The tail should never wag the dog
One extremely important caveat that the owners and managers of every painting business should always keep in mind is that the financial or operational strengths of a business transaction should always stand on their own, aside from the tax benefits that may be derived from them. In other words, the tax tail should never wag the tax dog.
For some painting contractors it may not be feasible to accelerate expenses into the current year. If, for example, the residential or commercial painting business had a pretty bad year with a lower than average profit and expects profits to pick back up next year, it might be prudent to defer as many expenses into the following year as possible.
A business in the 20% tax bracket this year, but expecting to be in the 30% tax bracket next year and with $10,000 worth of expenses in question, will save only $2,000 deducting them this year, while deducting them next year will save $3,000.
It should be noted that moves such as paying the owner, principal or partner a bonus, taking a shareholder distribution/dividend/draw, repaying officer loans, paying down credit card balances, paying down credit lines, or paying off other debt will not create deductions that result in tax deferrals. Generally, in order to put this plan in place, the business must actually be paying expenses or purchasing equipment.
Accrual vs. cash
Every owner and manager should understand whether the operation files its tax return on the accrual basis or the cash basis. Most year-end tax strategies only work for cash-basis taxpayers. Accrual-basis taxpayers report all income in the year that it is earned and all expenses in the year that they are incurred. So, just because next year’s expenses are paid this year doesn’t mean they can be deducted this year.
Above all, don’t spend money that wouldn’t ordinarily be spent merely to reduce the painting services operation’s tax bill. Remember, $1 spent does not equal $1 worth of tax saved: $1 spent creates a $1 deduction, which (depending on the tax bracket, business structure, and state of operation) will only lead to $.00 - $.60 worth of tax saved.
Tax planning not just for year-end
Despite or because of the uncertainty of what tax rates may look like next year, the owners and managers of many painting businesses are sticking with what’s worked best for them in the past: minimizing income and maximizing expenses. For those businesses sure to face higher taxes next year, an argument could be made to generate as much income as possible this year, as it will pay more in taxes but at a lower rate.
Tax planning should be a year-round process, keeping in mind that year-end strategies can reduce not only this year’s tax bill, but future tax bills as well. Obviously, steps should be taken to ensure the success of the operation in the following year.
While many painting contractors rely on the advice and help provided by tax professionals, or utilize software programs to ensure a low tax bill, even the most knowledgeable professional doesn’t know what will happen down the road. Congress could kick the can down the road again. But, uncertainty or no uncertainty, the time for tax planning is now.
Remember, when it comes to tax planning, no painting business owner or manager can wait until lawmakers all go home for the holiday recess before initiating their strategies. It will be too late to make the moves that will reduce this year’s tax bill, let alone to reduce the tax bills for many years to come.
Matt Battersby shares 9 things every contractor needs to know to save on taxes in the Winter 2013 issue of PPC magazinehttp://professionalpaintingcontractor.com
More ideas for managing and marketing your businesshttp://www.sherwin-williams.com/painting-contractors/business-builders/business-tips/