With operating costs soaring in a sluggish economy, convenience store owners have a variety of tax benefits available to them from the IRS.
By Mark E. Battersby, Contributing Editor.
Earlier this year, the Internal Revenue Service advised taxpayers to cool their heels and wait until mid- to late-February 2011 before filing their returns to allow the Internal Revenue Service (IRS) time to digest the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act passed late in 2010.
Although little could be done to structure already-completed transactions to reap the most tax benefits, the delay provided time to think about reducing a convenience store operation’s tax bill even lower than the point the economy may have driven it to and, of course, plan to keep tax bills at their legal minimums for many years to come.
Factored into this year’s mix are those changes, extended and expanded tax breaks and even a few resurrected provisions that should be factored into all tax planning for the balance of 2011 and beyond. It is imperative to continue tax planning even after the deadlines have passed or preparing any required changes on an already-filed tax return.
OK to Change Your Mind
Once a convenience store chain’s tax returns have been filed, if it is found that the tax bill is incorrect, changes can be made on an amended tax return. You are well within your right to change your mind about the company’s income and many of the credits or deductions included on an already-filed tax return.
Not too surprisingly, the IRS reports few taxpayers amend their tax returns to report additional income. However, correcting or amending any return because of errors, omissions, mistakes or overlooked deductions—as well as to report additional income—is encouraged.
Why would anyone want to change or amend their already-filed tax returns? First, the IRS assures everyone that changing your mind about previously reported deductions or income will not increase the likelihood of an audit. Secondly, changes might be needed as a result of overlooking some of last year’s many tax law changes.
Changes and More Changes
The Tax Relief Act, along with last fall’s Small Business Jobs Act, extended the Bush-era tax cuts, including rates, capital gains and dividend rules. Bonus depreciation, allowing an immediate 100% write-off of business property acquired after Sept. 9, 2010 and before Jan. 1, 2012 was included in the Relief Act.
A 50% bonus depreciation deduction is available between Dec. 31, 2011 and Jan. 1, 2013.
Early in the fall of 2010, the Jobs Act increased the Section 179, first-year expensing deduction allowing a convenience store operation to write off $500,000 of newly acquired equipment and other business property with an investment ceiling of $2 million in 2010 and 2011. The Tax Relief Act creates a $125,000 dollar limit and a $500,000 investment limit beginning in 2012.
Many convenience store businesses will also benefit from the provision that allows a 15-year, straight-line recovery of the cost of improvements made to leased, business property—business premises, equipment, etc. A similar write-off is available for “improvements” made to so-called “retail” and “restaurant” property.
Another temporary provision in the relief act for 2011 only is a payroll tax cut of 2% for employees—and self-employed operators—that will require adjusting payroll withholding for employers as well as the estimated tax payments made by the self-employed business owner.
Money Now, Returns Later
It goes without saying Uncle Sam, in the form of the IRS, wants its money sooner rather than later. That means pre-paying an estimated tax bill usually in four quarterly installments. It also means fully paying the expected tax bill on or before the deadline, either March 15 or April 15 for most businesses and individuals using a calendar year.
Even with the strict prepayment rules, extensions of time to make those payments are often granted for specific groups of taxpayers, usually those suffering from a natural disaster or unusual circumstances. Under special circumstances, the payment of tax can be extended for a reasonable period, not longer than six months.
Today, using Form 4868, “Automatic Extension of Time to File a U.S. Individual Tax Return,” a convenience store operator can obtain an automatic, six-month extension of time in which to file his or her tax returns. Naturally, a proper estimate of tax liability is required.
Incorporated convenience store businesses may obtain the automatic six-month extension of time to file income tax returns by submitting Form 7004, “Application for Automatic 6-Month Extension of Time to File Certain Business, Income Tax, Information and other Returns.” Form 7004, is also used to obtain a six-month extension for filing some excise, income, information and other returns.
The automatic six-month extension of time to file also applies to the returns of pass-through entities, such as partnerships, S corporations and limited liability companies (LLCs). Remember for 2012 payments, however, the Form 7004 does not extend the time for payment of tax.
Check the Box
The so-called “check-the-box” regulations allow business owners, managers and their advisors to reexamine the type of business entity currently used. Regardless of how it was formed or operated, a convenience store, franchisee, chain operation or business can select the type of business entity it wishes to use for tax purposes.
Not only can a partnership choose to be treated as a corporation, separating the partners from the business, the members of those increasingly popular LLCs can choose to be treated as either a corporation or as a partnership for tax purposes. Best of all, it can all be accomplished by simply “checking-the-box.”
Unfortunately, incorporated convenience store businesses cannot take advantage of the “check-the-box” rules. But for all others, the flexibility provided by the “check-the-box” regulations offer planning opportunities.
There is a great deal of pressure on many convenience store operators, managers and executives to continue cutting costs, including taxes. Obviously, identifying opportunities for tax deductions without running afoul of cash-strapped, state and local tax authorities should play a role in the planning process.
On a similar note, the financial or operational strengths of a business transaction should always stand on their own, aside from any tax benefits derived from them.
Tax Planning All The Time
Obviously, the best time to think about tax strategies is during the course of the tax year. For long-term tax savings, however, the tax bracket should be consistent year-after-year. If income is down this year, postponing deductions for use in a later, higher-income year—where legally possible—can reduce the tax bill.
The tax season has become a year round event and what better time than now to guarantee all deductions have been claimed for 2010 while incorporating overlooked or ignored tax strategies into the 2011 tax plans of the c-store operation or business?