Commercial Insights

Better Tax Savings

All of a sudden 2011 is winding down, and tax planning is winding up — along with a wide assortment of unknowns. The tax act signed into law in 2010, for example, provided only a two-year extension of the Bush-era tax cuts. It’s no surprise that many businesses aren’t sure how to proceed.

Where to begin?

One of the best opportunities at the moment for businesses to save money on taxes is to take advantage of tax provisions that were in place for the year but are scheduled to expire or become less valuable after December 31 (unless Congress extends them). The most significant of these are: 

• Bonus depreciation: The option to write off 100% of the cost of qualifying property as “bonus depreciation” expires at the end of 2011. However, the deduction is permitted even if the qualifying asset was in service for only a few days during the year. For 2012, the deduction drops to 50%.
• Section 179 expensing: All things being equal, businesses planning to purchase new property in 2011 or 2012 should try to accelerate it into 2011. Currently, the Section 179 expensing limit for 2011 is $500,000, the investment ceiling is $2,000,000, and a certain amount of expensing can be claimed for qualifying real estate. Beginning in 2012, these limits will drop to $139,000 and $560,000, respectively, and expensing of qualifying real estate won’t be available.

To learn more, view the details on bonus depreciation and Section 179.

Advantages closer to home

In recent years, many states have decoupled their rules for bonus depreciation and Section 179 expenses from those at the federal level. In Maine, for example, the state has instituted a new capital investment tax credit for 2011 and 2012 that is equal to 10% of the bonus depreciation claimed on the federal return. This may allow you to recover more than the cost of the asset in the state.

Click here to learn more about the Maine changes — and remember to take a close look at your business’s state income tax consequences in general.

Time for a cost segregation study? 

If you acquired new real estate, expanded an existing facility, or undertook a significant renovation project in the current year (or even within the past few years), you might be able to accelerate your cash flow by means of a cost segregation study and take advantage of the depreciation incentives.

Other tax credits to check out

Several tax credits are set to expire at the end of 2011 unless Congress extends them. The work opportunity tax credit and the research and development (R&D) tax credit are two of the most popular. Although the R&D tax credit has many times been extended one year at a time, there is some uncertainty about its prospects after 2011. 

 
Shifting income and deductions

Fortunately, most of the tried-and-true tax planning techniques continue to be relevant and can help virtually any business save money.

One of the most fundamental of these techniques involves shifting income and deductions between two tax years. The same technique can also provide some relief on your 2012 estimated tax payments if the payments are based on your 2011 tax liability.

Shifting income, however, is not always a matter of simply delaying receipt of funds.

• Tax rules might require you to recognize certain types of income when you earned the right to receive it even if you arrange for delayed payment.
• For certain taxpayers using the accrual method of accounting for tax purposes, certain expenses can be deducted in 2011 regardless of the fact that they won’t be paid until 2012. 

Tax savings in a downturn

Even if your business is not anticipating being profitable in 2011, year-end tax planning remains important to help avoid unexpected results and gain the most tax advantages from the loss.

• The ability to generate a refund by carrying back the loss might seem attractive, for example, but it can sometimes actually be more beneficial to carry it forward, given recent changes in the rules relating to net operating losses.
• If a business is operated through a partnership or S corporation, the owners might need to ensure that their basis in the entity is sufficient to allow them to deduct the loss generated in the current year.
• Keep an eye out, again, for state rules, too. The use of net operating losses is another area where states have decoupled from the federal rules, making it crucial to keep both state and federal law in mind when doing your planning.

Employee benefits — with tax benefits

Employee benefit programs can provide opportunities to manage your tax liability while also helping attract and retain higher-quality employees. But remember:

• Changes in your qualified deferred compensation arrangements (such as profit sharing or 401K plans) must be made before the plan’s year-end.
• Make sure you haven’t inadvertently made an untimely payment (or failed to make a timely payment) to your nonqualified deferred compensation plans for key employees, because to avoid penalties — which can be substantial — operational errors like these must be corrected in the year they were made.

Tax planning is a complex topic, with many more aspects, issues, and possibilities than we’ve touched upon here. To learn more and gain better control of your tax situation, check out our tax-planning guide online or contact Sno Barry or your BerryDunn service provider.