Tax Planning Before Year-End

As we enter the last quarter of 2009, your thoughts and energies should be directed and focused on implementing effective financial strategies that will carryover into the up-coming year and beyond. One very important component of financial strategizing is year-end tax planning. The key to effective tax planning is that it must be completed and implemented in a timely manner. This requires planning and taking steps before the end of the tax year since, with few exceptions, steps to reduce and minimize federal and state income taxes must occur prior to the end of the tax year. Given our current difficult economic times, it is critically important that funeral directors take advantage of every opportunity that is afforded to them in order to reduce income taxes and increase cash flow. In a nutshell, this means spending time with your tax professional now. Ideally, your tax professional has your current financial information that will enable him/her to maintain a complete and comprehensive understanding of your financial position.

Effective tax planning requires complete, accurate, and up-to-date financial information. This is true for both businesses and individuals. The old cliché’, garbage-in, garbage-out, definitely applies when it comes to making financial and tax planning decisions. For business purposes, regardless of the type of funeral home entity, whether it is a proprietorship, partnership, S Corporation, C Corporation or LLC, the basic information must include an up-to-date balance sheet (statement of assets, liabilities and equity) and income statement (statement of revenues and expenses). A current and properly prepared balance sheet is one in which the following procedures have been performed: cash accounts have been reconciled to their bank statements; accounts receivable have been reviewed for accuracy and for collectability; fixed assets have been updated to include new purchases that are properly classified as an asset, as opposed to being expensed on the income statement as repairs and maintenance; accounts payables have been properly classified and recorded; principal balances on debt obligations have been confirmed with banks or other lending institutions; and contributions and withdrawals to equity are evaluated and reviewed for accuracy. For the income statement, it is necessary to review the revenues and expenses for proper classification and to be certain that the depreciation and amortization expenses are recorded.

Given that the financial information used for planning purposes will involve annualizing amounts in order to arrive at the full year’s net income, it is essential to have the financial statements as accurate as possible. There is no question that tax and financial planning involves estimates and conjectures, but the stronger the foundation of financial information, the more likely that estimated results will be more accurate and reliable. Given today’s technology and training available, funeral homes, regardless of their case volumes or the number of locations, should have accurate and current financial information easily accessible.

In tax planning, one of the basic principles used in reducing overall federal and state income taxes is the ability to look at the current year, 2009, and into the future years, 2010 and beyond. With uncertainties as to the outcome of certain tax provisions that are expected to expire over the next five years and only being able to guess what Congress might do in enacting new tax provision, it is doubly difficult to achieve desired results. But with more uncertainties and unknowns, it is also doubly important to plan as best as possible. This point can not be better illustrated in a situation than where a funeral home owner is toying with the idea of selling his/her real estate and business. Under current tax law, capital gains at the federal level are taxed at a maximum rate of 15 percent. If the Bush tax cuts are not renewed by 2011, the rates will revert back to their pre-2003 rates, with the highest rate being 20 percent. Only time will tell whether the tax cuts will expire or new tax legislation will be enacted. These uncertainties become the impetus for making decisions, such as selling a funeral home in times when capital gains rates are more likely to be at their lowest level. On a side note, before funeral home owners seriously consider selling their business, they should request that their tax professional prepare a complete tax analysis that shows the tax implications if the sale were consummated at different sales prices and using various structures.

The basic strategy for year-end tax planning involves estimating which tax year will have a higher tax rate. For example, if 2009 has been a year in which the death calls are down, resulting in lower revenues and a lower tax bracket than normal, income should be accelerated into 2009 and expenses deferred until 2010. This strategy of deferring revenues and expenses at the business level is generally restricted to those taxpayers on the cash basis, as opposed to those on the accrual basis. An important point to make is that in attempts to defer income into the next year, funeral directors should not stray from their standard collection policies when meeting with families. For cash basis taxpayers that are ending their tax year with higher than normal revenues, they should make every attempt to pay all of their bills by the last day of the tax year, thus accelerating their expenses into the year in which the tax rate is the highest.

For accrual basis taxpayers, a very important and often overlooked and misunderstood topic is that of writing off business bad debts (accounts receivables). The Internal Revenue Service (IRS) provides specific language as to when and under what circumstances business accounts receivable can be deducted. According to the IRS, a taxpayer does not have to wait until the account receivable is due in order to determine whether it is collectible, an account receivable becomes uncollectible (worthless) when there is no longer any chance the amount owed will be collected, and it is not necessary to go to court to prove that an amount is uncollectible. The IRS only requires that you take reasonable steps to collect the amount owed. To illustrate the importance of carefully scrutinizing and maintaining for tax purposes only accounts receivables that are fully collectible, let us assume that a funeral home on December 31, 2009, ignores accounts receivable that are uncollectible and were generated in 2009 in the amount of $35,000.00. Given a tax bracket of 35 percent, the tax savings lost is $12,250.00. Maintaining on the books only collectible receivables is very important for managerial purposes, particularly in projecting cash flow.

Another important area for funeral homes to address in their tax planning is the depreciation rules and the limits allowed for deductions for Section 179 property. Funeral homes that purchase qualifying equipment, machinery, and certain vehicles during 2009 can elect to immediately deduct up to $250,000 of their cost provided total capital investments do not exceed $800,000. The election to expense this qualifying property is found in the Internal Revenue Code Section 179 (hence the name Section 179 property) and has been allowed in prior years but with varying limits. The maximum deduction allowed under Section 179 is reduced if the cost of all such property placed in service by the taxpayer during the tax year exceeds $800,000. If this election is not made, each asset would have to be capitalized and depreciated over their IRS-determined useful lives. It is very important to note that expensing qualifying assets under this section does not require an alternative minimum tax adjustment. Deductions are reduced if the business use of a vehicle or equipment is less than 100%. Beginning in 2010, the maximum deduction for Section 179 property will be reduced to approximately $135,000, and bonus depreciation for qualifying assets will be eliminated.

Given the tumultuous activity in the stock market over the past two years, a review and analysis of your personal and business investment portfolio should be in order. Proper analysis of your portfolio might uncover opportunities to sell some of your investments and recognize capital losses that are eligible to be offset against capital gains dollar for dollar. A point to emphasize is that net capital losses can only be deductible up to $3,000, and any net short-term gains are taxed at normal rates, up to 35 percent. In order to qualify as a long-term asset, which will make it eligible for favorable capital gains treatment, it must be held one year or longer. As with all tax planning, decisions made to reduce or save income taxes need to be viewed in context of the overall economic impact. Decisions to sell investments within a given portfolio must be made in concert with investment strategies and objectives. This philosophy holds true for all tax planning.

Another very important component in tax planning is addressing and analyzing retirement plans. Regardless of a funeral director’s age or financial situation, planning for the future should be foremost in their thoughts. In addition to paving the road to a financially healthy retirement life, most retirement plans have the added benefit of reducing the current year’s income taxes. Funeral home owners should evaluate the benefits surrounding the various defined contribution plans to determine, with the guidance of a tax professional, which type of  plan is able to meet their short-term and long-term goals and expectations.

Tax planning is just one of the many necessary tasks that face each and every funeral home owner. When done properly it reduces federal and state income taxes, thus increasing cash available to invest in the funeral business or use for personal items. As addressed earlier in this article, it is essential that planning be done with accurate and up-to-date financial information. Given the complexities and the nature of the IRS tax code, tax planning, along with all financial planning, should take place throughout the year. Sitting with or talking with your tax professional should take place on a regular and routine timetable. If current communications with your tax professional are not on a regular basis, pick up the telephone and give him/her a call and express your needs. A warning flag that a funeral home is not receiving proper attention from their tax and accounting professional is when an extension is filed because the books and records are not kept up-to date or because the tax professional is too busy to prepare the return. There are times when filing extensions are part of the planning process, as in the case where extra time is needed or desired to fund retirement plans.

The above information was presented to provide only a basic overview and awareness. Tax planning is very complex and comprehensive; therefore, this information should not be implemented without first seeking the direct advice of a qualified tax professional.  FBA

Ronald H. Cooper, CPA is a funeral home accountant with Cooper & Associates, CPA, LLC.  He can be contacted at 866-446-0656, or by email at ron@funeralhomeaccounting.com.