want to spend $100 or whatever it is, but it might have saved them a few thousand dollars." 
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