FOR MANY SMALL-BUSINESS owners, this will be a tough year.
A weak housing market and tight credit standards have made access to capital difficult. The high cost of raw materials, from steel to tomatoes, cuts into profits. Gas prices hovering at $4 a gallon continue to stifle consumer spending.
“You can read any number of reports saying consumers are still buying, but from the people I talk to they’re not,” says Paul Kutz an accountant and financial planner in Great Neck, N.Y., who advises entrepreneurs. “People are spending less money.”
Kutz points to a longtime client, an industrial-metals processor in New Jersey, as an example of how the slowdown is taking its toll. After logging several banner years, the firm’s last six months have been sluggish. Higher “input costs” — that is, the cost of materials used to create end-products — is eroding profits, which in turn hampers the firm’s ability to reinvest in its business and pay out year-end bonuses.
“Without exception,” Kutz says, “business owners are having a tougher time this year.”
Small firms can bail out a bad year by making the most of year-end tax and financial planning. Taking time to reflect on business goals and revamping strategies for next year should also be a priority, especially if you think economic woes will worsen.
Here are some year-end planning strategies to consider when the going gets rough:
Step-up collections efforts . If this year was lousy and you have a raft of unpaid invoices, consider stepping up your collections efforts as well as calling in old debts, suggests Paul D. Voytovich an accountant and financial planner in Orchard Park, N.Y. Also, try prebilling customers who may be willing to pay early. And if your business has any older inventory, liquidate it. Having more cash on hand this time of year allows businesses to do everything from make necessary capital improvements and equipment purchases to planning out marketing efforts for the coming year, says Voytovich.
Finance equipment purchases. If cash is tight, think about charging or leasing the equipment you’ll need in the coming year, says Kutz. By doing so before the end of the year, you can deduct up to $125,000 of business expenses such as computers, cars, software and heavy machinery through what’s known as the Section 179 deduction. (Watch our video on this tax break here .) According to this IRS rule, equipment purchases must be made and in use by Dec. 31 in order to deduct their cost on the year’s return, rather than depreciating those items over, say, a five- to seven-year period.
Make charitable contributions . If you write a check to a tax-exempt charity and it’s post-marked by the end of the year, you can take the deduction but you may not have to pay until 2009. Also, consider charging donations to charities on your credit card. This way, you can make donations up until Dec. 31. And if you contribute through a charity’s web site you’ll usually get a receipt instantly.
Set up retirement plans. By putting in place a qualified retirement plan by the end of the year, you can take the deduction without having to fund it until you file your tax return. “It is one way that a cash-based business can get a deduction but they don’t have to pay for it until they file their return, including the extended due date,” says Voytovich. Also, Simplified Employee Pensions (or SEPs) don’t have to be funded or even set up until the owner’s tax return is due. To recover administration costs, the IRS lets some small businesses claim a tax credit up to $500 per year for the first three years of a plan. Read more on small-business retirement plans here .
Deduct health-insurance premiums . “Self-employed people are allowed to claim 100% of the premiums that they pay [for themselves and their spouses] during the year,” says Brendan J. O’Keefe, an accountant and financial advisor in Orleans, Mass. That’s an above-the-line deduction, meaning you don’t have to itemize to receive the benefit, he says. In contrast, workers covered under a company plan “must spend in excess of 7.5% of their adjusted gross income before they can get any benefit in the form of a tax deduction,” says O’Keefe.
Carry-back losses. If your business is operating at a loss, the net operating loss (or NOL) carry-back provision allows you to offset the previous two or three years’ gains with this year’s loss. By opting for the NOL provision, “you could reduce your taxable income from the last two years and thereby generate a tax refund,” says O’Keefe.
Rebalance your marketing efforts. Year-end planning is not just about taxes, says Gary Gordon, a planner at Pacific Park Financial, Inc., in Aliso Viejo, Calif. He urges business owners to examine their marketing efforts. If this year’s sales were subpar, you may want to re-think your business’s marketing strategies. A good rule of thumb, says Gordon, is to apportion 10% of your profits toward marketing expenditures.
Review contracts and prices. Gordon suggests reviewing supplier or vendor contracts to make sure they are up to date. And if any supplier contracts are ending try to either negotiate lower rates or look around for less expensive alternatives. Also, if your costs have risen, you may consider raising prices on your own products and getting rid of unprofitable product lines.
Write to Diana Ransom at email@example.com .
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