The Tax Man Cometh

Tips for businesses preparing for their annual IRS rumble

Ever-changing tax laws can be daunting, but staying on top of the changes in U.S. tax law can pay dividends for business owners. From research-and-development credits to capital-gains taxes, small and middle-market business owners should take note of tax laws that have changed or are set to change in the next few years. Following are just some of the tax issues a business owner potentially should consider.

Tax laws that have recently changed
R&D taxes: Businesses conducting certain types of research and development have been eligible for tax credits, but those credits expired at the end of 2007. However, in past years Congress has extended these credits as late as December of the following year and Congress may extend these credits after it reconvenes in 2008. Businesses should continue keeping records as if the credits remain in place so that they can be ready should the tax breaks be revived retroactively. This is especially important to the numerous technology startups in Arizona.
Business property expenses: In 2007, Congress increased the cap on the expensing of business equipment from $100,000 to $125,000. Since eligible expenses include tangible property and software, companies thinking about capital outlays or computer upgrades should take the increase into consideration. As part of the same law, the phase-out of the expensing provision has been raised.

Work opportunity credit: In order to make the hiring of certain targeted groups — including welfare recipients, high-risk youth, food stamp recipients, qualified veterans, disabled individuals and others — more attractive, the Work Opportunity Credit provides a tax credit of up to $2,400 to business owners if they hire employees from one of the eight targeted groups. In 2007, Congress extended and expanded the Work Opportunity Credit to significantly expand the category of veterans that are treated as members of an eligible targeted group. In addition, the law doubles the maximum credit — to $4,800 — for eligible veterans. To determine if the credit is available, businesses should inquire about the military status of their new hires. In addition, the 2007 law permits businesses located in counties with population out-migration during the 1990s to claim the credit for new hires that are between the ages of 18 and 40. This could be a significant benefit to business owners located in Arizona’s rural empowerment zones and enterprise communities such as Cochise, Yuma, Santa Cruz, Apache and Navajo counties. Finally, the 2007 law permits business owners to begin claiming the credit against their alternative minimum tax.

Employment taxes: In December, Congress extended the 0.2 percent surtax imposed on unemployment taxes, which was scheduled to expire at the end of 2007. Business owners should make sure their withholding tables reflect the law change.

Tax laws set to change
Capital gains taxes: Currently, the capital-gains tax rate is at an all-time low of 15 percent, but that rate is scheduled to expire in 2010, and it’s not clear at this point if that low rate will be extended. If you are thinking about selling part or all of your business or paying out a dividend in order to get cash from your business, now may be a good time. Waiting several years could end up costing you money.

Estate taxes: If you own a family business, or are hoping to one day pass your business on to your children, be aware that estate tax laws are set to change. Estate taxes are based on a person’s total net worth when they die. This tax is scheduled to expire in 2010, and there will be no estate tax for the 2010 tax year. So businesses that pass on to the next generation that year will do so tax-free under present law. However, the repeal is scheduled to last only one year, and when it returns it may apply to more people than it does now and at potentially higher rates. In addition, exemptions are in flux. Business owners should consider both the various possible outcomes and the value of a contingency plan that can enable their survivors to pay taxes that may be due. Without preparing for possible estate taxes, the next generation may have to sell off all or part of the business in order to pay the potential taxes.

Other issues
State taxes: Even small and middle-market businesses are outsourcing, often resulting in employees orproperty located in other states, and states are more aggressively going after companies doing business there. Make sure you haven’t created a taxable presence in another state (or country for that matter) and end up having to pay additional taxes.

When dealing with complicated tax law, it’s recommended that business owners talk to professional accountants or tax consultants. But, being aware of changing tax laws can help business owners know what to talk to their advisors about and help them be prepared or possibly save money in the long run.

Donna Witherwax is a tax partner at KPMG in Phoenix. The information contained here is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser. The views and opinions are those of the authors and do not necessarily represent the views and opinions of KPMG.