Small Business

As tax season approaches, here are some tips

By Michelle Swafford / Staff Writer

Tax season may be months away, but tax preparers say now is a good time for businesses to prepare, especially Subchapter S corporations.

Additional tax deductions for 2005 and random audits that require more documentation and time are some of the reasons why firms should start now, tax preparers say.

"With all of the audits that are about to come out, documentation is the most important thing right now," said Kathy Apfel, owner of Kat Tax Business & Financial Services in Las Vegas. "It's a totally different atmosphere than what it's been before.

"They have to get with a tax professional. If they get in to see a person in December and January there are definite benefits to the small-business person."

About 5,000 Subchapter S corporation firms will be randomly audited on their 2003 and 2004 tax returns so the Internal Revenue Service can study how they are filing their returns and what, if any, problems are commonly occurring, Nevada IRS spokesman Raphael Tulino said.

One of the main issues the IRS is looking at is whether shareholders pay themselves a "reasonable salary," said Bill McCarthy, a certified public accountant and partner of McCarthy Kaster CPAs in Las Vegas.

If the firm's shareholders take distributions but do not have a salary, they can avoid paying Social Security and other taxes, but that's not legal, he said.

That's also an issue for Nevada because not taking a salary means that the income is not subject to unemployment taxes, he said, adding that Nevada firms must take a salary of $24,000 in 2006 to avoid paying unemployment taxes on distributions.

"That's always been the rule," McCarthy said. "The IRS has just said they're focusing on that."

Reasonable salaries are determined by what the firm would pay a third party to do the job of the shareholder(s), he said.

Subchapter S is a tax designation. Subchapter S corporations are allowed to pass expenses, income and taxes to shareholders, according to the IRS. That tax structure enables shareholders and corporations to avoid double taxation of the net income.

To qualify as a Subchapter S corporation, a firm must be domestically incorporated and have no more than 100 shareholders - made up of individuals, estates and some trusts - and have only one class of shares, among other things, according to the IRS.

Some of the records the IRS recommends that small-business owners keep to verify gross income, purchases and expenses in­ clude cash register tapes, bank deposit slips, receipt books, invoices, credit card slips, canceled checks, petty cash slips and account statements.

Other documentation is needed to show company assets and their depreciation as well as employment taxes.

"The biggest thing is the documentation of sales, where did the money come from and where did the money go," Apfel said.

Also, "You run into trouble when small businesses are using their Visa card for business and personal (purchases)," she said. "Those things have to be documented. The regulation says if you commingle personal and business funds technically it's disallowed."

The same thing goes for deducting computers, homes and cell phones for business purposes when they are also used for personal activities, she said.

Audits aren't the only reasons to organize early though.

Time is running out to reduce companies' 2005 tax liability through accelerated depreciation schedules, retirement plans and accounting changes.

This is the last year small businesses can deduct $105,000 in equipment purchases to reduce their income. Beginning next year, the limit is $25,000 - adjusted for inflation - and the rest must be depreciated over five to seven years, McCarthy said.

But firms can only deduct $25,000 per vehicle for sport-utility vehicles - instead of $100,000 allowed last year, he said.

Another way to reduce tax liability is by setting up retirement plans, which must be established by Dec. 31 to take a tax deduction, McCarthy said. The account does not have to be funded until September 2006.

The other way to reduce income on paper is to defer income to January and pay incurred expenses in December, McCarthy said, adding that you can't pre-pay expenses though.

Additional tax information for businesses is available at www.irs.gov/businesses/.

Michelle Swafford covers health care and small business for In Business Las Vegas and its sister publication, the Las Vegas Sun. She can be reached by e-mail at swafford@lasvegassun.com or at (702) 259-2326.

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