subject: Engineering Companies Prepare for 2011 Tax Hikes [print this page] Engineering Companies Prepare for 2011 Tax Hikes
On or about January 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. Most of the legislation passed this year in the United States Congress will start taking affect next year. Several new taxes and tax increases will be the result of some of that legislation.
Although most States have significantly reduced their budgets to account for the projected loss of revenues, States have passed legislation that will also increase taxes next year. This will affect your company and now is the time to start preparing.
Most engineering contracts are written so that invoices are sent out to clients periodically. In general, engineering firms are taxed on the profits that are made after the expenses are subtracted from the payments. It is common practice that engineering firms operate their businesses with about 10% profits. Any significant changes in the tax structure can have major impact to the company's ability to produce a profit. Not taking into account these new taxes next year can drastically reduce your bottom line.
According to the Wall Street Journal article by Arthur Laffer (June 6, 2010), the major concern is the expiration of President George W. Bush's taxcuts. "The highest federal personal income tax rate will go to 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts."
According to World Net Daily article by Herman Kain (July 12, 2010), Small businesses (Subchapter S corporations) will no longer be able to expense equipment purchases up to $250,000. "The new limit will be $25,000 which is equivalent to a tax increase." So if you are planning on buying new equipment early next year, it may be a better idea to make the purchase this year. The article also states that business profits will be taxed at the higher personal income tax rates.
So what can you do today!
Increase 2010 Services and Revenues Engineering companies may choose to increase their billings this year in order to avoid the higher taxes next year. Push to get more contract work done this year, and then push to get paid on that work before the end of the year. Although your revenues will increase more than expected this year, next year you may show lower revenues than expected. This particular move is expected across the broad spectrum of American businesses, which is why many economists are expecting a decline in American production next year, and a decline in the stock market. In addition, you may want to make purchases this year while you still make the tax deduction.
Increase 2011 Engineering Fees The other option is to increase your fees on contracts that will take effect next year. Typically, larger engineering firms operate on very low profit margins usually around 8% to 12%. Increases in taxes eat away at that bottom line. If you are able to maintain your normal workload, increasing your fees a few percentage points can minimize any tax discomforts on the bottom-line. But increasing your fees may have a negative impact; decreasing contracts. Lower profit margins can be absolutely devastating to a company. Again economists are expecting as a whole that we will see inflation next year due to increased taxes and lower production rates.
Recommendations Start now updating your Business Plan by making adjustments to your Budgets. Meet with your tax advisor now to see how 2011 tax codes will affect your business; run different scenarios and come up with a game plan. What additional contract services can your firm perform this year, and what adjustments in your fees maybe needed in order to compensate for those addition taxes in 2011?
