Taxes are an expense that eats into cash flow. However, smart planning can optimize tax opportunities to minimize the imact on your cash flow.
Here are three tax strategies that could help you from becoming cash-strapped during tax time.
Finance equipment purchases
Generous tax write-offs, such as bonus depreciation and first-year expensing, can be used when your business acquires machinery, furniture and other equipment, even if the purchase is financed in whole or in part. Payments made after the year of purchase help to improve cash flow because the tax benefits are claimed now while the cost of the equipment is made later on.
For example, if you purchased equipment late in 2011 that cost $60,000 and which you are paying off now, check to see which tax write-off (100 percent bonus depreciation or first-year expensing up to $500,000) can be used. If you are in the 25 percent tax bracket, a full write-off effectively saves you $15,000 in taxes (cash that you didn’t have to spend). You get the tax savings and you have not yet fully paid for the item that generated those savings.
For 2012, consider using this strategy if your business needs new or additional items. Check write-off rules for this year, which are set to be less generous for equipment purchases unless Congress extends the 2011 favorable rules for 2012.
Special account contributions for the cash-strapped
If you don’t have the cash on hand to make contributions to a SEPor other qualified retirement plan, you may be able to use a tax refund to help you. Here’s how this strategy works: Take the deduction on your return for the projected contribution. File the return and use the tax refund to then make the contribution before the due date (or extended due date) of the return.
For example, say you are self-employed and were profitable in 2011 but lack the money to make a retirement plan contribution now. You can set up a SEP plan (even though the tax year has ended) and figure the contribution you want to make. The contribution is tax deductible and you anticipate receiving a tax refund. File your return, receive your tax refund, and use it to complete the contribution you already deducted.
The same strategy can be used to make a contribution to a health savings account (HSA), if you are eligible to do so (i.e., you were covered by a high deductible health plan and meet other requirements). Just watch the deadlines:
For 2011 HSAs: April 17, 2012. For 2011 SEPs: October 15, 2012, if you obtain a filing extension.
The tax law allows you to carry back certain tax write-offs from the current year to be used in a prior year or years. The carryback lets you cut the taxes on prior returns and receive an immediate tax refund. This refund generates cash flow that can be used in your business. Carrybacks that may be available to you:
Net operating loss carrybacks. If 2011 was not a good year, your operating loss may create a carryback. Usually, the loss is carried back for two years, but there may be a longer carryback in some situations. General business credit carryback. Most business-related tax credits are lumped together and subject to an overall limitation called the general business credit; this is not a separate credit but only the limitation on other credits. If the general business credit exceeds the limitation for the current year, the excess can be carried back for one year. This carryback offsets your tax liability (not merely your income) to generate a tax refund.
You can receive a quick refund by filing Form 1045; C corporations file Form 1139. Alternatively, you can receive a refund by filing an amended tax return for the carryback year or years.
If you don’t use up the carrybacks, you can carry the unused amount forward to offset up to 20 years.
Work with your tax advisor to explore other tax-related strategies that can minimize the drain on your cash flow.
Barbara Weltmanis an attorney and author of J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business. She is also the publisher of monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com Follow her on Twitter @BarbaraWeltman.