Monday, November 9, 2009

Losing money in 2009? Plan to Lose a Lot!

In a remarkably business-friendly bit of legislation passed on Nov. 6, 2009, Congress extended the window for carrying back Net Operating Losses for 2009. The prior limit was a carryback of 2 years (2007 & 2008). For some businesses, 2007 & 2008 weren't particularly strong years, and those business owners could recover far more in back taxes from a carryback to earlier, more profitable years.

Like all tax laws, the mechanics of this process are somewhat complicated. Consult your tax advisor to see if carrying back losses as much as 5 years could actually help you. If so, go to every length to maximize your losses in 2009, unless you expect 2010 to be a wildly profitable year. There's little more honor in losing a few thousand dollars than in losing a small fortune. Why not go for it and get a nice refund of some high-bracket taxes from an earlier year? A counter-intuitive, but perhaps financially sound strategy.

Keep in mind, also, that a lousy December 2009 might cause a problem with your debt covenants. Or perhaps there's a problem already, and a little more red ink may not matter.
Whether you're having a record profit year or a record loss year, you may want to use some classic tax planning strategies to rack up more losses in 2009 than you might othewise have. Here are some ideas to consider:

  1. Defer Revenue -- A classic tax deferral strategy in a good year, it would also boost losses. If you're on a cash basis, you'll want to slow down your billing and collection efforts and let those payments drift into January. If you're an accrual-basis taxpayer, you may want to suspend shipments in the last part of December or defer billing customers until January by some other means.

  2. Take all costs possible in 2009 -- A cash basis taxpayer can, of course, accelerate payments of bills he would have otherwise paid in January. Clean out Accounts Payable. Prepay things like insurance premiums. An Accrual taxpayer can book invoices in December or accrue for costs incurred in December that haven't yet been billed.

  3. Use Credit Cards to pay for everything you can through December 31, rather than rushing to have vendors bill you and actually paying the invoice. It's not widely known, but even cash basis taxpayers can post credit card charges as of the date charged, rather than the date you pay the credit card bill. They are considered cash paid, by means of a loan from the credit card issuer. Thus, every dollar you can charge in December is additional 2009 expense for tax purposes, whether you're a cash or accrual basis taxpayer.

  4. Inventory writedowns -- A lot of things, particularly commodities, are cheaper now than when you might have put them into inventory. Consider using a "lower of cost or market" valuation strategy to write down raw material inventory. And while you're at it, look for excess or obsolete inventory you might write down as well. Cisco wrote down $2.25 billion in "excess inventory" in 2001, following the internet bubble. A writedown reserve won't work, per recent tax court rulings.

  5. Uncollectable Receivables -- Accrual Basis taxpayers can consider writeoffs of any receivables that uncollectable. You may have to demonstrate legal efforts to collect for a receivable to qualify. If, of course, those are later collected, in whole, or in part, the income would be incurred at that time. Worthless loans on your balance sheet could get the same consideration, whether you're a cash or accrual taxpayer.

DISCLAIMER: This article is about ideas you might use to minimize taxable income or maximize losses in 2009. This is not tax advice, and any strategy you choose should be confirmed with your tax advisor to be certain it fits your specific situation.

If you have ideas for minimizing current-year income that have worked for you, please click "Comments" below and share them with others.

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Terry Weaver

Chief Executive Boards International

Chief Executive Boards International: Freedom for business owners & CEOs -- Less Work, More Money, More Freedom to enjoy it

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