Year-end Tax Tips That Can Benefit Your Business

By Michael A. Bohinc, CPA

Benjamin Franklin once said, “In this world nothing can be said to be certain, except death and taxes.” He may well have added a third item to the list: “In this world nothing can be said to be certain, except death, taxes, and changes in the tax laws.” In the first 10 months of 2008, there were five laws enacted that included changes to various aspects of the tax code. As the year comes to a close, there are some tax law provisions that may benefit your business. However, to take advantage of them you’ll need to act fast, as some of them disappear after December 31, 2008.

Section 179 Deduction

This deduction is one that many people have heard of, but might not fully understand. This deduction allows a business to immediately write off an asset purchase (vehicle, equipment, etc.) in the year of purchase, rather than having to depreciate it. Depreciation means that you get to write off a portion of the asset purchase price each year over a period of years.

The Economic Stimulus Act passed back in February increased the expensing provision for 2008 to $250,000 with a phase-out limitation on asset purchases in excess of $800,000 during the year. These increased limits only apply for assets purchased in 2008. In 2009, the limits are reduced to $133,000 and $530,000 respectively. (Note: The Section 179 deduction for any SUV used in the business is still limited to $25,000. The remaining vehicle purchase price is depreciated over a five-year period.) The deduction is also limited to the taxable income of the business for the year. This law is in place to encourage businesses to invest in new equipment.

Bonus Depreciation

For assets purchased during 2008 only, a bonus depreciation deduction is allowed equal to 50% of the adjusted basis of qualified property placed in service.

An example may help explain the deductions available with the above two provisions. Let’s say a contractor purchases $500,000 of new vehicles and equipment in 2008. Here is how the contractor would calculate the tax benefits.

Therefore, this contractor would have a “net” cost of $364,000 on the purchases, thanks to the $136,000 in tax savings. While there are many contractors who don’t purchase this much equipment in a year, the tax benefits are still available to all contractors.

The amount allowed to be depreciated in the first year for a luxury vehicle (passenger automobile or a truck, van or SUV with a gross vehicle weight of 6,000 pounds or less and an original cost more than $14,800) has been increased for 2008 to $10,960. Of course, the vehicle must be used more than 50% of the time for business purposes and any non-business use reduces the depreciation amount allowed. This $8,000 increase in depreciation deduction expires December 31, 2008.

Differential Wage Payments

These are payments voluntarily made by an employer to a military employee representing the difference between their regular salary from the employer and their military pay. A provision of the Heroes Earnings Assistance and Relief Tax (HEART) Act allows a tax credit equal to 20% of up to $20,000 of differential wages paid to a qualifying employee between June 18, 2008 and December 31, 2008. This is for companies with less than 50 employees that have a written, non-discriminating plan in place.

Charitable Contributions

Contributions of inventory are generally deductible at cost. However, if inventory is contributed for the care of the ill, the needy, or infants, it may generate a deduction in excess of cost. This is a deduction that is often overlooked by business owners. There may be some obsolete, yet functional, inventory on the shelves that could benefit a worthy not-for-profit group.

Domestic Production Activities Deduction (Section 199)

This is a complex code section and the deduction requires a number of calculations. However, it’s something that contractors don’t want to overlook with their accountants because the benefits (deductions) can be significant. This was part of the American Jobs Creation Act as a way to encourage businesses to keep their production here in the U.S. The definition of “production” under this code section is broad. So broad, in fact, that it includes construction services and the specialty trades. For 2008 and 2009, the deduction is 6%. In 2010 and later, it is 9%. It is based on the lesser of your taxable income or net income from qualified production activities. Because of its complexities, I encourage contractors to discuss it with their accountants.

Residential Energy Efficiency Tax Credit (Section 25C)

Finally, a wrong has been righted. In the recent “bailout” bill, Congress reinstated the residential energy property credit for equipment placed in service in 2009. They had allowed this tax credit to “sunset” (expire) on December 31, 2007. It was one of the few energy credit provisions that was left behind. Be careful, though: this credit does not apply to anything placed in service in 2008. It’s only for 2009. And now that the tax credit has been reinstated, we have to work together as an industry to keep it on the books for years beyond 2009.

So, what is this specific credit all about?

This law provides for tax credits of up to a $500 limit on energy-saving products that meet certain federal standards on energy usage. The $500 limit is a lifetime limit. You can’t take the credit one year and then take it again another year with another residence.

One component of the tax credit covers qualified energy-efficiency improvements made to existing homes. Maximum credit on this component is $200 of the $500 total. Qualifying purchase items include:

• advanced main air circulating fan upgrade/installation (the credit can not exceed $50)

• exterior doors

• insulation materials or systems designed to reduce heat loss or gain

• exterior windows including sky lights and doors.

The other component of the tax credit covers residential energy property purchased for personal residences. Maximum credit on this component is $300 of the $500 total. Residential energy property items include:

• natural gas, propane or oil water heaters

• central air conditioners or heat pumps

• natural gas, propane or oil furnaces or hot water boilers

• biomass stoves that use any “plant-derived” fuel available on a renewable or recurring basis (i.e., wood pellets, etc.).

One significant change from when the law was previously on the books is that geothermal heat pumps now qualify for a much higher tax credit ($2,000). Previously, they were included in the property eligible for the $300 credit.

For more specific information on these energy tax credits, including energy

efficiency specification requirements, go to the Energy Star web site at http://www.energystar.gov/index.cfm?c=Products.pr_tax_credits.

These are just a few of the tax deductions and credits available for contractors. It’s never too late to start tax planning. However, once we ring in 2009, planning for 2008 is basically over and we have to turn our attention to the new year. Which brings to mind another quote from Mr. Franklin: Never leave that till tomorrow which you can do today. My best wishes to all of you for a healthy, happy and prosperous new year.

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.