Tax Elections for Small-Business Owners
While many tax rules are automatic, there are a number of instances in which owners can choose their tax treatment. Here's a listing of some elections available, the advantages and disadvantages to making them, and when they have to be made:
|Description of options||Pros and cons||When to make the election|
|S corporation status (instead of a C corporation)||Pro: Pass-through tax treatment eliminates double taxation.
Con: Cannot take advantage of many fringe benefits
|For current-year election: within two and a half months of start of year|
For next-year election: any time within the current year
|Expensing of business equipment (up to $19,000 in 1999) (in lieu of depreciation)||Pro: Immediate deduction for entire cost (up to dollar limit)
Con: May not have sufficient income to use expensing
|Due date of tax return for year in which equipment is placed in service (including extensions)|
|Amortization (AMT) of business start-up expenses over 60 months or more (instead of recovering capitalized costs upon a future sale)|| Pro: Deductions for costs over five years.
|Due date of tax return for first year of business (including extensions); corrective election on amended return filed within six months of original due date (plus extensions)|
|Waiver of net operating loss (NOL) carryback (in favor of only carrying the loss forward)||Pro: May gain greater tax benefit in future years (if future tax bracket is higher)
Con: Lose out on immediate tax refund
|Due date of tax return for the year in which the NOL arises (including extensions)|
|Figure depreciation of tangible personal property for AMT purposes using 150% over the regular tax recovery periods (instead of using longer AMT class lives)*|| Pro: Eliminates any AMT adjustment (and related record keeping)
Con: Smaller depreciation write-offs
|Due date of tax return for year in which property is placed in service (including extensions)|
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BARBARA WELTMAN is an attorney and a trusted professional advocate for small businesses and entrepreneurs. She is the author with such titles as J.K. Lasser’s Small Business Taxes and Smooth Failing, and she contributes regularly to American Express OPEN and SBA.gov. Her articles have appeared in the Wall Street Journal and U.S. News and World Report. Weltman is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and hosts radio shows and podcasts, including Build Your Business radio. She has been named one of the 100 Small Business Influencers in the U.S. for the third year in a row.
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