If your practice ready for the new tax year?
What you do, or don’t do, may haunt you
By Ted Feher, MBA, CPA, Senior Manager
Horne CPA Group, Houston
Remember during last year’s accounting closeout problems when you said: "We’ll fix it next year." Well, next year is here. If last year was fun, this year should prove even better.
The new year is fast approaching with all the attendant distractions, and one that often fails to get the attention it needs is year-end closing. Many of the decisions made, or not made, before year-end have long-suffering consequences. It is hard to make something happen once the clock has chimed midnight. Added to those concerns is the need to contend with the Y2K bug.
Let’s look at Y2K issues first. Perhaps you have been through enough Y2K by now, but to omit it from any year-end article would be foolish. Even if you don’t have or use a computer system, you need to realize how dependent your business remains on them. Can you think of associates you deal with who provide you with critical products or services that depend on a computer? Have they provided assurances that they have gotten all their Y2K shots? If you don’t know, then you are just as susceptible to a Y2K disaster as anyone else. What is your Plan B? If you do nothing else, you should have a list of viable alternatives in case what can go wrong does go wrong.
If you have a computer system, I presume you have had a Y2K checkup by now. Any consultants you use should have given you a bill of good health and developed a plan and timetable so you will be able to survive if something does go wrong. At a minimum, you should have a backup or two of all your information through year-end — all of it, because even if you got a clean bill of health, much like any other inocu lation, it is not 100% foolproof. Multiple backups should be stored in separate off-site areas. Make sure one of your backups is not computer-dependent.
At the low end of the technology spectrum, revisit last year’s closing process. Take a few minutes and sit down with your administrative staff and have them come up with a wish list. The list should include items they wish they had thought to do differently last year. They may deny there are any, but experience has taught us there are always some. Don’t take no for an answer unless you had the smoothest running year-end and lowest accounting ever.
If your staff can’t seem to come up with a list, ask your outside accountants. That should make work easier for your accountants and lower your accounting bill. Let them review what they did for you last year and tell you how to do a better job this year.
Tax planning
Jan. 15 is the due date for the final estimate for calendar-year returns. Anything paid after that date is not credited until the due date of the return.
You don’t need a plan per se, but you will never know if you got where you were headed without one. Do a year-end projection as soon as possible. (See related story, p. 149.) The process of doing the year-end projection will raise questions and stimulate discussion of the schedules and reports you need to prepare the current year’s tax return. It also will help prevent those surprises taxpayers seem to hate.
The tax projection also allows you to review year-end transactions to make sure they are accomplishing what you expect them to accomplish. It is difficult to re-characterize a transaction after the 31st. The harsh result of unintended consequences can be painful.
The typical tax strategy is to defer income, and presumably taxes, to a future year. On rare occasions, a taxpayer may need or want to do the reverse. Sticking with the typical strategy, the taxpayer will accelerate deductions and decelerate income. Since taxpayers can be on a cash basis or an accrual basis, it’s important to understand the difference in how the goal is achieved.
On a cash basis, you pay bills early and slow down collections and deposits. If you use an accrual system, you buy, book, and deliver late.
For cash-basis taxpayers — typically the majority of us — the way to reduce taxes is to write those checks and pay for every deductible item you can before Dec. 31. Similarly, deposits made after Dec. 31 will not be included as income this year. Apply good sense regarding deposits, though. If the Internal Revenue Service believes you stuffed all the checks in your bottom drawer during the last two weeks of December, its agents can be pretty successful at arguing the money should be reported as current-year income.
Inter-company/related-party rules
If you control more than one company, you are subject to the related-party rules of the Internal Revenue Code, section 267. Your financial statements may be correct, but they may not reflect tax realities. To the extent there are differences, it’s important to understand the relationship between the items on your financial statements and those on your tax return. The rules are designed to make sure one related party’s deduction is another related party’s income.
Retirement planning is your only true remaining tax shelter. If you don’t have one open yet, you should open one by year-end. The cost to open a plan is usually nominal. Funding and many of the other administrative expenses occur much later — usually not until you file your tax return. That can provide you with an eight- to nine-month delay between taking the deduction and paying the bill.
If you do have a retirement plan, make sure you understand all the idiosyncrasies. It’s certainly not illegal and surely no secret that plans are installed/created to benefit the owner as much as possible. However, when there are personnel changes, the funding formulas often fall apart.
Section 410b of the Internal Revenue Code presents a formidable unequivocal test. Plan funding formulas are designed to pass the test under normal circumstances. But when there is a lot of employee movement in or out of a plan (or both), the funding formulas may not pass muster. The plan administrator is usually not informed of such matters until well after the year-end — well beyond the period when something can be done about it. Under the wrong set of circumstances, one person participating or not being covered by the plan can undermine the entire planning process. Clearly, if there is any item one needs to discuss before year-end, this is it. The consequences of noncompliance can be so severe.
Check with your tax preparer about getting information to him or her as quickly as possible. Make sure the preparer will review it and alert you to any potential problem areas — some preparers get very involved in year-end payroll tax procedures and will ignore incomplete data if other work is pressing in on them. However, most will welcome the chance to review your circumstances during December. Typical documents should include your last financial statement and bank reconciliation, a list of fixed asset acquisitions and their invoices for income tax and property tax considerations, and the value of inventory, if relevant. If you are on an accrual basis, an accounts receivable and accounts payable report is a must.
If company cars are used by employees, it is important to determine how much will be deductible and how much will be included in the employees’ compensation, if any. Your accountant can supply you with a worksheet so you can list costs associated with the vehicle and the required mileage information.
Prepare a list of periods covered, amount of bill, and amounts paid for all the insurance coverage you have. Officer life insurance is not tax deductible and would be one of those differences previously mentioned. Review your meals and entertainment expenses. Typically, only half of meals and entertainment are deductible. How ever, when the meals are for the convenience of the employer, you can get a 100% deduction. You also want to check the expenses for misclassifications of business gifts into the entertainment category.
Make sure your staff get the latest changes to the payroll tax tables for the beginning of the new year. The Social Security ceiling increases, unemployment tax rates usually change, and income tax tables are adjusted for inflation.
When all that is done, you can relax, and have a happy new year.
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