As companies shelve copies of their completed 2004 tax returns, probably the last thing most want to think about is April 15, 2006. But tax experts say managers need to be proactive in planning for those 2005 returns and the important tax-law revisions scheduled to take effect.
Financial and tax advisers working with small and medium-size businesses urge clients to make the most of their 2005 deductions by planning ahead—particularly since the year already is well under way. Your best bet is to start thinking now about how you can leverage existing tax rules for maximum business benefit, says Larry Kline, a director in the Accounting, Tax & Advisory division of Century Business Services, Inc.
"Most people think of tax planning as something you do at the end of the year," Kline says. "We always advise that you should work on tax planning throughout the year."
With tax rules—some instituted after Sept. 11, 2001—about to change, the payoff for staying focused on midyear tax and financial planning can be substantial.
In 2004, for example, a business that spent $500,000 on equipment immediately could write off $100,000. For the remaining $400,000, the company could receive a 50 percent deduction for equipment depreciation, saving another $200,000. The company could write off an additional 20 percent of the remaining $200,000 expense, generating a total savings of $340,000 through cost write-offs in one year. Not surprisingly, Kline calls these "amazing" benefits for owners of small to medium-size businesses.
Some of these benefits will end in 2005. For example, the 50 percent bonus depreciation tax rule expired Dec. 31, 2004. However, a tax law beneficial to small and medium-size businesses that remains on the books through 2008 enables companies to write off the first $102,000 of equipment purchases.
As a result, in 2005 a company can buy $102,000 of computer equipment or other business property such as servers, telephone systems, desks—essentially anything that can be moved easily by hand—and write it off, rather than taking the expense over several years.
"Normally, if you buy business property, you spend the money up front and take on debt, without being able to take the deduction all at one time," says Kline. "But, under the existing rule, you're able to buy equipment—or, hopefully, you do even better and finance equipment purchases—and take your write-off immediately, which helps reduce your taxes. Right now, buying equipment is a great thing to do because you have such an incentive to write off any kind of purchase."
Robert Bornstein, a certified public accountant at Bornstein & Co. in Northbrook, Ill., says small businesses should be aware of new regulations for what the government calls "domestic producers," who make tangible products including food, bakery goods, software, even film. "Under these new regulations, companies, partnerships and individuals will be able to lower their tax rate by 3 percent in 2005 and 2006, 6 percent in 2007 and 10 percent in 2010," Bornstein says.