To Take a Profit, or Not, That is the Question
One of the most frequently asked questions we receive from small business owners is about whether or not to take a small business profit in the current year or hold it over into the next. There are several schools of thought when it comes to posting a profit versus pushing it off into the next or even subsequent years.
Profits and losses can be used in strategic accounting to offset other income or reduce tax burden. Deductions can also be used to produce a greater tax savings in subsequent tax years when the tax rate is lower, such as a 179 deduction for the purchase of capital assets. Continuing this school of thought, businesses often accelerate income, when possible, into years when profits are projected to be substantially less or possibly a loss.
According to Bruce Bartlett, former economic adviser to the White House, the U.S. Treasury and Congress, “the term ‘tax rate’ has meant the average or effective tax rate – that is, taxes as a share of income.” From a macroeconomic point of view, the tax rate is the total of federal revenues divided by the gross domestic product (GDP). If you follow this line of thinking, the U.S. tax rate is the lowest it has been since the start of the Korean War fifty years ago.
Even if we take into account not just federal taxes, but also state and local taxes, a USA Today analysis found last year that, “If we include everything – federal, state and local taxes, that the percentage is still it’s lowest since the 1950s.” These low tax rates beg the question on many small business owners’ minds, “Is this the year to take a profit rather than pushing the profitability into future years?”
“Right now it’s realistic to assume that tax rates are at the lowest they are ever going to be,” says David Bradsher,CPA, PASBA member and owner of Bay Business Group in Falls Church, VA. “The macro view of small business profits and deferring profitability for a year with lower tax rates was the hope that the business owner would pay less in taxes. With tax rates as low as 10 percent, we’ve hit the proverbial bottom and small businesses may want to consider taking profits in the 2011 tax year.”
If you do elect to take a business loss by pushing profits and deductions into future years, you must also be prepared to defend your decision should the IRS ask. That means having documentation to prove expenses, meetings, mileage, and any other ‘reasons’ for the business’ expenses to offset profitability. The more evidence you have to prove your case, the smoother an audit will go.
Of course, each small business is unique and has differing financial needs. Take the time to Schedule a meeting to speak with a small business accountant or tax professional to ensure that your business is receiving the most benefit from expenses and deductions to help lower your tax burden.
PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations. To find a trusted accountant in your area, visit www.SmallBizAccountants.com.
Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.
Copyright Information 2011 Professional Association of Small Business Accountants