Tax planning opportunities for small business owners in 2012

by Tony Novak, CPA, MBA, MT
   12/13/2011

Tax laws change every year, often providing new opportunities for business and personal planning that can save money and improve our overall financial results. This year is no exception. While there are no major changes to tax law affecting small business owners this year, there are a number of more subtle  developments in tax procedure that open new financial possibilities for businesses that approach the topic with proper planning.

There are more than 200 changes to federal tax laws effective in 2012. This article does not attempt to summarize or even list every change but rather to highlight a few of those issues that are most likely to have a substantial impact on small business owners. The intent is to stimulate some initial thoughts about the potential benefits of tax planning and trigger a discussion between the business owner and tax adviser. 

Cost of living adjustments

The most noticeable change for 2012 involves the indexing of a broad range of tax limits and thresholds. This is noteworthy because we had no cost of living adjustments for 2010 or 2011. In effect, we will feel the impact of three years' worth of price increases all at once.

After two years of a recessionary economy and relatively stable pricing, some economists expect to see sharp increases in 2012. Increasing tax limits and thresholds would seem to contribute to this inflationary thinking. Most of the changes serve to decrease taxes while others ultimately serve to increase taxes due. Business managers may wish to pay extra attention to the overall net impact of changing dollar amount transactions on their bottom line in early 2012.

The changes may not be immediately noticed in employees' wage tax withholding, according to Christian Hoyt of PayUSA.com, a professional payroll company. Employers are moving slowly to adapt the new rules due to uncertainties about the social security tax withholding rate for 2012, employee benefit plan reporting under PPACA, changes to 401(k) retirement plans and Health Savings Accounts. 

Small business owners and their payroll managers may need to make a series of small adjustments early in 2012 or as soon as clarification is available. This is also an opportunity to review the company's employee benefit plan documents to ensure that they are up-to-date with current law and consistent with the payroll system data.

Expiring tax breaks

A wide range of tax benefits designed to stimulate the economy during the recession expire now. If you did not use them in the past then you won't miss them in 2012. For those businesses that did take advantage of one or more of these items, the net effect will be that taxes will be higher in 2012. The list of expiring benefits includes liberal deductions for business start-ups, bonus depreciation for purchases, tax credits for hiring youth and veterans,  empowerment zone tax breaks and credits for energy efficient home improvements.

Independent contractors and employment tax liabilities

The IRS has known for more than a decade that 30% of small businesses misclassify employees as sub-contractors to avoid collection of wage taxes. The percentage is even higher in certain industries. The cost to the Treasury in lost tax revenues is enormous, possibly topping $3 billion dollars per year. In order to boost tax revenues, enforcement of independent contractor misclassification is a high priority item.

The cost of defending a wage tax audit and the potential tax adjustments (plus interest and penalties) represent a major financial risk to small businesses that use independent contractors. Some small business owners that considered themselves safe from this type of audit

Fortunately there is also some good news for small business owners. If your business is among those vulnerable to wage tax audits for this reason, then you may want to consider the new offer by IRS to voluntarily settle the issue in 2012.

In September 2011 the IRS announced details of the Voluntary Classification Settlement Program. In short, the program allows taxpayers to settle the issue with a payment of 10% of the wage taxes and completely avoid interest and penalties.

Tax attorney Ronald M. Warren, with the firm Kulzer & DiPadova, PA in Haddonfield New Jersey points out that "the Voluntary Disclosure Settlement Program provides an unprecedented opportunity to eliminate tax risk for wages improperly classified as nonemployee compensation. This is a great chance to become compliant at a minimal cost. If a taxpayer believes he may become the target of an audit, this program requires immediate consideration".

Keep in mind that the Treasury Department has gained focus and momentum over the past decade on closing this area of non-compliance to generate more wage tax revenue. The noose is getting tighter for businesses that use contractors in the place of employees. If you choose to avoid voluntary settlement then at least consider the financial effects on the business of an increasingly likely audit in the next few years.

Getting a fresh start

The IRS recognizes that some well-intentioned and honest business owners ran into trouble paying their taxes during the recession. When money is tight the tax bill is often the last item to be paid.

Self-employed taxpayers with gross receipts less than $500,000 and net income less than $100,000 are now eligible for a streamlined offer in compromise program to settle tax bills under $50,000 when the entire amount of tax due cannot be paid. The IRS looks at the taxpayer's assets and income to determine whether all or part of the tax can be paid as a lump sum or in installments. Settlement of an outstanding tax debt through a compromise offer allows a business owner to move forward with a new start without the financial and emotional burdens of a looming tax problem.

The threshold for filing tax liens against taxpayers is now higher; in most cases a business owner is now safe from liens if the unpaid tax balance is less than $10,000. Previously the threshold was $5,000 tax due. This change in procedure is important because a significant portion of small business tax delinquencies fall in the $5,000 to $10,000 range.

If a lien has been placed, the taxpayer now stands a better chance of having the lien removed to help restore business credit. Paid liens will be withdrawn at the taxpayer's written request under an expedited program. Unpaid liens can still be withdrawn if the taxpayer agrees to a direct debit payment plan. Attorney Ronald Warren emphasizes that this "willingness of the IRS to issue a lien withdrawal (and not just a lien release) is a substantial departure from the prior long-standing policy. A taxpayer can repair his record and his credit score immediately. If you recently satisfied a filed tax lien, or if you’ve made arrangements to satisfy an existing tax lien, please consult your tax professional to see whether you qualify for an immediate lien withdrawal".

 Small businesses with tax debts should now consider the tangible benefits possible from the ability to obtain additional business and personal credit in comparison to the manageable cost of a tax installment payment plan.

Business travel

Businesses may elect to use a standardized daily expense allowance rather than record each travel expense transaction. Besides simplifying record keeping requirements, adoption of this method provides workers with an incentive to economize and save money during business travel.

Financial and estate planning

The conventional advice is that estate tax strategies are no longer necessary part of financial planning for most small business owners. The smarter approach may be to 'go slow' and not abandon trusts and estate planning tools already in place. In other words, there may not be any need to hire an estate planning attorney this year but expect the issue to resurface in the future. Money spent in the past to preserve family wealth may still prove valuable in the future.

More information

The IRS.gov Web site provides more information on all of the topics mentioned. In particular the news page  and the small business page may be useful. The IRS also has a separate page to address the small business contractor vs. employee issue.