Monday, November 2, 2009

Some year-end tax planning information for businesses

As the year end approaches, now is a great time to review the tax situation for 2009 for both your company and your personal tax returns. There are some opportunities out there that may help you save money on your taxes but some of them expire on December 31, 2009. Today’s post will discuss some of the business tax provisions.


Section 179 Deduction – Typically, an asset purchased must be depreciated (written off) over a number of years. This deduction allows a business to immediately expense qualified property in the year it is bought. The limits for 2008 were extended through 2009. The maximum Section 179 deduction is $250,000 and the maximum investment limit is $800,000. Amounts invested in excess of $800,000 will reduce the allowable deduction dollar for dollar from the $250,000 limit. Qualifying property includes items used in a trade or business. Some examples include machinery, equipment, vehicles (see note below), furniture and off-the-shelf computer software. The Section 179 deduction is limited to the taxable income of the trade or business. Amounts not deductible in the current year because of the business income limitation are eligible to be carried forward to the next year. The $250,000 and $800,000 limits expire on December 31, 2009. The limits for 2010 are currently scheduled to drop to $133,000 and $530,000 respectively. NOTE: Luxury Auto Limits – The Section 179 deduction is limited to $25,000 for SUVs. The remaining purchase price is depreciated over 5 years.

“Bonus” Depreciation – The 50% bonus depreciation provision was also extended by the Stimulus Bill. This provision allows a taxpayer to write off an additional 50% of the adjusted basis of property placed in service in 2009. The property purchased cannot be used. It must be new.

Sample 2009 Depreciation calculation: Contractor purchases $325,000 worth of equipment during 2009.

Purchase Price $325,000


Section 179 Deduction $250,000

Remaining Basis $ 75,000


50% Bonus Depreciation $ 37,500

Remaining Basis $ 37,500


Regular Depreciation

(5-yr. MACRS - 20%) $ 7,500

Net Remaining Basis after all

1st yr. depreciation taken $30,000

The sample calculation shows that the contractor was able to immediately expense $295,000 of the $325,000 purchased during the year on the tax return.

Section 199 Domestic Production Activities Deduction – This is a manufacturer’s deduction that was created to encourage companies to keep production of their products in the United States. The definition of “domestic production” under this section is so broad that it includes “construction of real property performed in the U.S.” Contractors installing comfort systems or plumbing systems in a home may be eligible for a deduction under this section. There is one change to this deduction. The deduction was to increase to 9% for 2010. However, that increase has been revoked so the deduction will stay at 6%. This is a very complex section of the tax code so I encourage you to talk to your CPA about its’ applicability to your situation.

Work Opportunity Tax Credit – This credit allows a business to claim a credit equal to 40% of the first $6,000 of wages paid to employees in a targeted group. The employee must work over 400 hours during the year. Otherwise, the credit is reduced to 25% for those who work at least 120 hours during the year. The 9 targeted groups include qualified veterans of service in the U.S. Armed Forces and disconnected youth. A disconnected youth is someone who is between 16 and 25 years old and hasn’t been regularly employed or attended school in the past 6 months. For the complete list of targeted groups, go to the U.S. Department of Labor website. This program is administered at the state level.

“S” Corporation Built-In Gains (BIG) Tax – The BIG tax was enacted to keep “C” corporations from converting to “S” corporations solely to avoid taxes on appreciated property that would result in taxable gains if sold. It closed a “loophole” in the tax code. The BIG tax rate is the maximum corporate tax rate (currently 35%) at the time of the transaction (sale of property.) For 2009 and 2010, an “S” corporation is not subject to the BIG tax if the “C” corporation elected “S” status prior to 2002 for 2009 (prior to 2003 for 2010). The Stimulus Bill reduced the holding period from 10 to 7 years. So, if your company is an “S” corporation who converted from a “C” corporation prior to 2002, you can sell appreciated property without the fear of having to pay the BIG tax.

U.S. Treasury Department Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This article is not intended to be comprehensive in nature and competent professional tax advice should be sought in determining the issues that impact your specific situation.

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