NEW YORK - As small business owners start thinking about year-end tax matters, they shouldn't focus on their companies' finances to the exclusion of their individual taxes.
For owners who file their business returns on a Schedule C that's appended to Form 1040, the decisions they make in running their companies can certainly affect their individual taxes. So it's best to take a holistic approach to tax planning.
The common wisdom offered by tax professionals is to try to defer income until the new year and move up deductions into the current year - but only if doing so makes tax and business sense.
In trying to accomplish either of those feats, some owners need to be sure they don't run into a huge tax pitfall, propelling themselves into a bracket where they'll have to pay the alternative minimum tax on individuals. The AMT is an additional tax some people pay, especially if they have large incomes or many deductions.
One way business owners can find themselves saddled with the AMT is if they decide to make their January estimated state and local tax payment early, by Dec. 31. It seems like a natural thing to do, because the accelerated payment allows owners to deduct these taxes on their 2004 returns, instead of waiting to file for 2005.
But if that tax payment is hefty - and it can be in states like New York, California and Massachusetts, where tax rates run high - it can put them into AMT jeopardy.
You can also stumble into the AMT by having too much income. So if you're not taking advantage of the business deductions you're entitled too - such as using your $100,000 Section 179 deduction on equipment purchases - you can get hurt.
It's probably a good idea not to try to determine your vulnerability to the AMT on your own because a mistake can means hundreds of dollars in extra taxes. And along that line, you shouldn't make big financial business or personal financial decisions without understanding the consequences.
"Sit with your tax adviser and plan out what your tax liability is going to be for this year," is the advice of Jeffrey Berdahl, a certified public accountant with Beard Miller Co. in Allentown, Pa.
Knowing where you stand - and by this time in the year, you really ought to have a good sense of your financial and tax situation - can allow you to take full advantage of tax regulations. For example, Larry Torella, a CPA with Eisner LLP in New York, said you might even find that you can accelerate not only your January state and local estimated payment but also the one due in April.
You might even want to consider borrowing the money for that accelerated payment, Torella said. The key is a favorable interest rate so your tax savings now can more than offset your borrowing costs which, if they're a business expense, can be deducted.
Another issue that overlaps both business and personal taxes revolves around retirement plans. Torella reminded business owners that they still have time set up plans and take them as a business deduction for 2004.
Some plans need to be funded by Dec. 31, such as Keogh plans. Others, such as the increasingly popular SEP, or simplified employee pension plans, don't require contributions until the filing date of your return (including extensions). So if you're in a cash squeeze between now and the end of the year, you'll still have time to come up with the money.
Whatever tax planning decisions you make, you need to be sure that it makes sense for the direction you want to take your company in. For example, don't buy equipment just to get a huge Section 179 deduction. Unless you were going to make that purchase anyway, you're wasting money. If you're setting up a retirement plan, choose one that makes the most sense for you and for your employees, if you have any.
This is where a tax professional can help. A good adviser will help you see the various aspects of your financial life and help you make decisions that are in the best interest of all of them.