Review financials now to avoid tax issues later
By Jim Kendall
This column originally appeared in the September 7, 2015 Daily Herald
There may be a benefit to the early start of the 2016 Presidential campaign: A perhaps cautious Congress hasn’t initiated the type of broad tax legislation that brings headaches to business owners.
“We may see Congress do the easy things, maybe extend Section 179 depreciation allowances or the bonus depreciation,” says Greg Dowell, “but there isn’t really a big tax issue this year.”
To Dowell, the lack of distracting tax legislation is a plus. Managing partner at Bass, Solomon & Dowell LLP, a Palatine CPA firm, he prefers that business owners have time to review their financial data – and time to act if changes should be made.
(Section 179 of the Internal Revenue Code covers depreciation allowances for qualifying equipment purchases. Because Congress has not raised the depreciation allowance for 2015, as it has for previous years, the Section 179 deduction maximum is $25,000 and there is no bonus depreciation.)
Among the issues Dowell thinks we should review:
* Basic data. “Make certain you have good underlying accounting records,” Dowell says while making the point that good data equate to better projections.
“Where is your business right now?” he asks. “What are the income or loss data through August 31? If you project for the rest of the year, where will you end up?
“Assume your income is $500,000 now, but you’re worried about losing a major customer in November – or you’re considering a software upgrade that may cost $100,000.”
Dowell’s issue is that sound financial data are necessary now to create good decisions going forward. The question is what the $500,000 number will be December 31.
* Are your financial data classified correctly? A bank loan that, for example, is classified as income rather than debt throws any meaningful analysis off.
Your financials needn’t be perfect, Dowell says, but “Scan the data for reasonableness. Look for outliers. Compare your current data with the prior year,” an evaluation Dowell says will help catch errors.
* Your banking relationship. “You want to know your bankers’ names,” Dowell says. “You want to know the bank will go to bat for you when necessary – and that the bank will be there if you’re hit with fraud.
“Most businesses should have a line of credit. Explore one if you don’t have one.”
* Multi-state tax exposure. That far-flung network of virtual staff you brag about could cost you tax dollars. “Every state is interested in more revenue,” Dowell explains. “States are very aggressive in developing ways to interpret which businesses have a taxable presence.
“‘Market sourcing’ is a concept to watch. If you send a 1099 to a vendor in Washington State or if materials you create in Illinois are delivered to a location in Wisconsin – the tax situation (can get) murky,” Dowell says.
S-Corp owner reasonable compensation, retirement plan contributions and accounts receivable are among other items to review, Dowell says.