Tax strategies for large and small businesses

01:34 PM PST on Tuesday, December 13, 2005

By Terry Corbell

Despite a record year in collecting $47.3 billion in unpaid taxes - particularly, as a result of IRS audits of corporations and wealthy Americans - knock on wood, you can expect the high audit rate to continue in 2006.

In fact, an international law firm, Haynes and Boone, LLP, is reminding corporate executives that their company IRS returns will impact their personal returns. The odds are if a company is audited, its executives will also be audited, according to the Texas-based firm.

"Generally, company executives should carefully review their IRS Forms W-2 and/or 1099 to make sure that all items of compensation for the year are included," said Houston attorney Marilyn Doolittle. "If needed, the executive should ask the company to provide a detailed breakdown of all of the amounts that go into each of the boxes on the forms, and verify that all compensation has been properly included and subjected to employment taxes."

On what tax aspects should executives focus? "The areas that an executive should pay particular focus to are stock-based compensation ( e.g., stock option exercises, restricted stock vesting, stock transfers), and fringe benefits (e.g., personal use of company vehicles and aircraft, spousal travel, athletic skyboxes, loan forgiveness, and relocation expenses)," Doolittle informed me. "The IRS is expected to review the Forms 1040 of a company's top 5 to 20 executives, depending on how large and complex the company structure is."

Published reports indicate about one in 63 affluent taxpayers earning six figures were audited in 2005 compared to one in 117 who earned less than $100,000. Indeed, 20 percent of corporations were audited through Q3.

"All companies are going to have executive compensation tax issues reviewed as part of any IRS audit of a corporate (or partnership) tax return," Doolittle said.   

In addition, about one in 126 small businesses with $10 million in assets was audited. Those figures are the highest in a decade.

So if you own a small business, beware: Published reports also indicate the IRS will increase its audits of the self employed. Armed with a $10.68 billion budget approved by Congress for fiscal 2006 largely to improve tax enforcement, the initiative is aimed at alleviating the gap in what the government believes it should be collecting. This year's gap is estimated to be close to $311 billion.

Next year, the IRS will reportedly study S corporations, which comprised about 59 percent of corporate tax returns in recent years.

So no matter what your situation is, the obvious tips include saving records for a paper trail and to consult your tax advisor so you can legitimately save on taxes.

The basic idea, of course, is to maximize your expenses and delay your income past December 31, if possible. That might mean timing the billing of your customers so that you get your receivables in January and write off as many expenses as possible this month. In other words, accelerate your expenses and delay your income.

Here is a sampling of write-offs that might be particularly applicable in the Northwest:

Section 179, for example, is why you'll see a lot of last-minute sales pitches by truck or furniture dealers because they are aware that certain capital expenses can be deducted now. For this year, the Section 179 expense limit is now $105,000.

Health Savings Accounts (HSAs) mean you can pay for medical treatment by setting aside pre-tax dollars for health care expenses. HSAs are not to be confused with Medical Savings Accounts.

U.S. Representative Brian Baird (D-Vancouver), who has fought many years for sales tax fairness for Washington state taxpayers, which eventually saved the state's taxpayers an average of $500 annually, voted against the Budget Reconciliation Tax Bill last week.

"This irresponsible reconciliation bill contains an extension of the sales tax deduction that so many hardworking Washingtonians have benefited from and that I have tirelessly fought for throughout my congressional career," he said in a prepared statement. "However, the one-year extension was attached to a bill that has nothing to do with fairness, and everything to do with irresponsible tax giveaways to those who need them least."

Baird is concerned that the bill will increase the federal deficit: "This tax cut package primarily benefits the wealthiest Americans, actually raises taxes on more than 17 million middle-class families, and will cost us $81 billion over 10 years."

For Washington residents who don’t pay state and local income taxes, this means if you're thinking of making a large purchase, you might want to talk with your tax advisor before the tax benefit expires.

If your business conducts research or development, you might be entitled to a research tax credit. This is a dollar-for-dollar tax credit and it might especially be of interest to Northwest companies engaged in software development.

With Washington being the most trade-dependent state in the union, companies making profits on products produced domestically are probably interested in a Section 199 manufacturing profit deduction. This includes apparel, construction, film and music.

This past year seemed to be filled with natural disasters, which means charitable cash deductions might play a bigger role in your taxes. Such deductions, made after Hurricane Katrina struck in late August, provide attractive tax benefits.

Most businesses were hit hard by high gasoline prices. For the first eight months of 2005, the rate for business miles was 40.5 cents per mile. As a result of the high gas prices, the IRS raised the rate for business to 48.5 cents for the last four months of the year.

But beginning in 2006, here are the new rates: 44.5 cents per mile for business mileage; 18 cents per mile for medical and moving expenses; and 14 cents per mile for most charity purposes.

There are higher rates for Katrina relief. The rate is 29 cents for charitable mileage between Aug. 25 and Aug. 31, 2005 for deductions. The rate is 40.5 cents for reimbursement purposes. But there are other details for charitable mileage write-offs you'll want to review.

"Companies should be undertaking self-audits now, to shore up internal procedures and tax reporting before the IRS comes calling," attorney Doolittle reminded me. "Executives should be aware that their returns may be reviewed, or even audited, as part of their company's audit."

Finally, don't forget about the tax benefits of Keogh plans or IRAs. You still have time to act, but again don't hesitate to talk with your tax advisor ASAP.

From the Coach's Corner, a recent survey details how female CEOs are increasing profits. Instead of solely targeting market share or revenue growth, Babson College's Center for Women's Leadership reported 97 percent of surveyed female executives cited customer satisfaction as their highest priority.

 Employee satisfaction was identified by 92 percent and company culture was cited by 81 percent. Profitability was named by 64 percent.

 The survey included responses from 215 female executives employing more than 24,000 workers in Massachusetts in a wide variety of industries: Consulting, marketing, human resources, technology, health care, construction, manufacturing, and real estate.

 Seventy-seven percent of the executives founded their companies.

 The results speak for themselves: More than 75 percent of the companies had revenue of at least $1 million last year. The average was $28 million. From 2003 to 2004, 54 percent enjoyed revenue growth of at least 5 percent. For the majority, they said their motivation was their desire for a challenge and personal achievement.