It's already time to estimate company taxes
By Joyce M. Rosenberg
NEW YORK The holidays are here, and income tax filing season is months away. But don't be lulled into a false sense of security.
If you haven't started looking at your company's taxes and estimating how much the bill is likely to be, you're setting yourself up for unnecessary angst and perhaps tax penalties come April.
"What they need to be doing at this point is taking a look at a pro forma tax return and see where they would be, based on all the knowledge they have now," said Gordon Spoor, a certified public accountant with Spoor, Doyle & Associates in St. Petersburg, Fla.
It's not just a matter of avoiding panic and frustration at tax time. Spoor noted that many businesses must make their first estimated tax payment for 2003 on April 15, the same day that 2002 taxes will be due. It's important to know as early as possible whether you're likely to have enough cash on hand.
Moreover, you might find that you must pay more than you expect when you make your final 2002 estimated payment Jan. 15. Spoor again cautioned that you're better off doing the calculations now and paying the money on time rather than facing a penalty.
Once you've come up with some rough figures, you might want to defer some income until 2003 or accelerate some deductions.
You can defer income by not billing your customers or clients until January. But be aware that this can be done only if you run your business on a cash accounting method, in which income is reported during the year it is received. If your business is on the accrual method, you have to report it when it is earned, even if it hasn't been received yet.
Deductions must be treated in a similar fashion. With the cash method, you can accelerate a 2003 payment into 2002 for example, making a rent payment early. Under the accrual method, a deduction must be reported for the year in which payment is due.
If you're thinking of buying equipment before the end of the year, the Section 179 election allows small businesses to deduct up front rather than depreciate the entire cost of up to $24,000 in equipment. Under Section 179, you can use this deduction for equipment that is placed in service (but under the cash method, not necessarily paid for) by Dec. 31.
A couple of caveats: You cannot use the election for a building or part of a building, such as a heating system. And when it comes time to file your tax return next spring, you must complete IRS Form 4562, Depreciation and Amortization, Part 1, to use the election. You might also want to know that next year, the amount of the election increases to $25,000.
Spoor offers another caution: Don't just go for the election because it's there. Do the math and see if depreciating the equipment over a longer period of time would work out better for you.
Don't base your business decisions, such as buying equipment, only on whether it will save you money on taxes. A lower tax bill can be a poor justification for spending a lot of money.