The end of 2003 is just around the corner and with it comes the end of the accounting year for many builders. Is your building company ready for the end of the year? Are there any last-minute tax-savings steps that you can take to cut your company’s and your personal 2003 tax bill? Are there any transactions you can make to beef up your year-end financial statements? Have you finalized your business plan and operating budget for 2004? This column will take a look at some of the activities that you should be engaged in before year-end.
Find Last-Minute Tax Savings
Tax-planning strategies including deferring or eliminating income subject to taxes; shifting income from one taxpayer to another and one year to another; and increasing losses and deductions. With tax rates going down in 2004, in most instances it makes sense to do some tax planning to defer some of your taxable income into next year.
The deferral of income and the associated tax can be the equivalent of an interest-free loan from the government. Additionally, if the “proceeds” of that loan are invested wisely (rather than spent on toys), enough money can be earned to pay the original tax on the income. A basic principle of taxation is to accelerate deductions. The acceleration of deductions by a taxpayer will postpone the payment of taxes and thus give the taxpayer the use of the money in the intervening period. This is true whether the taxpayer’s bracket is expected to go up or even down. With rare exceptions, it is always better to defer income taxes. Following are some ideas you may want to discuss with your tax advisor:
- If your company files its tax return on a completed-contract basis, you should consider deferring closings on house sales. When scheduling your closings around year-end, consider pushing as many as possible into 2004 in order to defer income to 2004.
- Accelerate payment of overhead expenses. This technique works best for cash-basis taxpayers. To accelerate deductions for 2003, pay as many overhead payables as you can in the current year. If you have cash available you may want to consider prepaying some of your January 2004 expenses. If you will owe personal state income tax for 2003, you may want to prepay it before year-end to get the deduction for your federal tax return.
- The tax law passed in 2004 provided additional incentives to accelerate the write-off of fixed assets purchased. The Section 179 deduction, which allows businesses acquiring $400,000 or less in equipment during the year to immediately expense equipment purchases, has increased to $100,000 from $25,000. There are some limitations on Section 179 as it relates to autos and other listed property, so before purchasing a vehicle check with your tax advisor as to whether it will have any limitations for the Section 179 deduction. Another change in 2003 was expanding the Section 179 deduction to include off-the-shelf computer software.
- In addition, the tax law also increased the amount of bonus depreciation that can be elected for assets purchased after May 5, 2003, to 50%. The 30% bonus depreciation put in place in 2002 is available for assets purchased prior to May 5. Bonus depreciation allows taxpayers to immediately deduct 50% of cost with the remaining amount depreciated over the life of the asset.
- Dividends are now treated the same as capital gains and taxed at a lower rate. This may be good news for stockholders of C Corporations, where it was usually beneficial to bonus out all profits in order to avoid double taxation. Check with your advisor to see if the lower tax rate on dividends would benefit your year-end tax planning.
- Contribute as much as possible to tax-deferred retirement plans. You may be able to contribute up to $40,000 for yourself depending upon the particulars of your plan.
Improve Your Financial Statements
For custom builders who are required to present financial statements to their bank or outside investor, there are a number of things you may want to do prior to year-end to improve the look of your statements. When making some year-end transactions you need to look at both the tax and financial statement effect of the transaction. Sometimes transactions that would improve your financial statements may actually increase your current-year tax liability.
- Consider selling off non-current assets and turning them into current assets. This move would improve your working capital ratio, which your bank uses as a measure of liquidity.
- Another method of improving liquidity is to refinance your debt, moving it from current (due by the end of 2004) to long-term. As an owner of a C Corporation you may want to issue a long-term note to the company and use the proceeds to pay off current debt.
- Minimize prepaid expenses. Many times bankers throw out prepaid expenses in their calculation of working capital.
Put Corporate Documents in Order
Year-end is also a good time to make sure that all of your corporate activities are up to date. The main advantage of having a corporation is to protect your personal liability. However, lawyers have been able to pierce the corporate veil when the entity was not properly treated as a corporation.
- Update your corporate minutes so they document all activities mentioned in your bylaws that need to be acted upon by the corporation’s officers.
- Make sure that all related party transactions are properly documented. Officer loans to and from the corporation need to be formalized. Check with your tax advisor on interest requirements.
Plan for 2004
If you haven’t started developing your 2004 budget and business plan by now you are really behind the eight ball. The best time to start developing your budget is before you have to start delivering homes in 2004.
To make the best of your operating budget it is important to not only look at your revenue and expenses for the year but to also identify your costs and expenses on a month-by-month basis. This will make it easier for you to compare your financial results to your budget.
Developing your budget and business plan is a time-consuming process but as the old saying goes, “If you fail to plan you are planning to fail.” A custom builder with a strong plan that includes a detailed monthly operating budget as well as specific, written, measurable goals and strategies has taken the first step toward success.
Year-end is almost upon us. Do some planning now so you can enjoy the holidays and start off the new year on the right foot.
Steve Maltzman, CPA, is president of Steve Maltzman and Associates in Colton, Calif. Visit him at www.smacfo.com.
