Tax planning should be a year-round strategy, with year-end planning serving as a good backup. So, it is not too late to plan for tax savings. Regardless of when it is done, the goal with any planning should be keeping the tax bill at a legal minimum, year-after-year.
Since a snow and ice management business owner’s obligation is to pay their fair share of taxes, and not a dollar more, consider these tax savings tips such as those for treating the cost of the equipment and new technology that plays such an important role in every snow and ice management operation.
DON’T OVERLOOK DEPRECIATION – AND ALTERNATIVES
Depreciation is the income tax deduction that allows a business to recover the cost or other basis of its equipment or other property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of equipment, vehicles, buildings and computers. Also depreciable is intangible property, such as patents, copyrights and computer software.
The “extenders” bill passed late in 2015, permanently set the Section 179, first-year expensing write-off at $500,000 with a $2 million overall investment limit before phase-out must begin. While the dollar amount of asset purchases remains the same, thanks inflation adjustments, the investment limit for 2016 increased to $2.010 million before phase-out begins.
Those 2015 tax changes also extended the 50-percent “bonus” depreciation write-off for equipment placed in service between 2015 and 2017, with lower percentages kicking in for an additional two years. That means a write-off of 50-percent of the purchase price in the first year plus the regular depreciation rate on the remaining 50-percent.
Although depreciation can only be claimed for assets placed in service prior to the end of the tax year, claiming or ignoring depreciation write-offs should be given some thought. For instance, while taking the bonus depreciation write-off is the rule, a snow or ice management professional can elect out for all property within a "class". Thus, if the operation purchases five trucks (5-year property) and $65,000 in office furniture (7-year property), the choice can be made to not take bonus depreciation on the trucks or the furniture, or both, but selecting which trucks to use the election on is a no-no.
In many cases, taking depreciation up front makes sense. It's a great way to boost cash flow. But spreading the deduction over time might make sense for a startup or a snow or ice management business that expects future taxable income to be considerably higher. This analysis is not easy since a number of factors including the type of assets, the operation’s current and future tax rate, the availability of the Section 179 expense option, etc. must all be a part of the decision to write-off or not to write-off.
CALCULATING BUSINESS EXPENSE RECORDS
While finding, and documenting business expenses is generally a big chore, keep in mind that records can serve as reminders of potentially lucrative small business tax deductions. The home office deduction, for instance, requires compiling multiple expenses and calculating percentages, while the deduction for auto expenses requires extensive recordkeeping that should have begun at the beginning of the year. Consider these other overlooked, and frequently misunderstood, deductions.
As a general rule, whenever possible, repairs and maintenance expenses should be deducted immediately, rather than capitalized and depreciated. That said, the IRS has issued sweeping new “repair” regulations that govern how the cost of acquiring, repairing or improving business property should be accounted for. Several changes to these guidelines will further impact all snow businesses.
A snow and ice management business with an “applicable financial statement” (AFS) can take advantage of a new safe harbor to deduct as much as $5,000 per purchase or invoice. Small businesses lacking an AFS can take advantage of the new de minimis safe harbor by electing to deduct smaller purchases ($500 or less per purchase or per invoice). A business with gross receipts of $10 million or less can also take advantage of a safe harbor for repairs, maintenance, and improvements to eligible buildings.
WORK OPPORTUNITY TAX CREDIT
Thanks to the tax “extenders” bill, the Work Opportunity Tax Credit has been extended through 2019 for employers hiring members of targeted groups. That same bill also added qualified long-term unemployment recipients to the roster of targeted groups.
As a general rule, software must be depreciated over a 36-month period, but with some important exceptions. When, for instance, software comes with a computer and its cost is not separately stated, it's treated as part of the hardware and depreciated over five years. However, under the Section 179 first-year expensing rules, the whole computer system (including bundled software)’s cost can be written off it is within the Section 179 annual deduction limits.
ADVERTISING & PROMOTION
The cost of advertising the snow and ice management operation’s services — business cards, yellow page ads, and so on — is deductible as a current expense. Promotional costs that create business goodwill such as sponsoring a peewee football team are also deductible as long as there is a clear connection between the sponsorship and the business.
KEEPING IT REAL
Over the years, the way the IRS views “reasonable compensation” has changed significantly. The IRS and the courts believe that if owners perform services for their business, the business should pay the owner a reasonable salary as compensation for those services. In addition —and crucially — that reasonable salary is subject to self-employment tax.
IGNORE FOR SAVINGS
Obviously, it is not easy trying to break a life-long habit of minimizing income and maximizing deductions in order to produce a low tax bill. Surprisingly, however, the lowest tax bills often result from legitimate tax deductions postponed or ignored.
Many snow and ice management professionals ignore perfectly legitimate deductions because they believe it will increase the likelihood of an audit — or because the paperwork and recordkeeping isn’t worth the amount of the deduction. Although keeping track of small items purchased for the business is often too time consuming to be worth the trouble, for many expenses such as travel, entertainment and the like, physical receipts are not required for amounts less than $75.
Taking depreciation up front makes sense. It’s a great way to boost cash flow. But spreading the deduction over time might make sense for a startup or a snow business that expects future taxable income to be considerably higher. .
EXTENDING THE PAIN IF NOT THE PAYMENT
Anyone who has tried but can’t get their taxes prepared by the filing deadline can file a Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return or use an online service. The IRS will automatically grant extensions of as much as six months to file taxes. Unfortunately, while the extension provides more time to file the business’s tax returns, it doesn’t grant more time to pay the tax bill — or a good estimate of the final tab.
Although taxes should never be the primary reason behind any strategy, purchase or move made by a snow or ice management professional, taking advantage of our tax rules is important. It is never too late to plan on saving taxes.
Any snow-related business owner changing their mind after the return has been filed can amend or change that already-filed tax return. However, in order to achieve low tax bills, either before or after the return is prepared, professional assistance may be required.Mark E. Battersby is a financial writer and frequent Snow Magazine contributor.