Plan Ahead

Close the purchase of depreciable personal property or real estate
within the current year to keep your nursery in the same tax bracket.

Now is the best time to think about reducing your nursery’s tax bill even lower than the point the economy may have driven it to. Growers should also take steps to keep that tax bill at its legal minimum for many years to come.
 
While many business owners rely on the advice of tax professionals or use software programs to ensure a low tax bill, the real goal should be to attain a low tax bill for not just this tax year but in successive years, too. The best guarantee of consistently low tax bills every year is tax planning.
 
Tax planning is easy: the more tax deductions taken, the lower the nursery’s taxable income will be — at least for this tax year. Ignoring potential tax deductions this year might mean significant savings in later years when profits and tax bills are higher. But the time to act for those low tax bills is before the end of the tax year.

During 2009, nurseries can expense and immediately deduct up to $250,000 of the cost of qualifying property and equipment.Tax planning basics
When thinking about any type of tax planning, every grower should keep in mind that although the IRS may occasionally disagree, the courts strongly back every taxpayer’s right to choose the course of action that will result in the lowest legal tax liability. As the end of the tax year fast approaches, every nursery faces several different options of how to complete certain taxable transactions.
 
Our tax system has graduated rates that increase along with the income of the business at various tax rates. One strategy for saving taxes means reducing the tax bracket of the nursery. Getting the most from the temporary 15-percent tax rate for dividends means finding another way to reduce corporate level income and taxes.
 
No business owner can literally reduce their federal income tax rate. They can take actions that will have a similar effect.

• Choose the optimal form of organization for the business (such as sole proprietorship, partnership, corporation or S corporation). Although not a year-end tax planning strategy, this option deserves attention in the overall tax planning process, especially in light of the current (and temporary) 15-percent tax rate on dividends paid by incorporated businesses.
• Structure transactions so that payments received are capital gains. Long-term capital gains earned by non-corporate taxpayers are subject to lower tax rates than other income.
• Shift income from a high-tax bracket individual (such as you, the business owner), to a lower-bracket individual (such as your child). One fairly simple way to accomplish this is by hiring your children. Another possibility is to make one or more of your children partners in the business, so that net profits are shared among a larger group. While the tax laws limit the usefulness of this strategy for shifting “unearned” income to children under the age of 14, some opportunities to lower tax rates still do exist. The time to think about those strategies is during the course of the tax year.

Consistent tax bracket
Although the goal is usually to reduce taxes this year, to be really effective, the tax bracket should be consistent year after year. If income is up this year, but expected to be down next year, a grower might want to postpone asset sales or other unusual transactions until next year. If income and profits are down this year, disposing of unneeded equipment or business assets via a profitable sale may generate extra income — income taxed at the nursery’s current low tax rates.

Nurseries operating on an accrual basis can fix the amount of employee bonuses before Jan. 1 but pay them early next year.Tax saving strategies
Depending on the circumstances, a number of legitimate strategies a nursery can employ before year’s end will help it remain in the same bracket this year, next year and for many years thereafter. Basic year-end tax saving strategies include:

• Delaying collections. A cash-basis nursery can delay year-end billings or credit card receipt processing until late enough in the year so payments will not come in until the following year.
• Accelerating payments. Wherever possible, prepay deductible business expenses, including rent, interest, taxes, insurance, etc. Keep in mind the tax rules limit tax deductions for some prepaid expenses.
• Accelerating large purchases. Close the purchase of depreciable personal property or real estate within the current year.
• Accelerating operating expenses. If possible, accelerate the purchase of supplies or services, or the making of repairs.

Naturally, what a grower can do depends a great deal on the accounting method used by the operation. A cash basis nursery deducts expenses as paid and receipts become income when received or when made available. An accrual-basis nursery realizes income when billed and expenses when incurred — regardless of when income is actually received or when payment is made.

Tax law changes
The American Recovery and Reinvestment Act (ARRA) earlier this year extended a number of expiring provisions and created a few more that will affect the year-end planning process.

• ARRA extended the 50 percent bonus first-year depreciation allowance available in 2008 to 2009.
• During 2009, nurseries can choose to expense and immediately deduct up to $250,000 of the cost of qualifying property and equipment.  The $250,000 maximum expensing amount is reduced if the cost of all Section 179 property placed in service in 2009 exceeds $800,000.
• For tax years beginning in either 2009 or 2010, ARRA eliminates the corporate level tax on the built-in gains of an S corporation that converted from regular C corporation status at least seven tax years before the current tax year.

Expiring provisions
Making year-end planning more urgent than usual, a number of provisions in our tax law expire in 2009.  Among the expiring provisions are:

• Reduced estimated tax payments for small businesses
• The tax credit for research and experimentation expenses
• Increased alternative minimum tax (AMT) exemption amounts
• Expensing of brownfields environmental remediation costs
• Empowerment zone tax incentives
• Renewal community tax incentives
• The Federal Unemployment Tax Act surtax of 0.2 percent
• Tax incentives for investment in the District of Columbia

Tax rule flexibility
There is a great deal of pressure in many nurseries to cut costs, including taxes. This coincides with increased scrutiny of tax returns on many levels of government. Identifying tax deductions, without running afoul of cash-strapped state and local tax authorities, should play a role in the planning process.
 
The financial or operational strengths of a business transaction should always stand on their own, aside from any tax benefits derived from them. There is also the question of whether a tax deduction should be taken or ignored, if legally feasible.
 
An excellent illustration of the flexibility of our tax rules are those governing bonuses. A nursery operating on the accrual basis has the opportunity to fix the amount of employees’ bonus payments before January 1, but pay them early next year. Generally, the bonuses are not taxable to employees until 2010, but are deductible on the operation’s 2009 tax return — so long as announced before the end of 2009, and paid before March 16, 2010.
 
While few businesses are in a position to pay employee bonuses, a nursery may benefit by delaying income until next year. However, there is constructive receipt when income is made available to the growing business.

Tax planning all the time
Although tax planning should be a year-round process, a number of year-end strategies can reduce not only this year’s tax bill, but future tax bills. 
 
The owners and managers of every nursery should be taking additional steps to ensure the success of the operation in 2010.
 
Whether or not the nursery is facing a large tax bill or severely lower taxable income, professional advice is almost a necessity. But there should be no uncertainty regarding the need for planning to minimize the bite of taxes.