Assets, Production, Deductions, and Energy

3 hot year end tax planning areas for businesses

For business owners, year end is the perfect time to review the past year, as well as to assess the coming one, so you can map out some tax-saving strategies. Three specific areas you may want to look into are assets, production and energy.

All offer opportunities to lower your tax bill and put that money back to use building your bottom line. And all have been affected by recent tax law changes.

1. Assets:

The Section 179 deduction The Sec. 179 expensing deduction has been a perennial favorite among business owners for some time. And for good reason — in 2006, it allows you to deduct up to $108,000 ($100,000 indexed for inflation) of investments in depreciable assets in the year you place them in service. But the deduction phases out dollar-for-dollar for 2006 investments exceeding $430,000 ($400,000 indexed for inflation).

In some instances — such as for qualified zone property, qualified renewal property, qualified Liberty zone property and Gulf Opportunity zone property — the expense election is even higher. Expense elections for heavy SUVs are limited to $25,000.

The big news regarding the Sec. 179 deduction is the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), which President Bush signed into law on May 17. Before TIPRA, the deduction was due to dwindle down to a relatively small $25,000 limit with a $200,000 phaseout after 2007. TIPRA extends the $100,000 limit and $400,000 phaseout, and their annual inflation indexing, through Dec. 31, 2009.

This gives you two more years to determine which assets you may need to buy and to make the most of these significant, necessary purchases before the 2009 deadline. Generally, you shouldn’t buy a major asset only for tax-saving purposes. But if you figure you’ll need one or more items anyway, why not get them while the getting is good?

2. Production:

The manufacturers’ deduction The manufacturers’ deduction, also referred to as the domestic production activities deduction (or Section 199 deduction), came about as part of the American Jobs Creation Act of 2004. It was initially intended to help create and retain domestic manufacturing jobs. But many other types of production-related activities qualify for the tax break as well.

For 2006, the deduction applies to 3% of your qualified production activities income (QPAI), taxable income or, if applicable, alternative minimum tax income — whichever is less. This percentage will rise to 6% for 2007 through 2009 before topping out at 9% in 2010 and thereafter.

The deduction is also limited to 50% of wages you report on employees’ W-2 forms. And this is where TIPRA comes into play.

For pass-through entities (such as partnerships and S corporations), partners, shareholders or others who receive QPAI were previously considered to have been allocated their total share of the entity’s deductible wages for the purpose of the 50% limit. But, under TIPRA, deductions are now limited to 50% of the wages used to calculate their QPAI.

3. Energy:

The EECB deduction The energy-efficient commercial building (EECB) deduction sprung to life as part of the Energy Policy Act of 2005. It allows both owners and leaseholders of commercial buildings to deduct the cost of energy-efficient property they install in those structures.

For buildings that achieve a 50% energy savings threshold of the total annual energy and power costs with respect to combined usage of the building’s heating, cooling, ventilation, hot water and interior lighting systems, the deductible amount may be up to $1.80 per square foot of floor area. Structures that meet a 16 2/3% threshold may be eligible for a smaller deduction — up to 60 cents per square foot of floor area.

To claim the deduction, you need to obtain a certification that your building will achieve the required energy savings. In Notice 2006-52, the IRS sets forth guidelines regarding the content of that certification and the qualifications that the certifier must meet.

Moreover, the Department of Energy will be keeping a public list of software that must be used to calculate energy savings for EECB deduction certification purposes. It also provides a process that software developers should use if they wish the Department of Energy to include their software on that list.

The IRS has not specified an overall per-building cap on the EECB deduction. Requirements other than those mentioned here may apply.

Staying current As of this writing, more tax law changes are expected. So be sure to consult with your tax advisor for the latest info and advice. Staying current with all the goings-on will give you the best shot at keeping your company’s tax bill low and its profit margin high.

TIPRA tips for individuals The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) gives you plenty to ponder as a business owner. But it also raises a few tax-planning opportunities — and pitfalls — for you as an individual. Some TIPRA tips to consider:

Stay aware of the alternative minimum tax (AMT). If your AMT liability exceeds your regular tax liability, welcome to the AMT trap. Fortunately, TIPRA increases the AMT exemption to $62,550 for married couples filing jointly and $42,500 for single and head of household filers — but only through 2006.

Plus, such nonrefundable personal tax credits as the Dependent Care credit, the credit for the elderly and disabled, the credit for interest on certain home mortgages, the Hope credit for college expenses and the Lifetime Learning credit can now be claimed against the AMT, thus offsetting both regular and AMT tax liability.

Enjoy those low capital gains and dividend rates a bit longer. Under current law, most long-term capital gains and dividends are taxed at a 15% rate. But this provision was scheduled to sunset at the end of 2008. TIPRA extends this lower rate two more years, so the provision now expires at the end of 2010.

Re-evaluate shifting income to children. Previously, only children under age 14 were taxed on unearned income at their parents’ tax rate. It was often beneficial to transfer income-producing or appreciated assets to minors age 14 or older, because the income or any gain on their sale would be taxed at the child’s lower rate.

The new law increases the age threshold to 18 (with some exceptions), effective retroactively for all of 2006. The child is still entitled to $850 of tax-free unearned income in 2006, and the next $850 is taxed at the child’s rate before the “kiddie tax” applies.

Find out how our expertise in Tax Services can add value to your business. Email us or call us at 1 (888) 875-9770.

related links

International Tax Services

Newsletters and Articles

Wealth Management

Track your Refund

Tax Rates

Tax Tools and Calculators

Resources