Masonry Magazine December 1988 Page. 13
TAX MATTERS
Irving L. Blackman is the most published CPA in the country and spreads his tax knowledge as a dynamic speaker. Mr. Blackman specializes in closely held businesses and will consult with readers of this column. He is a partner in Blackman Kallick Bartelstein, a Chicago-based accounting and business consulting firm. Direct your questions to 300 S. Riverside Plaza, Chicago, IL 60606, or call (312) 207-1040.
YEAR-END TAX PLANNING... A SURE WINNER
The best way to beat the tax collector is to continually monitor your tax situation according to an organized tax plan. Start early in the year. Update the plan after mid-year. Then you are ready to harvest your savings at the most important update: the final year-end tax planning session. This checklist article will help you reap your harvest.
But first, let's talk about objectives. Your overall objective is to jockey both income and expenses into the year—either 1988 or 1989—that will produce the lowest overall tax for both years. However, sometimes your strategy will be to spread the tax impact into years after 1989. Or was 1986 a loss year? If so, your best bet may be to increase the loss as much as possible. Why? Your loss can be carried back to 1985 (when tax rates were higher), allowing you to recover a cash refund for past taxes paid.
This article emphasizes the year-end aspects of tax planning, but the material also should be used as the basis for your planning after year-end.
Balance-Sheet Items
A. Cash
1. Invest in tax-free municipals.
2. Invest in dividend-paying stock of domestic corporations (70 percent tax-free).
CAUTION
You cannot borrow to carry such stocks.
3. Does an excess amount of cash indicate an accumulated earnings problem?
B. Accounts Receivable
1. Write off all bad accounts.
2. Make sure below-market loans to shareholders will not exceed $10,000, resulting in nondeductible imputed dividends.
C. Inventory
1. Are overhead items being properly included or excluded according to the new capitalization rules?
2. Are inventory levels and locations designed to minimize state and local property taxes?
3. Sell obsolete, old or damaged merchandise to capture inventory losses as a current deduction.
4. If not on LIFO, write down damaged, shopworn, odd lot and obsolete goods to salable values, less direct costs of disposition. The value assigned must be established by actual offer for sale within 30 days of the valuation date. If they cannot be sold, junk them.
5. Consider switching to the LIFO method. If using LIFO, determine inventory levels needed at year-end to maximize benefits.
D. Investments
1. Realize gains to offset expiring operating or capital loss carryforwards.
2. Realize corporate capital losses to carryback against gains of prior years.
3. Consider filing consolidated returns.
E. Property, Plant and Equipment Accounts
1. Instead of selling equipment, avoid gain by trading it in.
2. Initiate needed repairs.
3. If equipment is obsolete, sell it or abandon it so you can deduct the remaining book value.
4. Place property in service before year-end to maximize depreciation; but don't blow use of mid-year convention by putting 40 percent of property in service during the last three months of the year.
5. Deduct the cost of tires and tubes immediately, whether the vehicles were purchased new or used (Rev. Rul. 59-249, 73-357).
6. Determine and properly report the personal use of company cars (and other such facilities).
7. Consider impact of depreciation and investment credit recapture on dispositions.
8. Expense up to $10,000 of new personal property instead of taking depreciation over a period of years.
F. Liabilities
1. Debt obligation-formalize all debt obligations (particularly to stockholders/officers). Issue notes at rate required to avoid imputed interest, and pay the interest when due.
2. Structure payments received in advance to be eliminated from current income.
a. Service contracts
b. Security deposits
3. Fix vacation pay liability sufficiently to warrant accrual.
4. Fix officers and directors' bonuses by resolution before year-end.
NOTE
Compensation, rents and interest due to more than 50 percent shareholders must be paid in cash to receive current year deduction.
5. With disputed amounts: To nail down current deduction
a. Settle, possibly by deferring payments
b. Prepay, subject to future settlement
c. Transfer full amount to trust (or escrow) to be used to satisfy pending lawsuit. To the extent that the trust funds are not used to satisfy a claim, the return of such funds is taxable in the year received.
6. Accrue payroll taxes (FICA and FUTA) on wages earned and accrued in current year, but paid in following year.
G. Capital Stock
1. Consider an S corporation election or termination based on estimates of anticipated corporate earnings and taxpayer's personal tax bracket. Beware of built-in gains.