End-of-Year Tax Tips

As we close out the year, thoughts begin to turn to income tax returns. To give you a head start, and hopefully to help you save money, we have asked Larry Kopsa, CPA, a noted salon and spa expert and a partner with Kopsa Otte, to answer some questions that we thought you might have. Kopsa Otte is a CPA firm that specializes in salons and spas. The firm also works extensively with distributors.

Q.The most obvious question that we have is what is the most important thing that salons and distributors can do to reduce their tax burden?

A.If I could give just one piece of advice at this time of year it would be to do a pre tax appointment with your accountant. Once the stroke of midnight on December 31st hits, there is not much we can do to reduce your tax burden.

Q.What does a pre tax meeting involve?

A.We are currently meeting with our clients and determining what their taxes will be if they finish the year without making any changes. We then factor in customized tax planning moves to determine how we can make wise choices to minimize the tax bill.

Q.Give us a simple item people can use if they don't have time to meet with their accountant.

A.First of all we stress that it is important to realize that tax savings is not our primary objective. Our overall objective is to be profitable. It would not be prudent to spend $100 to save $30. Having said that, if the situation is right we are advising clients:

• If clients are on a cash basis of accounting we recommend that they pay as many expenses by December 31st as they can. By writing the check and mailing on or before December 31st as opposed to January 1st allows us a deduction this year.

• Besides normal business expenses, we are advising our cash basis clients that are thinking about giving out year-end bonuses to give them out before the first of the year.

• On the other hand, accrual basis taxpayers don't have to worry about getting the checks written. Accrual basis taxpayers are able to deduct their payables.

Q.That sounds like a good idea. Maybe this is a silly question but how do I know if I am a cash or accrual basis?

A.When you file your first tax return you make an election on what method of accounting that you want to use. Unfortunately many times the person preparing the return just makes the election for you. You can determine your method by looking at your return. There is a box on the return that is marked "cash" or "accrual." On sole proprietors the box is on the Schedule C. On corporations the box is on page 2, and on partnerships and LLC's the box is on the first page.

Q.That seems fairly easy. Can you give us another quick tip?

A.If a business is considering purchasing equipment in the next few months, consider accelerating the purchase and placing the equipment in service this year. There are some specific qualifying rules, but most businesses can, if they so choose, expense up to $108,000 of equipment in the year purchased and placed in service. This can create a big dent in taxes owed.

Q.Are there any sleepers that businesses need to know about?

A.We have two new big tax law changes this year that impact our tax situation, most, but not all of the changes reduce our tax bill. People do need to know how these laws impact them.

The one ruling that people can get started working on is the change in the telephone excise tax. This year the IRS has finally agreed that they should not be charging excise tax on certain long distance calls. The good news is that you can claim a refund on your 2006 income tax return for the excise tax paid between February 28, 2003 and August 1, 2006. For individuals they have this quite easy. You are allowed a credit, just like withholding, depending on the number of exemptions that you claim for 2006.

The bad news is that they have not yet come up with a simplified method for businesses. What businesses have to do is find their old telephone bills for this period of time and add up the applicable excise tax. Depending on your long distance calls this number could really add up.

Q.Do you have any other words of advice?

A.I could write a book, but using a qualified professional, who is knowledgeable in the industry, can really help you not only save taxes but also make your business more profitable.