Dollars & Sense

Tax tips and tax planning

IRS Audits

IRS audit rates are rising again after falling to all-time lows.  Enforcement now is a top priority of the IRS and audits will increase, however, audit rates are still far below what they were several years ago.  Audits rose 14% in 2003 compared to that of 2002.  In fact, keep in mind that the audit numbers for 2002 were greatly reduced from those in the 90's. 

One of the tools the IRS uses for determining what returns are to be audited is the matching process.  The IRS is matching W-2's and 1099's to the income tax returns and additionally they are matching K-1's from pass through entities such as S-corporations and partnerships.

Tax returns are being audited a year or two after they are filed.  Therefore, taxpayers should manage their tax planning now for the growing audit risk they can expect to face in the years to come.

Creating a business?

Are you selling items on eBay?  If so, you have created a business that must be reported on your income tax return. 

You report your sales and expenses on a business return which is a Schedule C for self-employed individuals.  If what you are selling are items that you have in inventory, you must keep and report the results on the accrual basis vs. the cash basis of accounting.

Remember, if you show a profit from your business, you owe self-employment tax.

Should you lease or buy business equipment?

There are not clear-cut answers or rules of thumb.  Each determination needs to be made based on your own circumstances.

The case for leasing

1. The preservation of capital
2. The expected obsolescence of the equipment
3. Questionable resale value
4. Limited use of the equipment
5. Urgency to use the equipment

Some people who swear by leasing say it doesn't pay to buy depreciating assets or those that are likely to become outdated soon.  For such assets, leasing can provide 100% financing with relatively low payments over an extended period of time. 

The case for buying

1. Expensing the equipment for tax purposes
2. Bonus depreciation
3. Quicker tax write offs
4. You own the equipment once payments are done

The bonus depreciation enacted after 9/11/01 is slated to end as of 12/31/04.  If you intend to make expensive equipment purchases, you might want to act this year.

The decision to buy or lease equipment is an individual one depending on your particular situation.  You should consider the tax law as well as your need for capital before deciding how the equipment should be acquired.

Income tax projections

Do you know if you are going to owe money to the IRS come April 15, 2005?  Do you know if you are going to get a refund? 

These are questions that, as a business person, you need to know the answers to; and you need to know the answers in August or September, not next April.  The reason that you need to know those answers is to enable you to plan for the next six months to a year. 

You may need planning to alleviate any tax problems and for tax strategy; to purchase a new truck, to take some time off, to do a major truck overhaul, to fix up your home, or to add to your retirement savings. 

Though your records should be looked at by your tax preparer throughout the year so that he can spot potential problems or adjust your estimated taxes, a tax projection based on your operations will best indicate your tax position come April 15. 

You or your tax preparer can prepare a tax projection and leave enough time until the end of the year to do proper tax planning and adjust your estimated taxes to minimize any potential penalties.

This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. 

Contributions to this article were made by Shasta May, Director Business Development for PBS.  If you would like further information, please contact us at 800-697-5153.  Visit our Web Site at www.pbstax.com.

"Everyone's financial situation is different.  This article does not give and is not intended to give specific accounting and/or tax advice.  Please consult with your own tax or accounting professional."