December 17, 2009
by Linda Kessel, CPA
Cash flow is an important reality for any small business. Planning is important no matter where your business is today or where it will be in the future.
The Basics
A few simple tips are essential to managing cash flow. Among them is keeping a bank account for your business apart from your personal accounts, allowing you to keep funds separate and quantified for planning purposes. Tracking the inflows and outflows of your business makes it easier to anticipate future needs, growth and emergencies.
A new business is going to require more cash flow to get started, then level off as operations continue. Having the cash available at the beginning will help you manage the time lag from start up to cash returns.
Maintaining accurate accounting records throughout the year is another important factor in managing cash flow. When financial information is in order, it becomes easier to apply for financing when needed to maintain or expand your business and to complete tax filings in the most efficient manner.
Meeting with a CPA prior to year-end, in addition to times during the year, will help you anticipate what is to come and allow you to strategically plan for it. In addition to tax saving ideas, you may learn about opportunities to operate as a different type of entity that’s more beneficial from a business, legal and tax perspective.
Good Cash Flow
Good cash flow is important to running your business optimally. One option for reducing taxes while preserving cash not needed for current operations is to contribute to a retirement plan. Various plan options can be customized to maximize the benefit to the small business owner and, in addition to increasing employee retention, are tax deductible.
Investment in capital equipment and expansion of current operations, such as upgrading production machines for a manufacturer or a new computer inventory system for a retailer, is another way to use available cash while growing your business. Current expensing, bonus depreciation and energy credits are effective ways to reduce taxes when you are investing in your business.
In 2009, up to $250,000 of qualified asset additions can be expensed directly (Section 179 assets). Additionally, bonus depreciation allows for accelerated depreciation of 50% in the first year.
A deduction is available for qualified manufacturing activities, and credits for increasing research exist for businesses creating and developing new products.
Credits against tax are also available for purchasing and leasing energy efficient motor vehicles, including hybrids, lean-burn technology vehicles, alternative fuel and fuel cell vehicles. The credits range from $250 to $4,000 depending upon make and model purchased or leased and are applied dollar for dollar against tax.
Owners and lessors of commercial buildings may deduct the cost of installing property such as interior lighting systems, heating, cooling, ventilation and hot water systems or building envelope that reduces the total yearly energy cost from 16 2/3% to 50%. Lighting systems are the easiest to upgrade, since the required materials are readily available and the energy efficiency gains are known. The deduction may be as much as $1.80 per square foot of floor area.
Minimal Cash Flow
If your business is operating on a break-even basis, you can continue to take advantage of existing tax savings benefits.
It’s very important in a minimal cash flow position to maintain payment of salaries to yourself and your employees, and to timely pay the related withholdings to the IRS. If you contributed to a retirement plan in the past, continue to do that as well, keeping in mind that you have 8 ½ months after year end to actually make the contribution. Any investment in new equipment or inventory helps you and those businesses making sales to you.
All of these payments and purchases keep your business operating and help you continue to take the resulting deductions against taxable income.
No Cash Flow
Many businesses are currently in the position of no cash flow or negative cash flow. Business activity may be light, and there is not enough cash flow to sustain it. There are still options available to alleviate some of the deficit.
Minimizing withholding on your salary throughout the year will allow you to use cash for critical business expenses and investments. Then evaluate your tax situation with an advisor near the end of the year and pay any required tax amount prior to year end.
Rental of a facility for your operations is an opportunity for negotiation, especially if you’re having trouble making those payments or are within 2 years of your lease expiring. You may be able to reduce or defer your rent payments, since many lessors would rather continue renting on a reduced basis than not at all, but they may want to extend the term of the lease in return.
Current negative cash flow often results in a net operating loss for your business, but if you’ve had income for that business in the past, you may be able to carry back the loss as many as five years. The taxes you paid in any of the five years can be refunded to you currently.
If your business is depleting cash faster than it can be replenished, but there’s still income and therefore taxes due on that income, it’s still important to complete your filings with the IRS. This will require negotiation of a payment plan, but being forthright about your situation will put you in a much better position than simply not paying and having current taxes haunt you in the future.
For more information on ways to maximize cash flow with tax incentives, please contact Linda Kessel, CPA at Schechter Dokken Kanter, lkessel@sdkcpa.com or (612)-332-5500