The last thing you want to do in these tough economic times is to pay Uncle Sam more than you owe. Congress passed last year a number of tax incentives that could help you cut your tax bill for 2008. These provisions cover everything from equipment purchases to energy improvements to new market development and recycling.
The Emergency Economic Stabilization Act of 2008 included $150 billion in tax incentives and makes almost 300 changes to the Internal Revenue Code. The majority of the taxpayer relief takes place immediately in 2008 and 2009. As a result, year-end tax planning takes on a special urgency this year to maximize these new tax breaks.
Here is a quick rundown of the major business benefits from legislation passed this year:
• If your business has less than $800,000 in depreciable property, Section 179 of the tax code now lets you deduct up to $250,000 (up from $125,000 last year) on purchases of new equipment. Then you can take bonus depreciation equal to 50% of the equipment’s value, all before regular depreciation kicks in. The only catch is that you have to acquire and start using the new gear before the end of 2008. Be careful with really big purchases. Companies with more than $800,000 in qualifying asset purchases are not eligible for the increased depreciation write-off in 2008. Eligible businesses include sole proprietorships, partnerships, and corporations.
• A special first-year depreciation allowance for business vehicles in 2008. For cars it is $10,960; for trucks and vans, it rises to $11,160. Both limits are $8,000 higher than the previous first-year depreciation limit. As a result, many businesses that had once thought it better to lease vehicles may now want to consider buying them. Also, consider buying a hybrid vehicle because the government allows some generous tax breaks for some models.
• Raised the standard mileage deduction rate to 58.5 ¢ a mile. The rate remains 50.5 ¢ per mile for driving during the first six months of 2008.
• The Code Sec. 179D deduction for energy efficient commercial buildings is extended through December 31, 2013.
• A 50% depreciation deduction for reuse and recycling property placed in service after August 31, 2008. This means that equipment and other personal property used in recovering fiber and recycling packaging qualifies for the special deduction.
• Exclusion for heavy vehicles with idling reduction units or advanced insulation. Idle reduction devices are designed to provide a vehicle those services (such as heat, air conditioning, or electricity) that would otherwise require the operation of the main drive engine while the vehicle is temporarily parked or remains stationary.
• Extension of the research and tax credit to amounts paid or incurred in 2008 and 2009. Recent changes also raise the percentage from 12% to 14% and makes some technical corrections.
• Be aware of special state rules. For example, in California, companies have to keep track of a long list of potentially costly changes, including accelerated estimated tax payments next year. This was passed by legislators in the attempt to combat the state’s massive budget shortfall. California has also gotten rid of energy credits and capped the business credits that can be claimed to 50% of a taxpayer’s liability before the credit.
• Companies have to consider what will be the tax implications of the new Obama administration. Do you believe that Obama will raise taxes on businesses? If you do, you may want to defer some tax deductions and accelerate income. This runs contrary to the advice traditionally given to taxpayers. But it could save you money in the long run. This is something you should definitely discuss with your accountant.
• Obama has also talked about raising capital gain taxes from 15 to 20% for some taxpayers. For small-business owners ready to sell their companies, it might make sense to complete a sale before higher taxes take a bigger bite out of the sale price. The downside is that companies are not selling for high multiples now.
• Generally, IRS regulations allow company losses to be deducted in the current year and carried back for up to two years to offset income. Be aware that this only applies to sole proprietorships. Unless the individual put in enough personal money or has a financial liability in the business, owners of an S-corporation, partnership or limited liability corporation cannot claim the loss.
Check with your accountant or tax preparation expert to make sure that you qualify for any of the above tax breaks. Be aware that some of these tax breaks are time sensitive. Where possible, use credits instead of just basic deductions. A credit reduces taxes dollar for dollar, making it more valuable than a deduction, which simply reduces taxable income.
