As we welcome in the holiday season, people’s thoughts turn to taxes and year-end planning. OK, that’s a stretch but most CPAs’ and tax preparers’ thoughts do turn to taxes this time of year. Spending some time reviewing your tax situation prior to year end may save you some money come tax time next spring.
For comparison purpose, the mechanical and plumbing codes combined total about 830 pages. The Internal Revenue (tax) Code has almost 4,800 pages. It is constantly changing and growing. There were over 300 changes made to the tax code alone in the American Recovery & Reinvestment Act of 2009 (commonly known as the “Stimulus” Bill.) A number of provisions in previous bills were extended in the Stimulus Bill. However, a number of them expire on December 31, 2009. Let’s take a look at some of them.
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.
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.
Traditionally, the typical year end tax strategy is to defer income into next year and accelerate deductible expenses into this year. This is done to defer paying income taxes. Think of it as kicking the “tax” can further down the street. This holds true in years where you expect to be in the same or lower tax bracket the following year. If you expect the opposite to be true (higher tax bracket), then accelerate income and postpone deductible expenses. This way more income is taxed at a lower rate. Currently, tax rates for 2011 will be going up for the high-end tax brackets as the Bush tax cuts are allowed to expire. With the programs that the current administration has on its’ agenda to implement, I do not see how they can keep from raising the tax rates on the middle class in 2011 as well. Here are a few year-end tax planning ideas for your individual returns.
American Opportunity Education (AOE) Tax Credit – This used to be called the “HOPE” scholarship credit. The Stimulus Bill has increased and expanded the educational tax credit. For 2009 and 2010, the credit is 100% of the first $2,000 of qualified educational expenses plus 25% of the next $2,000 of qualified expenses. The maximum credit amount is $2,500 per student per year. Additionally, the credit now applies to the first 4 years of post-secondary education. It was only 2 years under prior law. Qualified expenses include tuition, fees and course materials including books. The old law did not include books. The credit starts phasing out for taxpayers with an adjusted gross income (AGI) of $80,000 (single)/$160,000 (married.)
Tuition Deduction – For taxpayers who don’t qualify for the AOE Tax Credit, there is a deduction allowed for up to $4,000 of tuition and fees paid to an accredited post-secondary school. The deduction is not available to those with an AGI over $80,000 (single)/$160,000 (married).
Estimated Tax Payments-Small Business Owners – For 2009, the “safe harbor” provision for taxpayers in order to avoid underpayment penalties has been expanded. Taxpayers can avoid the penalty if the taxpayer has withheld or makes estimated tax payments totaling 90% of the previous year’s tax return. It was 100% under the old law. The taxpayer’s AGI must have been less than $500,000 and more than 50% of the gross income on the previous year’s return must have come from the small business. NOTE: This provision doesn’t apply to “C” corporations.
Sales vs. Income Tax Deduction – You are allowed to deduct the state & local sales taxes paid instead of the state & local income taxes if you choose. This provision would be most beneficial to those of you in states with no income taxes.
Sales Tax Deduction on Vehicles – For vehicles purchased from February 18th through December 31st, 2009, you can deduct state and local sales taxes on the purchase. The vehicle purchase price cannot exceed $49,500. Vehicles with a gross vehicle weight (GVW) that qualify include: passenger autos, light trucks and motorcycles. Motor homes also qualify with no GVW restrictions. You can take this deduction whether you itemize your deductions or not. The deduction phases out for those whose modified AGI is over $125,000 (single)/$250,000 (married.)
Additional Standard Deduction – For 2009, an additional standard deduction amount is available to those who pay real estate taxes and who do not itemize. The amount is the lesser of the state & local real estate taxes paid during the year or $500 (single)/$1,000 (married.) This expires 12/31/09.
First-Time Homebuyer’s Credit – This credit was expected to end on November 30, 2009. However, it was extended to April 30, 2010 in early November by the bill passed that extended unemployment benefits. This law allows those who haven’t owned a home in the U.S. during the previous 3-year period prior to buying the home a tax credit equal to 10% of the purchase price up to $8,000. The home has to be purchased with a signed contract by April 30, 2010 and it must close by June 30, 2010. The credit is equal to 10% of the purchase price of the home up to a maximum credit of $8,000. The purchase price of the home cannot exceed $800,000 to be eligible for the credit. The credit is a refundable credit meaning you may receive a check from the IRS if you have a zero tax liability. The credit phases out at the following income levels: Single - $125,000 - $145,000. Married filing Joint - $225,000 - $245,000. The taxpayer must be at least 18 years old and not a dependent. Related party transactions (sales between family members) are not eligible for the credit.
The law has also been expanded to include current homeowners who do not qualify for the 1st Time Homebuyer’s Credit. Current homeowners are eligible for a credit up to $6,500 for buying a new house as long as they’ve lived in their current home as their principal residence for 5 consecutive years out of the 8 years prior to the sale of the house.
These are just some of the deductions and credits available. You have until December 31, 2009.
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.
Michael A. Bohinc is a certified public accountant in Cleveland, OH. He is also a licensed HVAC and plumbing contractor in the State of Ohio. He is a Consult & Coach Partner for the Service Roundtable. He has over 20 years’ experience working on business management issues in the HVAC and plumbing industries. He can be reached at: 440/ 708-2583, e-mail firstname.lastname@example.org.