To paraphrase Tennyson’s comments on young men and spring, in the winter everyone’s fancy turns to thoughts of tax-savings. With just a few weeks before the end of the year, business owners especially should be considering what they can do to reduce their tax burden.
The deduction for domestic production activities continues from 2005, but it’s often not well understood. For one thing, although it sounds like it involves manufacturing, it can also apply to contracting, engineering, architecture, agriculture and other activities. Calculating the deduction can be complex depending upon your situation, even with recent regulations intended to clarify things. Basically, though, the deduction for 2006 can be up to 3 percent of qualified production activities income for the year, limited to 50 percent of W-2 wages related to the activities. Businesses that may qualify for the deduction need to make certain they’ve paid enough wages to get the full benefit.
Many businesses consider whether they should buy new equipment at year-end for potential tax savings. Such property used for business purposes can be depreciated over time, but a certain amount can also be expensed in the first year under Sec. 179 of the IRS code. There are limits, but those limits are currently very generous: up to $108,000 of business equipment can be expensed in 2006.
Whether depreciating or expensing, you can only take a deduction if the property is actually placed in service in the current year. If you rush out to buy a computer on December 31, and it’s still sitting in the unopened box on January 1, you may not be entitled to any write-off this year.
Deductions are also limited to that percentage of an asset that is actually used for business. This is especially important with cars and trucks, which are often used for non-business purposes (and note that commuting from your home to your office is not considered business). Limits also apply to the amount of depreciation or expensing available based on the size and type of vehicle. Make certain you understand those limitations, and that you’ve documented your business usage.
Since the personal use of company-owned vehicles can lead to compensation issues, sometimes it’s better for individuals to own cars and let the company reimburse them for business use. When done properly, such reimbursement provides a deduction for the business without adding any additional tax to the individual.
Sec. 179 expensing generally doesn’t apply to real property, but potential tax savings exist for making buildings more energy-efficient in 2006 and 2007. Certain property installed in a commercial building to reduce annual energy costs by 50 percent or more may entitle the owner to deduct up to $1.80 per square foot. The credit for solar energy property is now 30 percent, and contractors may claim a credit of up to $2,000 for each qualified new energy-efficient home built and acquired for use as a residence. Other tax savings are available for energy-efficient non-business property, but note that in all cases the property must be placed in service by December 31, 2007, so act quickly to save not just energy, but taxes.
Recent laws have made changes to the pension area that may affect your current retirement plan, but if your business doesn’t have one, you should consider the idea. In addition to providing a nice benefit for the future, retirement plans can allow businesses to take a deduction this year for contributions that don’t have to be made until the return is filed next year.
Your tax advisor can help you plan for the situations mentioned here and more, and can walk you through the often-confusing provisions (it’s not rocket science, but it is tax law). Don’t wait until after the year’s over to talk to your advisor.
