Tax Tip: New Year's Resolutions
Did last year's tax bill leave something to be desired, such as a refund? Consider these tips from Murray Alter, a tax partner at accounting firm Coopers & Lybrand in New York City.
· Investigate whether it makes sense to change your corporate status. Since the tax rate on S corporations tops out at 42% (compared with a 34% maximum on C corporations under $10 million), you might realize substantial savings by switching. However, New York and some other states give S corporations favorable tax treatments that may more than make up for the difference.
· If you expect to be penalized for tax underpayments during 1995, boost estimated tax payments this year. Small companies can avoid penalties by paying estimated taxes that are equal to 1995 taxes. Says Alter, "If the IRS considers you a large corporation -- meaning with taxable income of $1 million or more in any one of the prior three tax years -- compliance rules are more complicated, so involve your tax adviser early."
· Look for ways to minimize state and local taxes. "Consider moving if you operate warehouses in a state with a 'throwback' tax rule, which enables it to tax revenues on goods shipped out of state," advises Alter. (Companies subject to such a rule can end up paying tax on more than 100% of their taxable income.)
· Ask your tax adviser to keep an eye on the Miller case. This is a Sixth Circuit Court case involving a business owner who tried to deduct the interest charges assessed on an overdue federal tax bill. Two lower courts sided with him, "but at the third level the court agreed with the IRS," says Alter. "If a higher court overturns the ruling, business owners might benefit from filing amended tax returns."* * *