The arrival of fall is always accompanied by shorter days, cooler weather, footballs in the air, and the changing color of leaves in the trees. It is also a signal that there are only a few short months to effect tax planning strategies before the end of the year.
Much of the media attention recently has been placed on President Obama’s American Jobs Act, which was proposed in early September, 2011. President Barack Obama proposed a $447 billion package of tax cuts and spending initiatives to spur economic growth. The propositions in the Act will now be debated and voted upon by Congress in a process that could take months.
That doesn’t mean that small business owners are left out in the cold. There are many existing tax incentives that can still be implemented by small businesses for 2011. Taking advantage of these measures can improve cash flow immediately while stimulating the economy at the same time.
Below are some strategies that might make sense for business owners to implement for 2011.
Section 179 and Bonus Depreciation – Many of the tax incentives that have arisen in the last few years were specifically adopted to stimulate spending in the economy. Such is the case with Section 179 and bonus depreciation. The idea is that businesses accelerate their spending on qualified assets that are otherwise needed to run the business. Instead of waiting to make capital purchases in the future, Congress is stimulating the business owner to buy these assets now.
Both the ‘Tax Relief Act of 2010’ as well as the ‘Jobs Act of 2010’ that passed in late 2010 affected Section 179 in a positive way.
For 2011, the Section 179 Deduction limit increased to $500,000. The total amount of equipment that can be purchased increased to $2 million. This includes most new and used capital equipment, and also includes software.
The “Bonus Depreciation” increased to 100% on qualified assets. However, this can be taken on new equipment only.
When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation – unless the business has no taxable profit in 2011.
Research & Development Credit – The R&D credit isn’t just for white lab coat scientists. Manufacturers, architects, builders and others can incur qualified R&D costs. The measurement that qualifies activities for the credit isn’t the use of test tubes and beakers; it is the actual process of experimentation that drives the qualification.
Many businesses have been forced to make significant changes to their product offerings, operations, and use of technology to deal with an ever-changing economic landscape. Preparing for such changes often requires the use of processes that may allow business owners to benefit from research and development (R&D) credits. These credits, which for many years were thought to be hard to obtain, have proven to become very valuable to a business.
Cost Segregation – Cost segregation is an IRS approved method of re-classifying components and improvements of commercial buildings from real property to personal property. This process allows the assets to be depreciated on a 5, 7, or 15-year schedule instead of the traditional 27.5 or 39-year depreciation schedule of real property. Thus, business owners’ current taxable income will be greatly reduced and their cash flow will increase.
In addition, much of the property that has been reclassified as personal property can be eligible for the bonus depreciation described above. If a business or its owners have constructed or purchased real estate in the last couple of years (or are contemplating doing so), they should consider cost segregation in their overall tax planning.
Interest Charged Domestic International Sales Corporation – If a business has foreign sales, the owners should consider an Interest Charged Domestic International Sales Corporation (IC-DISC). IC-DISCs are domestic corporations formed for the purpose of providing limited incentives to small exporters of U.S. products and certain services. The use of an IC-DISC may allow a business (or its owners) to substantially reduce the tax rate it pays relating to the net income derived from these sales.
Domestic Production Activities Deduction – If applicable, business owners should make sure they are utilizing and maximizing the Domestic Production Activities Deduction (DPAD). The DPAD is a special permanent deduction for businesses that perform qualified work in the United States and have manufacturing or production taxable income.
A business can optimize this deduction by ensuring that their accounting systems can account for the measured activities of incentive correctly. The DPAD is generally 9% of the smaller of a) the Company’s qualified production activities income or b) the Company’s taxable income. Generally, the DPAD cannot be more than 50% of the Form W-2 wages the Company paid to its employees (including Form W-2 wages allocated to a shareholder on their Schedule K-1).
In summary, there are many great tax planning strategies that can be implemented immediately, leading to increased cash flow for the business owner. Of course, all of these strategies have required qualifications in order to be utilized, and careful consideration must be made by the business owner in determining how these planning ideas fit into their overall tax planning strategy. These strategies should be thoroughly discussed with a qualified tax planner before implementation.Written by: Steve Arman TGG Accounting