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2010 Year End Tax Planning – Businesses

If you are like most businesses, your year end is December.  That gives you a month to plan for the year end taxes.

Here is a summary check list of areas to address for begin the year-end planning process:

  • Is business up or down compared to last year?
  • How are the margins this year compared to last year?
  • What amount of salaries have you drawn (as owner of the business)?

If the business is up compared to last year, then it is important to be looking at the “bottom line”.  If you have higher profits than last year, you may look to your overheads: expenses and cost of goods sold, to see if you can spend more before the end of the year.

If your business is down from last year, then look to the “bottom line” to see if you still have a profit.  If so, then you may not have much else to to.

If you are showing a loss, you may need to spend some more time on your year-end projections.  Can you “afford” to show a loss?  If you have creditors who you owe money to, like suppliers or banks, then they may expect you to be showing “cash flow” to cover your debt service (money you need to pay them).  Your options are to invoice out more in December to increase your Sales, and look at minimizing your expenses until the year end.  If this business approach will help you to look better by the end of the year, then that is the short-term plan.

This has been a hard year for many businesses.  The only way that the business has survived is through borrowing money.  If that is the case and there is no way that the business can show profitability, then very different tax planning may be in order.  Look ahead to next year: does it look like the business may become profitable next year?  If that is the case, then take all of your “hits” this year: do the opposite of the plan in the previous paragraph.  Don’t push to invoice out in December other than the minimum.  Take all of the expenses that you can in December.  The result will be to should a bigger loss this year, and give the business a chance to show better financial results for next year.

Planning is harder if the business is other than a “C” Corporation.  A “C” Corporation pays its own taxes.  Other entities, like LLCs, “S” Corporations, partnerships and sole proprietorships have the net income of the business linked for tax purposes to the business owner’s or owners’ personal tax returns.  Be sure to plan for both the business taxes and the personal taxes at the same time.  The objective is to minimize the overall taxes for the combined business and owners.

The purpose of this blog is to start the planning process.  The best result is to dialog with your tax professional to discuss the use of any carryovers or special tax treatments available to the business and its owners.