Year End Tax Planning
Target Audience: Tax Savvy Companies, Section 179 Deduction, Business Owners
It’s business time for tax-savvy companies
There are many ways to succeed in business. You can provide tried-and-true products and services in a long-established field. Or you can shatter the mold and break new ground. (Maybe you can even do both.)
But, whatever your approach, you’ll more than likely get a lot further if you run a tax-savvy company that pays Uncle Sam his due without overpaying and, of course, without falling prey to penalties and interest. And, as year end approaches, now is the time to get down to business.
Higher depreciation deduction available
The Section 179 deduction allows you to expense, rather than depreciate, up to $250,000 in new equipment acquisitions for 2008. This amount was raised from $128,000 with the signing of the Economic Stimulus Act of 2008 earlier this year.
Before you run off to start shopping, though, there are some things you should know. The deduction applies to machinery and equipment — including office equipment and light trucks — that are put in service before year end (or the end of your tax year that begins in 2008). It also applies to certain software purchases.
The equipment doesn’t have to be new — it just has to be new to you. But, to qualify, it must be used at least 50% for business in the first year you own it. You can deduct only the business-use percentage of the cost, and, for vehicles, there are weight-related limits on the deductible amounts.
Additionally, for 2008, your Sec. 179 deduction is decreased dollar for dollar if you spend more than $800,000 on equipment. This phaseout amount was also raised (in this case from $510,000) with the signing of the Stimulus act.
Also bear in mind that, under the act, some property may qualify for a special “bonus” depreciation amount equal to 50% of its adjusted basis. Such property includes tangible property with a recovery period of 20 years or less, computer software purchased by the business, water utility property, and qualified leasehold improvement property. (In lieu of taking bonus depreciation, corporate taxpayers may be eligible to accelerate alternative minimum tax credits or Research and Development credits, under the Housing and Economic Recovery Act of 2008 signed into law in July.)
Because both the Sec. 179 limit increases and the 50% depreciation allowance are currently available only for 2008 and can provide large 2008 deductions, you may want to consider making major asset purchases this year, assuming it makes good business sense to do so.
Accounting methods spur choices
Some key tax moves may be predicated by your accounting method. If you have a cash-basis business, for example, you can delay sending out bills so that you don’t receive payments until early next year. In doing so, you can defer taxable income to next year.
Accelerating deductions into the current year is also generally beneficial. To do so, see whether you can pay off your accounts payable before year end to get the deduction into this year’s return. And if you’re eligible for the installment method, use it to defer income on sales of noninventory property.
On the other hand, maybe your company is an accrual-basis business. If so, look into postponing product shipments or services provided until early next year (though don’t sacrifice customer service in the process, of course). And if you receive payments before you deliver goods or perform services, you can defer the income to next year if you meet certain requirements.
Also consider longer term strategies that allow you to defer income or gain. Among the possibilities are sales of stock to an employee stock ownership plan, installment sales, and like-kind exchanges.
Compensation, benefits offer opportunities
Year end bonuses are a popular way to reward and retain employees. If you accrue employee compensation such as bonuses and vested vacation pay at year end but don’t pay it until next year, you may be able to deduct it this year. Your business must be on the accrual method, and you must pay the accrued amounts within the first two months of next year.
Bear in mind, however, that you can’t accrue bonuses and other expenses owed to certain related parties, such as more-than-50% C corporation owners or any S corporation shareholders, partners in a partnership, or members of a limited liability company.
You might also look into whether there are any tax-qualified fringe benefits you might offer employees. Examples include group-term life insurance (up to $50,000), health insurance, parking and employee discounts. Such “statutorily excluded” benefits aren’t included in your workers’ taxable income, and you’ll receive a deduction for them.
Let circumstances guide you
Year end tax planning is something business owners need to spend some time doing every year. But that doesn’t mean you should do it the same way every year. Let your circumstances guide you, and work with your CPA to make the best choices.
The Work Opportunity credit: A tax break extended
The Work Opportunity tax credit has been extended through Aug. 31, 2011. This federal tax credit is available to all private businesses and was designed as an incentive for employers to hire individuals in certain targeted groups that consistently experience high rates of unemployment, including ex-felons, food stamp recipients and disabled veterans.
Hiring such workers can help them acquire the skills and experience needed to be eligible for better, higher paying job opportunities. Meanwhile, you’ll gain access to a new pool of potential employees and qualify for a tax break. Generally, the credit can be as much as 40% of qualifying first-year wages you pay to an eligible individual who begins to work before Sept. 1, 2011. The credit is, however, limited to $6,000 per employee ($3,000 for a summer youth employee).
Find out how our expertise in Tax Services can add value to your business. Email us or call us at 1 (888) 875-9770.
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