Regulatory changes for small business in 2013

The calendar won't be the only thing changing for small businesses this New Year. Small businesses will have to look out for regulatory changes in 2013 that will change the way they operate. These potential regulatory norms would require significant adjustments to the way the businesses operate.

Changes in Tax Rates

A majority of small businesses are organized in such a way that revenues are taxed at the individual rate instead of the corporate rate. Without action from the federal government, the expiring tax cuts will increase individual tax rates in 2013, resulting in a tax rate hike for many small businesses. In addition, the capital gains rate would also increase. Gains on assets held longer than a year would be taxed at 20 percent instead of the present 15 percent for middle-income and upper-income taxpayers. The rate for lower income taxpayers would rise to ten percent from zero.

If the current tax cuts are allowed to expire, businesses will also face a decrease in allowable expenses and real property will no longer be included. The start-up deduction for businesses will also be reduced from $10,000 to $5,000. For business owners looking to leave their business assets to their heirs, or for those who may inherit assets, the maximum estate tax rate would increase from 35 percent to 55 percent. At the same time, the maximum exemption  would decrease to $1 million from $5 million.

In addition to these, the steady increase in cyber frauds, impending immigration and healthcare reforms make it imperative for small businesses to have adequate checks and balances in place.

How to reduce taxes?

The easiest way to reduce income taxes is to either increase deductions or defer income. Small business owners can increase deductions in a variety of ways, including purchasing supplies and equipment before the end of the year to be used in the future. Paying bills early, prepaying for maintenance and subscription plans and making charitable donations can prove significant if done before the end of the year. On the basis of accounting method used, business owners can also depreciate assets to create additional deductions.

Small business owners can defer income by contributing to qualified retirement plans such as 401(k), IRA & SEP accounts before the end of the year. Some types of investments, like annuities, also allow investors to defer taxes. Investors avoid paying federal income taxes on the principle and interest until they withdraw the money.

A sound business recovery and continuity program is a must. Emphasis must be laid on key vendors having adequate processes to ensure uninterrupted service in the event of extreme weather or other unforeseen circumstances. Critical documents like tax returns and other financial documents must be maintained at alternative locations for protection and adherence to retention guidelines.

Professional help can help facilitate these proceedings

A certified tax & accounts outsourcing service provider can be a valuable professional resource, particularly when it comes to helping business owners identify and take advantage of opportunities to reduce their income tax burden. In addition to providing guidance and expertise regarding qualified retirement accounts and strategies for deferring income, they can help small business owners manage cash flow, plan for growth, and mitigate risk.

How are you preparing your small business for the looming tax changes? Have you considered outsourcing solutions to help your small business get through with minimal financial losses?

A professional outsourcing company like GKM can help you make sound decisions that benefit both your business and personal interests.

Why start a business retirement plan?

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Starting a business retirement plan can be a complex process for small business owners in particular as they need to factor in issues such as multiple sources of retirement income, special tax considerations and succession issues. 

Beginning a business retirement plan will help make deductible contributions for 2012. Listed below are some compelling reasons for you to start a retirement plan:

Reduce the income tax your business pays, as plan contributions for the business owner are deductible as a business expense. Income contributed to a tax-deferred retirement account reduces your personal taxable income for the year. For instance, if $20,000 has been contributed in 2012, there is no need to pay income tax on that amount that year. Income tax is deferred until money is withdrawn from the account.

Minimize your exposure to the new 3.8% Medicare tax on net investment income. Effective January 1, 2013, individuals with modified adjusted gross incomes over $200,000 [$250,000 if married filing jointly, $125,000 if married filing separately) will be subject to an additional 0.9 percent HI (Medicare) tax. The additional Medicare tax is also applicable for the self-employed. Contributing to a tax-deferred retirement plan will help minimize exposure to tax.

Investment earnings grow tax-deferred. While in a tax-deferred retirement account, investment earnings are exempt from tax, enabling investments to potentially grow faster than in a taxable account.

Your plan not only helps secure your future, it may be the primary way your employees can help secure theirs. This is important given that more people will likely be relying on employer-sponsored plans as Social Security becomes less certain, health care gets more expensive, and life spans grow longer.

You can contribute a greater amount each year than to a personal IRA. Contributions to a personal IRA are limited to a maximum of $5,000 in 2012, while going up to $50,000, between employer & employee contributions in the case of some business retirement plans.

Gain access to a Roth retirement account. Unlike personal Roth IRAs, even high-income individuals can contribute to a Roth account at work without any income limits in business retirement plans.

Offering a retirement plan helps make your business competitive when it comes to attracting and retaining good employees.

Retirement assets are generally protected from creditors.

There are potential tax benefits to offering a plan, because plan contributions for the business owner are deductible as a business expense.

What type of retirement plan is the right fit for your business? There are several types to choose from and many small business owners can find the options confusing. For example, some small business retirement plans are better for sole proprietors while others may be more appropriate for businesses with up to 100 employees.

With help from your financial and legal advisors, you can choose a plan which best suits your business retirement plan needs and objectives. 

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Small Business - Tips to plan your taxes for 2012

Tax laws are subject to change every year, allowing individuals and small business owners to plan how their tax savings can pan out. For any business, big or small, a diligent approach to tax planning is sure to open up new tax saving avenues, taking advantage of the business deductions for which it qualifies.

This article is an attempt to trigger meaningful discussions between the tax payer and the tax advisor, looking to create awareness about potential benefits of tax planning.

A few aspects which will substantially impact your business are listed below:

1. Follow your tax laws closely | Hire consultants

As long as your tax filing is appropriate, there will be no roadblocks. However, for inappropriate filings, say, incorrect computation of sales tax, payroll tax & income tax, penalties, fines and punitive interest costs will add up. In case you do not have in-house assistance or unable to spend time on tax research to evaluate your business’s financial situation throughout the year, a CPA can help, by reviewing your overall position and providing you with the expert tax planning counsel you need today and in the years ahead. By combining unrivaled education, training and experience with a focus on your financial situation, a CPA can recommend sound strategies designed to make your goals a reality.

2. Make use of deductions | Expense related

Some deductions you should research on and take advantage of are automobile deductions, home office deductions, travel expense and entertainment expense deductions. Utilizing deductions helps to deduct business costs from gross income. Section 179 deductions apply to most tangible personal business property in service during the tax year, such as computers, office furniture, vehicles and machinery. These provide immediate tax relief on newly purchased equipment, helps improve cash flow and increase investment options for small businesses.

3. Classify your business | Different types have varied tax rates & liabilities

Proper classification of your business can help in reduction of your tax rates. You will be best advised to research on various types of businesses and what type your best fit is. Some business classifications are Sole Proprietorship, Partnership, Limited Liability Corporation, S-Corp, C-Corp among others with special tax statuses for some of them.

4. Plan for the future | Beware of tax traps

Ask yourself the following questions, and come up with viable plans for the future:

1. Have I created the most tax efficient type of business?
2. What is the best tax efficient way to save for my retirement?
3. What is considered a reasonable salary by IRS standards?
4. In case I wish to expand my business across states, what are the stipulations on multi-state taxability?
5. Is there a requirement to report my foreign assets? Non-disclosure may lead to onerous penalties from IRS. Take care if you own a bank account, real estate, business or other assets in a foreign country.
6. What is the IRS purview on business succession – most effective way to leave behind a business while avoiding a huge tax bill?

4. Pay out taxes in installments

In case you face difficulties in paying your taxes in full, you can negotiate a deal with the IRS wherein monthly repayment is possible. This will be beneficial especially for small business owners. Choose the right payment plan based on your need and eligibility. However, be wary of interest payments that might harm your business. 

  

Budgeting for a small business

Budgeting might seem an overtly complex exercise for some business owners. However, there are no hidden demons in budgeting if a realistic estimate of spending is made possible and priorities clearly established.

A few common budgeting pitfalls to avoid are listed below for a better understanding and utilization of the budgeting process:

Underestimating the costs:

Almost all businesses have a set of supplementary or ancillary costs that often go unnoticed and do not always make it to the budget. For instance, every time you purchase a new software or equipment, although the cost of equipment might figure in your purchase, the associated costs such as training, time and maintenance costs involved in the process might have missed the bus, thus resulting in an underestimation of the actual costs involved.

No Budgeting:

The biggest mistake of all budgeting short sights is to go about your business with no idea about the profitability in the future with no quantified predictions. Bills come in, checks go out – yet, it is a monotonous process with no order to the exercise.

Non Prioritization / Non-objective planning:

The business will go to waste if there is no concrete business plan attached to it. Without clear goal setting, priorities cannot be set on your spending / purchasing. Setting goals and not tying your expenditures to them is an exercise with even lesser value.

Scrutinize all expenses, make the best choice:

As a small business owner, you can least afford to lose money. Budgeting is the best time to compare estimates to actual pay-outs, and adjust the figures accordingly. For instance, if a website maintenance service is costing you $1,000 a year, and a similar service is offered at $500, you can take time to scrutinize the individual service offerings, and decide to eliminate on the additional costs incurred.

Monitor your cash flow:

Keep a close watch on your inflows and outflows, and ensure your budgeting helps focus on projecting future cash flows too. A budget with emphasis only on expenses and ignorance towards revenues will fail miserably in projecting cash flows. Keep having periodic checks to ensure your revenues match your expenses – else, it is a disaster-in-waiting for your small business.

Focus on what really matters:

Ensure you do not spend similar amounts of time on each item on your budget. Rather, spend the maximum time on those items that drive your profitability and business viability.

Bring in a flexible approach:

A good business is one which is flexible. For instance, if the actual revenue is not as expected, be prepared to trim down on your expenses. Here, it is crucial to follow a strategy where you overstate your expenses and understate your expected revenues. While a no-frills-attached approach to expense planning is a good idea, also set aside income wherever possible. In most unimaginable ways, such money set aside can bail out your business in the future. It can also serve as a contingency fund to dip into in case of budget overruns. 

Use your budget as a limiting exercise, not as the LIMIT:

Sticking sincerely to your budget is fine, but do not it act as a constraint. It should act to restrain your spending, but do not get too stiffened up on it. An unplanned trip to a trade conference or a valuable seminar will fetch you precious contacts although the expenses may be unbudgeted. Be prepared to go beyond your budget when a valuable investment comes knocking.

Get in touch with us at GKM for discussions on setting up a budget for your business requirements. We are here to help you grow your business.