The fourth quarter is arguably the most important time of the year for a small business owners — it’s when they should be doing year-end tax planning and looking ahead to 2007. Capital spending, hiring plans and employee compensation should all be items on the agenda.
Fourth-quarter planning, whether you do it yourself or with the help of a certified public accountant or tax professional, isn’t something to put off or ignore. There can be a heavy price, and not just in taxes, to be paid early in the new year, if you haven’t looked at your books and thought about how your company is likely to fare for the rest of 2006 and into early next year.
“As a CPA, I can do a lot to help you before the year ends. After Dec. 31, there’s not a lot I can do,” said Bob Doyle, president of Doyle Wealth Management Inc. in St. Petersburg, Fla.
Moreover, by looking at your business over a longer period of time — accountants suggest six months — you can make better decisions not just about money, but about running your business.
Doyle said an accountant in particular will want to see a company’s balance sheet as well as its income statement — not just for this year, but past years as well. Balance sheets are key because they reveal a company’s cash flow, and income statements will help an owner determine whether the business is likely to turn a profit.
Doyle noted that it’s critical to look at the information on these documents from a historical perspective. For example, a company might have a big profit by year’s end, but if the first quarter has historically been a slow period — as cash flow will reveal — an owner shouldn’t be gleefully spending. He or she should be putting money aside for those lean days.
Now is the time to be thinking about capital spending. Many owners are anxious to take advantage of what’s known as the Section 179 deduction, which allows a small business to deduct up front rather than depreciate over time the cost of certain kinds of equipment bought and put into service during the tax year. For 2006, the deduction, named for a section of the Internal Revenue Code, is a maximum of $108,000.
Again, how much you spend will depend on your cash flow into early next year. If you have a lot of cash on hand now and will be flush in the first quarter of 2007, you might want to accelerate that computer or vehicle purchase into 2006, take the Section 179 deduction and save on this year’s taxes. But if early 2007 looks to be cash-poor, you might be better off waiting.
Retirement plan
This is also the time to be thinking about your retirement plan — Doyle said a realistic look at your financial statements will help you determine how much you can contribute for 2006. But you might also want to be thinking about changes in your plan; if you want to switch to a different kind of plan, you still have time to do so and get the benefits for 2006. A caveat: If the plan you’re interested in is a SIMPLE, or Savings Incentive Match Plans for Employees, you have only until Oct. 1 to create one.
If you need more information about retirement plans, look at IRS Publication 560, Retirement Plans for Small Business. Your accountant can help you get started, but you might also need the help of a human resources or benefits consultant to determine what kind of plan is best for your business.
Manufacturers’ fourth-quarter planning should include taking stock of their inventory. If they have too much on hand, Doyle suggested, it might be time to sell it off, even at a discount.
Doyle noted that many small business owners who have had a good year decide in the fourth quarter to give employees bonuses. Year-end planning can help you with bonuses as well — if you want to give performance-based bonuses, for example, estimating what 2007 will be like can help you set the criteria for those awards now. That in turn allows you to tell employees what targets they’ll need to meet next year to get that extra money.