Uncertain economy, tax law changes make small business midyear tax checkups more complicated

Small business financial checkups get complicated

NEW YORK — Small business owners who want to give their companies a midyear financial checkup may find it hard to forecast what the rest of the year will bring. It’s not just the economy that’s unpredictable, there’s also uncertainty about the tax laws.

This may complicate the decisions that owners typically make at this time of the year, such as whether to buy new equipment.

Jeffrey Berdahl, a certified public accountant with RLB Accountants in Allentown, Pa., said business owners will have to do a lot of waiting and watching. First, to see how the economy fares, and second, what changes are made in taxes before the November elections.

“It’s really hard to plan right now, because nobody knows what’s going to happen down in Washington,” Berdahl said. “What you learn today’s going to change tomorrow.”

Berdahl said accountants are waiting to see how lawmakers change capital gains taxes, which would affect anyone who sells an interest in a business. He said it’s also not yet know what changes may come in the alternative minimum tax, which can impose a heavier tax burden on taxpayers, including small business owners, who have large deductions.

But Berdahl also said it’s widely expected that tax rates will go up next year. So business owners who are expecting to have a better 2011 need to factor that into their 2010 planning.

Here are some of the financial issues small business owners should be looking at now:

TO BUY OR NOT

The Hiring Incentives to Restore Employment Act passed earlier this year included a provision that extended into 2010 the $250,000 Section 179 deduction, which allows small businesses to deduct up-front rather than depreciate the cost of certain kinds of equipment. The deduction, which had been $128,000 in 2008, was nearly doubled last year as part of the government’s economic stimulus programs. Its continuation at a higher level in 2010 is an acknowledgment that small businesses still need help.

But owners need to ask themselves some questions before they buy a new car, office furniture or computer equipment:

—How badly do you need the equipment? If your PC is on its last legs, you probably need to buy a replacement soon. If it will help you make more money sooner, you may also want to buy now.

—Are you more likely to need big deductions this year, or next? If your company is likely to have stronger business in 2011, when taxes are expected to be higher, then maybe you should put off the purchase and take the deduction later.

—Would you get a better deal now? If your supplier is hungry for business and willing to give you a lower price, then maybe you should go for it. There are end-of-the-model-year sales now at car dealers. But retailers always have PCs marked down.

Another tax provision that’s still uncertain is the bonus depreciation that increases the portion of a purchase price that can be deducted for the first year. Congress has yet to pass an extension of the provision.

HIRING INCENTIVES — IF YOU HIRE FULL-TIME WORKERS

Most owners are pretty sure about whether business is good enough for them to start hiring. For those who are leaning toward taking on a new staffer, the HIRE act contains a couple of incentives.

One is a tax break for employers who hire full-time workers who were previously unemployed or working part-time. This break exempts employers from paying the 6.2 percent Social Security tax on workers hired after Feb. 3 and by the end of the year.

Moreover, for each worker who is hired and retained for a year, the government will give a business a $1,000 credit on their 2011 taxes.

But, as with equipment purchases, the tax breaks on hiring probably aren’t going to be the deciding factor for many business owners. Many must decide whether it makes more sense for them to contract work out to freelancers rather than taking on full-time staffers. Others may decide they only have enough work to bring on part-time help.

PERSONAL VERSUS COMPANY FINANCES

At this point in the year, some business owners might want to be considering whether they should put money into their personal investments. If business has picked up, and they feel they can spare the cash, retirement plans or even rainy day funds may be the place for it.

Berdahl said many owners are focused on paying down their debt, which is a smart move for many. His suggestion is that they consider opening Roth Individual Retirement Accounts, or converting traditional IRAs into Roth accounts.

With taxes expected to go up in 2011, a Roth IRA can make sense because withdrawals aren’t taxed. An owner with cash to spare can just open a Roth IRA. In a conversion, the government will assess a tax on money that has previously been invested tax-free. But, again, when the owner accesses the Roth funds after they’ve appreciated over the years, there’s no tax to be paid.