It's time to settle accounts for 2004 -- and prepare for a fruitful 2005. Here are three ways to get the most out of the annual end-of-the-year bookkeeping scramble.
1. It's the Depreciation, Stupid
Remember bonus depreciation? It was one of the two major business tax breaks passed by Congress in 2003. Well, bonus depreciation, which is designed to boost business spending by allowing business owners to depreciate newly purchased assets at a faster-than-usual rate, is set to expire on January 1. So if you've yet to take advantage of it, time is about to run out.
Under the current rules, business equipment purchased and put into service by December 31 can be depreciated 50% immediately, rather than 30% as was the case in prior years. In other words, if you have $50,000 worth of qualified property, you can take at least $25,000 off taxable income right away. Obviously, there's no time to order a brand-new factory line at this late hour. But if you're thinking about something less ambitious, like upgrading your computer system or adding new vehicles to your fleet, do it now instead of next year. (The other major tax break, which raised expensing limits on purchases of business equipment, was extended until the end of 2007.) Another depreciation-related benefit set to disappear: You can depreciate as much as $10,710 off a new company car in 2004. Next year, that'll fall to just over $3,000.
2. Avoiding the AMT
One of the benefits of private ownership is that you typically have more flexibility in deciding when to book revenue than bigger, publicly traded corporations, according to Mel Schwarz, a director at accounting firm Grant Thornton. That can be a big help when dealing with the Alternative Minimum Tax. That much-loathed levy was designed to target fat cats who try to avoid paying income tax, by taking away many of their deductions and exemptions and slapping them with a minimum 26% rate. The problem is, because it's not adjusted for inflation, the AMT is drilling deeper into ordinary taxpayers each year. Business owners may be especially vulnerable. That's because a number of fairly common business-related deductions -- such as a loss from a flow-through entity or depreciation and incentive stock options -- wind up triggering the AMT.
Planning for the AMT is devilishly difficult. But it's not impossible. The trick is to run the numbers before tax time and project whether 2004 and 2005 will be AMT years, and try to minimize taxes across them. In some cases, you'll want to shift income into an AMT year from a non-AMT year; in other cases, the opposite is true.
3. Look Sharp
Smart accounting means doing more than preparing your books for the taxman. "Use accounting for analytical purposes," says author and business consultant Linda Pinson. Take your year-end numbers and compare them line by line with your business plan. That'll show you where you overspent or underperformed, as well as where your planning was unrealistic. It's an easy exercise that will leave you better equipped to make decisions for next year.
All the while, keep an eye out for figures that don't look quite right. They might be evidence of fraud -- a salesperson taking kickbacks, say, or a payroll manager juicing a paycheck. Carl Lacher, a CPA and managing partner of Lacher MacDonald & Co. in Seminole, Fla., sees it all the time: clients who are too busy running their business to keep good accounts or strict internal controls. Balancing the books is not enough, Lacher says. "Does the bank reconciliation smell right, or is there something funny about that $4,000 for bank errors each month?" he asks. It's a rhetorical question. "This is the time to start checking on whether your business is getting done what you think is getting done," he says, "not what someone else wants done."