While most think of the end of the year as the time to plan, in reality it’s never too soon to start.  Desirable results don’t just happen; they are generally the product of careful planning and monitoring throughout the year. We wouldn’t take a trip without planning a route and watching the map to make sure we stay on track. So why would we journey through the next year of business without a similar plan? As we begin to review the results of our 2011 journey, we need to be asking ourselves where are we going in 2012 and what we should be doing now to reach our desired destination.

First and foremost, any journey needs a road map. In business, a well thought-out budget should provide a guide to help us reach our financial destination. But it’s not enough to target our destination, financial or otherwise, without developing a realistic plan to achieve our goal. A goal to increase revenue by 20 percent is great, but if there’s no plan in place to make it happen, we are not likely to get there. Once the plan is drawn, monitoring the budget against actual performance is crucial. If we don’t watch the road, how do we know we are on track to reach our final destination? Changing course is not usually painful if the business takes a small wrong turn, but left unchecked until yearend, that small detour could result in a year that is miles off course.

To keep on course, it is helpful to keep many eyes on the road ahead.  Budgeting and planning should involve input from various levels of staff to both bring different perspectives to the table and help to keep the business on track. Department managers should have input on their specific budget line items, as well as the authority to control and monitor their department’s performance. Recognition, monetary and otherwise, can help to encourage every level of staff to be budget conscious.

Understanding Tax Depreciation Rules

Another important consideration for early 2012 is the effects the changing tax depreciation limits will have on the company’s tax position. For many, the bonus and Section 179 depreciation deductions of the last several years have provided a great tax benefit. But these powerful tools only defer the tax (by accelerating the deduction of new asset purchases); they don’t make it go away forever. As of this writing, these tax benefits have been reduced for 2012. Bonus depreciation, which was allowed on 100 percent of new asset purchases in late 2010 and all of 2011, is reduced to 50 percent this year. So in 2012, businesses will likely report less tax depreciation; there will be none available for the assets that they took 100 percent bonus on in 2010 or 2011, and the allowable bonus and Section 179 deductions for 2012 additions will be lower than in the prior two years.
 
As of this writing the Section 179 deduction, which allows businesses to fully depreciate both new and used assets in the year of purchase subject to certain limitations, has also been reduced. The 2010 and 2011 Section 179 deduction of $500,000 of asset purchases, phasing out completely once total asset purchases exceed $2,500,000, is reduced to $139,000 of asset purchases, phasing out completely once total asset purchases exceed $699,000 in 2012 (including inflation adjustments).

Businesses need to consider the effect that these changes in tax depreciation will have on 2011, 2012 and future years.  In doing so, we need to evaluate whether utilizing the bonus and Section 179 provisions for 2011 will be most beneficial in the long run. For example, a C corporation has $50,000 of taxable income in 2011, prior to taking any bonus or Section 179 depreciation deductions. The corporation has the ability to bring its tax liability to zero by taking Section 179 depreciation on new assets purchased in 2011.  Before deferring the liability to 2012, the corporation should consider what this will do to its total tax liability for 2011 and future years.
 
For corporations, the first $50,000 of income is taxed at 15 percent and the next $25,000 is taxed at 25 percent. Accelerating the deduction into 2011 will result in more income in 2012, which may push the deferred amount from the low 15 percent tax bracket in 2011 to the higher 25 percent tax bracket in 2012. Although the cash will be available in 2012, the business will pay significantly more tax over the two-year period by deferring income into 2012. This simplistic example clearly shows why businesses need to closely evaluate the effects of bonus and Section 179 depreciation benefits before blindly taking the maximum deductions in 2011.

State Tax Compliance

In addition to federal taxes, there are state issues to consider. The economy being what it is, states are scrambling for money. As a result, non-compliant businesses are being dragged into the limelight. If your business isn’t filing sales, personal property and/or income taxes in the states where it has nexus, 2012 is the time to get on board. And if you aren’t sure whether your business has nexus in states where you are operating, 2012 is a good time to find a tax professional to help make that assessment and bring the business into compliance.

Cognizance of Impending Accounting Changes

In addition to planning for tax changes, businesses need to be aware of impending accounting changes and how these changes may affect their business. This is especially true in the leasing industry today. As most are aware, the Financial Accounting Standards Board (FASB) is working with the International Accounting Standards Board (IASB) to significantly change lease accounting. Currently, a second exposure draft of the new standard is expected in early 2012, and after a comment period and re-deliberations, the new standard is expected to be finalized in the second half of 2012 with an effective date no earlier than January 1, 2015.

So why worry if the effective date is so far down the road? Although these changes are not expected to be implemented for a few years, they will impact many businesses in the leasing industry from a procedural, accounting and sales perspective.
 
A major impact of the proposed change is to do away with off-balance sheet accounting for leases (book-basis operating leases). And it is expected that the change will be retroactive, meaning that leases will need to be restated, as of the effective date, to comply with the terms of the new standard. Leases being written today may well be affected by the change, so it is not too early to start figuring out how these proposed accounting changes will affect our businesses. Staying ahead of the curve means addressing these issues and developing new sales strategies before the change takes effect.
 
Restatement of an entire lease portfolio will be a daunting task, not to mention the need to make sure that your portfolio management software is properly updated to comply with the changes, and your accounting team has been adequately updated on the requirements of the new standard. Companies issuing comparative financial statements will have multiple years of data to restate. The work involved in the restatement will place a burden on your team and may require additional staffing to ensure a smooth implementation.

Succession Planning is Critical

A solid business road map should address not only current needs such as budgets and tax strategies, but also some long-range strategies. The time to start succession planning is not when retirement is just around the corner. For most closely held businesses, a single or small number of owners “drive” the company. These business owners need to plan ahead if they want to build an asset with value to fund their retirement. Planning ahead may include assessing how to build maximum value into the company’s balance sheet, mentoring one or more individuals who will be able to step in and assume the business, or possibly identifying businesses in your industry that would benefit from the merger of the entities, thus bringing a higher value to your investment. Advance planning can definitely help maximize a business owner’s return on investment.

There will likely be some crucial twists and turns in our 2012 road maps, and the ride may be bumpy.  Budgeting for results, planning for change in both tax and accounting rules, and planning for the long term are all important steps to guide us along the way. Navigating the journey can be a challenge, but the proper planning can help make the journey both manageable and successful!

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