Year End Tax Planning - Businesses: Smart Moves To Take Before December 31

As December 31st approaches, where does your business stand on taxes? By making timely moves, you might be able to put a sizeable dent in your 2009 business tax bill. Here are some strategies to consider.

 

Unpack new equipment. This year's economic stimulus law extended the enhanced Section 179 deduction for another year. The maximum deduction in 2009 for business assets is generally $250,000. In addition, you may be able to claim a 50 percent "bonus" depreciation deduction on any excess cost.

 

Reminder: To qualify for either tax break, you must "place the property in service" before 2010.

 

Take your best shot at collecting debts. Due to the recession, your business may have had trouble securing payment for goods or services this year. If your business records income on an accrual basis and has totally worthless debts, you can write them off as bad business debts in 2009, thereby reducing your tax liability. Keep detailed records of the efforts -- such as phone calls, e-mails and correspondence -- that can prove the worthlessness of a debt if the write-off is challenged by the IRS.

 

Reduce estimated tax payments, if allowed. A self-employed individual is generally required to pay "estimated tax" in quarterly installments. If you qualify under a safe-harbor exception, you can avoid an underpayment penalty.

 

New rule: The economic stimulus law allows you to base estimated tax payments on 90 percent of your 2008 tax liability (instead of the usual 100 percent) if your AGI for 2008 was less than $500,000 and more than 50 percent of your income was derived from small business activities.

 

Hire "target" workers. A special jobs credit -- called the Work Opportunity Tax Credit -- is available to employers who hire workers from certain disadvantaged groups. The credit is generally equal to 40 percent of the first $6,000 of wages for a maximum credit of $2,400 per employee. If eligible workers are hired and start before year-end, the credit can offset 2009 taxes.

 

Fix up business premises. If you make minor repairs at your business location this year, you can generally deduct the cost of the repairs on your 2009 return. However, "improvements" that prolong the life of the property, enhance its value or adapt it to a different use must be added to basis. For example, replacing a ceiling tile is a repair, but installing a new roof is generally treated as an improvement. Keep repair and improvement expenditures separate.

 

Take advantage of new NOL rules. Normally, a net operating loss can be carried back just two years before being carried forward for up to 20 years. The economic stimulus law allowed a five-year carryback for NOLs in 2008 for certain small businesses. New legislation enacted in November enables a business, regardless of size, to carry back NOLs in 2008 or 2009 for up to five years.

 

Caveat: The carryback to the fifth year can only offset 50 percent of taxable income.

 

Give corporate property to charity. A company can generally deduct donations of property equal to its basis in the property. However, there are several exceptions in the tax law.

 

Example: If a C corporation gives computer equipment to an elementary or secondary school, it can claim a deduction equal to the basis plus one-half of the ordinary income that would have been realized had the computers been sold (up to twice the amount of basis).

 

Determine if your business is eligible for the Domestic Production Activities Deduction, which is increasing next year.

 

The deduction is available to manufacturers of clothing, goods and food, as well as farmers. It can also be claimed by businesses engaged in a variety of other activities including certain real property construction; music recording and film production; electricity, natural gas and water; software development; and engineering and architecture services for  construction.

 

For 2009, the Domestic Production Activities Deduction equals 6 percent of the lesser of:

 

Taxable income derived from qualified production activities or

 

Taxable income for the year (determined before the deduction).

 

For 2010, when the federal deduction is fully phased in, the rate increases to 9 percent.

 

However, the deduction cannot exceed 50 percent of W-2 wages allocable to domestic production gross receipts. (Therefore, if your business pays minimal wages, the deduction will be very small.)

 

Contact us to help determine if one or more of these year-end techniques is appropriate for your business.