Sooner is better when preparing for income tax season

NEW YORK -- The holidays are here, and income tax filing season is months away.

Do NOT be lulled into a false sense of security. If you haven't started looking at your company's taxes and estimating how much the bill is likely to be, you're setting yourself up for unnecessary angst and perhaps tax penalties come April.

"What they need to be doing at this point is taking a look at a pro forma tax return and see where they would be, based on all the knowledge they have now," said Gordon Spoor, a certified public accountant with Spoor, Doyle & Associates in St. Petersburg, Fla.

It's not just a matter of saving yourself panic and frustration at tax time. Spoor noted that many businesses must make their first estimated tax payment for 2003 on April 15, the same day that any 2002 taxes will be due. It's important to know as early as possible whether you're likely to have enough cash on hand to pay your bill.

"You don't want any surprises," Spoor said.

Moreover, you might find that you need to pay more than you expect when you make your final 2002 estimated payment on Jan. 15. Spoor again cautioned that you're better off doing the calculations now and paying the money on time rather than facing a penalty next April.

Deferring income possible

Once you've come up with some rough figures, you might have some decisions to make. Depending on your projections, you might want to defer some income until 2003 or accelerate some deductions.

You can defer income by not billing your customers or clients until January. But be aware that this can only be done if you run your business on a cash accounting method, in which income is reported during the year it is received. If your business is on the accrual method, you have to report it when it is earned, even if it hasn't been received yet.

Deductions must be treated in a similar fashion -- with the cash method, you can accelerate a 2003 payment into 2002; for example, making a mortgage or rent payment early. Under the accrual method, a deduction must be reported for the year in which payment is due, so writing that check early won't lower your tax bill.

These are particularly important considerations if you're thinking of purchasing equipment before the end of the year and planning to take advantage of what's known as the Section 179 election. Named for an Internal Revenue Code provision, this election allows small businesses to deduct up front rather than depreciate the entire cost of up to $24,000 in equipment.

Under Section 179, you can use this deduction for equipment that is placed in service (but under the cash method, not necessarily paid for) by Dec. 31. So if you're thinking of buying a new SUV for your business, or a new computer (or both; the election applies to an aggregate of $24,000 in equipment), you might want to do it soon.

Some cautions

A couple of caveats: You cannot use the election for a building or part of a building, such as a heating system. And when it comes time to file your tax return next spring, you must complete IRS Form 4562, Depreciation and Amortization, Part 1 to use the election. You might also want to know that next year, the amount of the election increases to $25,000.

Spoor offers another caution: Don't automatically go for the election. Do the math and see if depreciating the equipment over a longer period of time would work out better for you.

He suggested using the election for equipment that you'd expect to depreciate for longer periods.

One more word of warning, one that has become a mantra of sorts for tax professionals: Don't base your business decisions, such as buying equipment, only on whether it will save you money on taxes. If it's not a move that will benefit your business in and of itself, a lower tax bill can be a poor justification for spending a lot of money.

There are other decisions to be made between now and Dec. 31 that can affect your taxes -- for example, setting up or switching retirement plans, a move that could help you and your employees save hundreds of dollars in taxes.

But, of course, time is short, and you might need help in determining how to set up a plan. Get an appointment right away with a tax professional who can steer you toward a plan that will best serve your needs.