By: Joan C. Szabo
Many business owners face a perplexing tax picture now that a number of business tax breaks have expired. Congress included extensions of those breaks in a tax bill it sent to President Bush, but he vetoed the bill because it also included tax increases.
The failure to extend the tax breaks has complicated tax planning for companies and has increased the 1992 tax liability of many small-business owners.
The expired benefits include a 25 percent deduction from gross income of health-insurance premiums for the self-employed, a targeted-jobs tax credit, and an income exclusion for employer-provided educational assistance.
"The breaks, especially the deduction for health-insurance premiums, were vital to small business," says Donald Hull, owner of Hull Company Accountants, in Westminster, Md. Most of Hull's clients are small-business owners.
Tax experts generally agree that major tax legislation will be considered in 1993 and that a number of the credits and deductions may be restored then, but there's no certainty. "Unfortunately, these tax breaks are pawns that may be used to raise revenue, and the little guy will take the heat on it," says Hull.
Despite the uncertainty over the future of these tax benefits, accountants maintain that there still are a number of important tax-planning strategies that business owners can follow. Here are some of the more significant ones:
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Lowering State Tax Liability. When looking for tax savings, small-business owners should pay close attention to state and local taxes, says Jack Porter, national director of tax practice for the accounting firm of BDO Seidman in the company's Washington, D.C., office. "States are becoming increasingly aggressive in trying to collect tax revenue," he says. A sluggish economy, combined with reduced federal aid to states and municipalities, has put pressure on state and local governments to increase tax revenues, and business people need to make sure they are not paying too much.
Sales taxes and use taxes are two types of revenue raisers that states have been employing to make up for shortfalls - and auditing for possible noncompliance. The sales tax is an excise tax typically imposed on retail sales of taxable property or services. The use tax is an excise tax generally imposed on any taxable property bought for storage, use, or other consumption in the state - if the sale was exempt from sales taxes because the property was purchased out of state.
You should review your company's records to identify potential overpayments of sales and use taxes on purchases of machinery and equipment used in manufacturing. Generally, such purchases are exempt or are taxed at a reduced rate - often as inducements by states to attracts business.
If you do business in more than one state and are trying to lower your tax liability, accountant Porter suggests you consider moving your inventory out of the higher-tax state. This may save you personal property taxes on your inventory as well as state income taxes.
In the property-tax area, he suggests maintaining a list of personal property on which you are being assessed and the level of the assessments. Monitor the list carefully year to year to make sure assessments are not higher than warranted, he says.
Look closely too at state income tax rates; you may want to change the incorporation of your company from one state to another. Porter cites the example of a medium-sized manufacturer incorporated in New York but headquartered in New Jersey. By changing the company's incorporation to New Jersey, the firm paid income tax rate is lower than New York's. The shift resulted in a significant tax savings.
Quick Tax Refund. If your business expects a sizable federal income-tax refund because 1992 turned out to be less profitable than forecast, you may be able to expedite that refund to receive it several months earlier than usual, says Sam Starr, a partner with the Washington office of the Coopers & Lybrand accounting firm.
Also, another cash-flow benefit may be possible in 1993 if you expect your company to incur a loss in 1993.
Under regular refund procedures, a corporation cannot receive a refund for overpaid taxes until a return is filed. When a corporation files for an extension in submitting an annual income-tax return, the time for receipt of the refund is delayed further.
However, a special Internal Revenue Code provision allows a corporation that overpays estimated income taxes to apply for a quick refund immediately after the close of the tax year. To expedite the refund, you will need Form 4466, a request for refund of the overpayment of estimated tax. The application must be filed no later than the 15ht day of the third month after the end of the corporation's tax year and before the corporation files an income-tax return.
Starr says that the Internal Revenue Service will pay the refund within 45 days of the date on which the application is filed, except if errors or omissions are found. to qualify for this refund, the estimated tax overpayment has to be at least 10 percent of the expected income-tax liability for the taxable year, and at least $500. In addition, you can obtain an immediate cash-flow benefit by postponing some or all of the 1992 corporate taxes otherwise payable during 1993 if it is estimated that a loss will occur in 1993. The postponed amount may never have to be paid if the estimate of the 1993 loss turns out to be accurate, says Starr. To use this provision, Form 1138 must be filed with the IRS before paying the taxes relating to the extension.
