With the continuing economic uncertainty, companies are staying vigilant when it comes to controlling costs.
While every business owner must pay taxes, you may be paying more than necessary. Are you taking advantage of all tax savings available to you? Do you have a tax planning strategy that takes into account deferrals and tax traps?
Here are some considerations for business owners anxious to save tax dollars in 2010.
Project Your Income:
In order to time income and deductions to your advantage, you will need to project your business’s income for this year. In doing so, you may find it better to defer tax. If you expect to be in the same or a lower tax bracket next year, consider:
Deferring income to next year—If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.
Accelerating deductions into the current year—If you’re a cash-basis taxpayer, you may want to make an estimated state tax payment before December 31st, so you can deduct it this year rather than next year. However, consider the alternative minimum tax (AMT) consequences first.
Caution: If you are experiencing a low-income year, the negative impact on your cash flow may not be worth the potential tax benefit. Another consideration: if it’s likely you’ll be in a higher tax bracket next year, the opposite strategies (accelerating income and deferring deductions) may save you more tax. Keep in mind that some income tax rates may go up in 2011. You should consult a professional tax advisor before determining the best strategy for your business.
Savings for Depreciation:
For assets with a useful life of more than one year, you generally must depreciate the cost throughout a period of years. You may want to choose the Modified Cost Recovery System (MACRS) instead of the straight-line method in order to obtain a larger deduction in the early years of an asset’s life. However, if you make more than 40% of the year’s asset purchases in the last quarter, you could be subject to the mid-quarter convention, which is typically less favorable. The following depreciation-related tax savings and strategies are available during 2010:
Section 179 expensing election—The Small Business Jobs Act of 2010 (SBJA), which was recently signed by President Obama, allows business owners to elect to deduct up to $500,000 of new asset purchases during 2010. Examples of assets that qualify for the Section 179 election are new equipment, furniture, computers and off-the-shelf computer software.
SBJA also temporarily expands the definition of eligible property to include qualified leasehold-improvement, restaurant, and retail-improvement property. The maximum amount of such property that can be expensed is $250,000. Keep in mind that you can claim the deduction only to offset net income, not to reduce it below zero. Also, when total asset purchases during 2010 exceed $2 million, the deduction begins to phase out dollar-for-dollar.
Bonus Depreciation—SBJA also extends, through December 31, 2010, 50% first year bonus depreciation, which had expired at the end of 2009. The extension is retroactive to January 1, 2010. Property that qualifies for bonus depreciation 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.
Cost segregation study—If you have recently bought or constructed a building or are remodeling existing space, consider a cost segregation study. It identifies property components and related costs that can be depreciated over 5-7 years using 200% the straight-line rate or over 15 years using 150% of the straight-line rate. Therefore, you can depreciate the property much faster and dramatically increase your current deductions. Examples of assets that qualify include decorative fixtures, security equipment, parking lots, landscaping, and architectural fees allocated to qualifying property.
Your Automobile Usage:
Your automobile may translate to tax savings. Just be sure to keep complete records, specifically a current log of business vs. personal miles. Automobile expenses can be deducted using the mileage-rate method (50 cents per business mile driven in 2010) or the actual-cost method (total out-of-pocket expenses for fuel, insurance, and repairs, plus depreciation).
If you buy or lease hybrid or lean-burn-technology automobiles, you may be able to claim tax credits worth up to $3,400 for cars and light trucks. However, these credits phase out once a specified number of a particular vehicle has been sold.
In addition, under Section 179 expensing, you can deduct up to $25,000 of the purchase price of a new SUV or truck that weighs at least 6,000 pounds, but fewer than 14,000 pounds. The normal Section 179 expensing limits generally apply to vehicles weighing more than 14,000 pounds.
Your Employee Benefits:
Did you know that including specific benefits in your compensation package can not only help you attract and maintain the best employees, but can also help you manage your tax liability?
Qualified deferred compensation plans—These include pension, profit-sharing, SEP and 401(k) plans as well as SIMPLEs. You can benefit from a tax deduction for your contributions to employees’ accounts and your employees benefit from the tax-deferred savings that the plans offer. Small employers (generally those with 100 or fewer employees) that create a retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of qualified start-up costs.
Fringe benefits—Some fringe benefits, such as group term-life insurance (up to $50,000), health insurance, parking (up to $230 per month), and employee discounts aren’t included in employee income. Yet, you as the employer still receive a deduction and typically also avoid payroll tax.
The above considerations are only a sample of the tax savings strategies available to business owners this year. Be sure to consult a professional tax advisor to ensure you are taking advantage of all potential savings for 2010.
Content contributed by the Charlotte office of Elliott Davis, PLLC, an accounting, tax and consulting services firm providing clients the solutions needed to achieve their objectives in 10 offices throughout the Southeast. For more information, contact Dan Warren at 704-808-5210 or visit www.elliottdavis.com.