Still time for effective year-end tax planning

It’s not that we don’t like surprises, it’s just that some surprises aren’t much fun — especially when they concern business taxes.

Here, for example, is what CPA Greg Dowell calls a “negative surprise.” Illinois tax legislation passed in January “suspended the ability of C corporations to utilize net operating losses,” Dowell says. What that means, he continues, is that if your business incurs a loss in 2011 that you want to carry back to 2010 to recapture some cash flow — well, a C corporation’s ability to recapture losses was blocked by state lawmakers through 2013.

(Businesses organized under subchapter C of the federal tax code pay income taxes directly. In comparison, profits or losses generated by subchapter S corporations pass through to shareholders and become part of their gross income.)

Dowell, managing partner of Bass, Solomon & Dowell LLP, a Palatine accounting firm, notes another state change, too: the Illinois business income tax rate that was 4.8 percent last year is 7 percent this year — plus, Dowell says, the regular 2.5 percent replacement tax.

Happily, Dowell’s year-end tax planning advice contains more positives than negatives. The first thing to do, Dowell says, is “make certain your accounting records are up to date. If they’re not, you’ll make tax decisions on faulty information.”

Get numbers from your accountant. Off-the-shelf software “can trick you into thinking you know more than you do,” Dowell says.

With good data in hand, you can determine what the business’ current net income looks like, then project income, and taxes, for the full year. This is the time to consider the amount to set aside in retirement plans, too.

Generally, Dowell says, 2011 has been a “pretty quiet year” for federal tax changes. However, there are some expiring benefits to keep in mind:

Ÿ This is the last year businesses can deduct the full cost — up to $500,000 — of qualifying equipment purchases under Section 179 of the federal tax code. Equipment can be new or used, as long as it is new to you.

The kicker, given today’s date, is that the equipment must be in service by Dec. 31.

Next year, the Section 179 write-off drops to $125,000.

Ÿ In some situations, a bonus depreciation write-off of 100 percent for new equipment could be a better option. Ask your accountant.

The bonus depreciation expires Dec. 31.

Ÿ This also is the final year to accelerate write-offs of qualifying real property, such as leasehold improvements, under Section 179 or the bonus depreciation. The improvements “must be within the shell of the building,” Dowell says, but that means property owners can, for example, write off the cost of remodeling space for a new tenant.

Unique rules make this write-off especially useful for restaurant and retail owners.

Ÿ Jim Kendall welcomes comments at JKendall@121MarketingResources.com. © 2011 121 Marketing Resources Inc.