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Business Tax Tips by Peter Soh, CPA As 2004 winds down, it's a good idea to review your tax situation. With several new provisions in effect, there are plenty of deductions and deferrals to take advantage of. 1) Consider deferring income and increasing expenses. Since income tax rates are declining for individuals, owners of pass through entities like S corporations, LLC's, sole proprietors, and partnerships should defer income to the next year (2005) and accelerate expenses to this year (2004). Each year the individual income tax rates are decreasing by roughly a half percentage point. If you are an accrual basis taxpayer, consider billing you December invoices in January for your customers and asking your vendors to supply you invoices in December. If you are a cash basis taxpayer, pay your bills in December rather than next year or utilize a credit card, and bill your customers in January rather than December. 2) Take advantage of Section 179. You can expense up to $100,000 in 2003 and 2004 for new equipment (like computers, furniture, fixtures, qualified SUV’s (over 6,000 lbs gross weight), and off the shelf software. The enhanced Section 179 will sunset on 12/31/05 and return to the $25,000 pre 2001 deduction. There is an investment limitation of $410,000 in 2004. So the expense election of $100,000 will be reduced pro ratably if the all qualified purchases exceed $410,000 Lastly, the deduction can only be used if the taxpayer has taxable income. Unused Section 179 carryovers can be applied to the next year until there is taxable income (indefinitely). 3) Also, in addition to Section 179, you can utilize "Bonus Depreciation" of an additional 50% if you are qualified small business and you have purchased equipment in a specified period. This new law benefit allows businesses to claim greater first-year write-offs for purchases of computers, machinery, SUV’s over 6,000 lbs, and also qualified leasehold improvements. Businesses are eligible to claim an additional first-year depreciation deduction equal to 50 percent of the cost of qualified property. Another important fact is that bonus depreciation allows you to go below your earned income for your business. So carefully calculate this benefit with your enhanced Section 179 to maximize your depreciation deduction. Many states conform to this new rule but certain states like California and Georgia do not and you must make adjustments in your depreciation for those states. They generally conform to the pre 2001 rules. 4) If you buy a new auto, get enhanced depreciation. In general, autos and trucks are limited to the luxury auto depreciation limits. Regular limits For automobiles first placed in service in calendar year 2004, the annual dollar maximum depreciation amounts are:
Separate, higher caps apply to electric automobiles. This reflects Congress's desire to encourage these environmentally friendly vehicles. Note, however, the popular hybrid electric/gasoline vehicles such as the Toyota Prius do not qualify; the vehicle must be totally electric. For electric automobiles the caps are: 1st Tax Year: $8,880; 2nd Tax Year: $14,300; 3rd Tax Year: $8,550; Each Later Year: $5,125. Trucks and vans Depreciation and expensing dollar limits for trucks and vans are adjusted for inflation using a special new-trucks CPI component rather than the new-cars component. The "new trucks" component results in a slightly higher depreciation deduction for trucks and vans to reflect the fact that their "heavy-duty" nature makes them a bit more expensive to build. Trucks and vans are defined as passenger automobiles built on a truck chassis, including minivans and sport utility vehicles (SUVs) built on a truck chassis. Some minivans and SUVs are constructed on an automobile chassis. For qualifying trucks and vans, the 2004 regular depreciation limits listed above are higher by the same dollar amount used to compute the higher level for 2004 vans and trucks over the 2004 passenger auto limits:
Vehicles that weigh more than 6,000 pounds are not considered "passenger automobiles" subject to any of the auto depreciation caps, whether they are classified as sedans, wagons, trucks, vans or SUVs. Congress is in the process of closing this "loophole" (which also applies to Bentleys and other heavy land yachts) retroactive to tax years beginning after December 31, 2003. Any change will likely be attached as a revenue provision to one of the tax bills now pending. 5) Consider
donating excess inventory to qualified nonprofit organizations. You'll
benefit the organizations and, by removing the items from your
shelves, generate a tax deduction as well. How your business is
organized affects the write-offs you can claim. For C corporations, the corporation deducts charitable contributions up to 10% of taxable income. Donations of inventory to special charities (schools, needy, and the ill) can result in enhanced write-offs. The write-off for inventory can be increased by 50% of the difference between the property's basis and its fair market value. But in no event may the write-off exceed 200% of the property's basis. Similar enhanced write-offs apply to the donation of scientific property used for research and certain computer equipment to schools or libraries. After donating the items, be sure to remove them from your opening inventory account. If the inventory was manufactured by you (instead of purchased by you), also remove from the cost of goods sold your materials, labor, and other indirect costs that were included in the cost of production. 5) SEP IRA's allow for a 25% contribution to your retirement plan instead of 15%. Employers can now contribute the lesser of up to 25% of the employee's salary or $41,000 into the plan in 2004. You can setup a SEP IRA by April 15, 2005 for the 2004 tax year and get the tax deduction for the contribution for 2004. 6) Max out on contributions to your qualified employer retirement plan and IRA. Contributions to your 401(k), 457 or 403(b) reduce your taxable income and may have the added bonus of an employer match. Contributions to your traditional IRA may be tax deductible in many cases. What's more, money in these accounts grows tax deferred, so it has a chance to compound faster. Employer plan contributions must be made before the end of the year, but you have until April 15, 2005 to make your 2004 IRA contribution. And don't forget to contribute the additional catch-up allowance if you're 50 or older. 2004 contribution limits for 401(k)s and IRAs
7) Taxpayers with inventory can utilize the "Cash Basis" method if they have average gross receipts of less than $1MM for each taxable year ending after 12/16/98. This allows for certain accrual basis taxpayers to see if the cash basis method of accounting is better than the accrual basis (usually if Accounts Receivable is greater than Accounts Payable) and the cash basis is a much more simpler method of accounting. 8) Capital gain relief. Capital gain tax rates for non-corporate taxpayers( individuals, partnerships, S corporations, and trusts) for long term capital gains over 1 year are now 15%. Qualified capital gain property includes: stocks, bonds, mutual funds, and tangible property. The 15% rate does not apply to collectibles or residential or nonresidential real estate depreciation recapture. Collectibles such as antiques are taxed at 25%. Depreciation recapture of residential or nonresidential real estate is taxed at 25%. Also, if you sold qualified small business stock, you can actually exclude 50% of the gain if you held the stock for over 5 years. The qualified gain must be the lesser of $10MM for married filing joint taxpayers or $5MM for single or married filing separate taxpayers or 10 times the adjusted basis of the stock. 9) Dividend tax cut. Qualified dividends are eligible for 15% tax rate versus the your individual tax rate which can be as high as 35%. Dividends received from domestic or qualified foreign corporations in which the US has a tax treaty with are subject to the 15% tax rate. Dividends from REITS are not eligible for the 15% tax cut. Pass thru dividends from mutual funds that meet the above criteria are eligible for the dividend tax cut. Dividend tax cut sunsets on 12/31/08. 10) Consider offshore planning with controlled foreign corporations (CFC's). If you business has foreign sales (outside the US). Consider incorporating a subsidiary in a low tax jurisdiction to source these foreign sales and pay less US taxes on the profits of those foreign sales. Taxes will be paid once those earnings are repatriated back to the US but the deferral of these taxes can be enormous. 11) Consider setting up qualified defined benefit plans. These plans have been around for a while. Allows for you to fund a retirement plan with life insurance contracts without the limitations of qualified defined contribution plans. Allows the owner to move business assets in a tax-deferred vehicle to fund the retirement of owners. Only consider if owner is relatively close to retirement and for companies with a low amount of employees. The funding requirements are typically higher than defined contribution plans also. So take time to digest these tasty morsels and always contact your tax advisor if you are considering these tax planning techniques. 12) Alternative Minimum Tax Planning. More and more individual taxpayers are now subject to alternative minimum tax (AMT). AMT is a nasty tax system that takes away many of your tax benefits like property taxes or state taxes paid, personal exemptions, accelerated depreciation, low income housing credits etc. The tax rate for AMT is 26% for incomes below $175,000 and 28% for incomes above $175,000 ($87,500 for singles and married filing separate). For corporate taxpayers, if gross receipts are less than $7.5MM since inception (after 1993), then AMT does not come into play. Corporate AMT rate is 20%. Taxpayers need to carefully analyze whether to take certain tax benefits like prepaying state or property taxes and generating tax credits not eligible for AMT so that they can minimize their AMT tax liabilities.
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