Manufacturers & Distributors ARTICLE -

F&D's Top 5 Year End Tax planning Tips

Target Audience: Manufacturing and Distributing Companies, M&D Industry Employees, Manufacturing Distributors

The end of 2005 is not far off, and it's always a good idea to take one last look at your tax situation while there is still time to take action. Some planning ideas need to be implemented before year-end to be effective for this year. With that in mind, here are the Top 5.

1. Maximize the New Deduction for U.S. Production Activities. The Jobs act created a new tax break to benefit manufacturers. You may deduct 3% of your qualified production-related income or your taxable income - whichever is less - in 2005 and 2006. The deduction will increase to 6% for 2007 through 2009 and jump to 9% for 2010 and beyond. Take note, however, that the deduction is limited to 50% of your W2 wages. A company with $1 million of qualifying income, for example, would have to have paid wages of $60,000 or more to claim the entire 3% deduction.
2. Energy Tax Incentives Act of 2005. The Act provides incentives for businesses to make certain energy conservation or alternative energy expenditures. While these credits and deductions may not net you a significant tax break, you should consider them if you are planning energy-efficient improvements or purchases in 2006, and want to save money while doing your part for the environment. The 3 areas where you can benefit include:

   a. Credits for energy-generating or storage property. Businesses are eligible for several credits ranging from 10% to 30% for purchase of qualifying solar energy property and for fuel cell and microturbine power plants placed in service in 2006 and 2007. 

   b. Credits for energy-efficient new homes. Contractors are eligible for a credit of $2,000 per home for new construction that meets a 50% energy efficiency standard, is located in the U.S. and is sold in 2006 or 2007. The Act also provides a $1,000 credit for manufactured homes that meet a 30% energy-efficiency standard. 

   c. Energy-efficient commercial building deduction. A deduction, based on a square-footage calculation, is available for the cost of major energy-saving improvements to commercial buildings in 2006 or 2007. 

3. MACRS Deductions. Under MACRS (Modified Accelerated Cost Recovery System), property can be classified as either five or seven-year personal property, 15-year land improvements, or 39-year real property. Under MACRS, significant tax benefits are gained by identifying property that would normally be classified as real property and depreciated on a straight line basis over 39 years and reclassifying it as either five or seven-year property, depreciated under the 200 percent double declining balance method or 15-year property, depreciated under the 150 percent double declining balance method. 
4. Section 179. The deduction limit for 2005 is $105,000. You can deduct the purchase of eligible property - including machinery, equipment and most storage facilities, but not income-producing property or buildings - in the year you buy it rather than depreciate it. Additionally, for you to be eligible for the full deduction the total Sec. 179 property you put in service during the year cannot exceed $420,000 (in 2005). And for every additional dollar you spend, you lose a dollar in deductions.
5. LIFO vs. FIFO Accounting. If you choose LIFO, the last items you've bought or produced are assumed to be sold first. This can slash your tax bill when costs are rising. As buying costs rise, so do the costs of goods sold, so you reduce taxable income. But if you're subject to the alternative minimum tax, check with your accountant, because using LIFO could raise your tax bill. If shrinking prices have been a problem for your business, you might prefer to use the FIFO method. It assumes you've sold your oldest inventory first, so you'd identify more recent purchases in the ending inventory. At year end, you match inventory items with the costs of the same type of items you've most recently bought or produced. 

This Top 5 list is intended to give you just a few ideas to get you thinking about year end planning for 2005. We would like to discuss your situation in detail to see how these and other planning ideas can be used to reduce your tax bill. Please don't hesitate to call us if you would like more details or would like to schedule a tax planning strategy session.

Find out how our M&D accountants can add value to your business. Email us or call us at 1 (888) 875-9770.

related links

M&D Newsletters & Articles 

Tax Services

Audit Assurance and Accounting

Industries

Tax and Business Updates