Business tax planning starts now

Business Tax Planning Starts Now
Most major indicators show the national economy is in the early stages of recovery from a prolonged recession. Addressing tax-related business options now, and doing adequate planning with your tax advisor, offers many potential tax benefits and expanded opportunities.

Immediate Opportunities to Explore

Here are some specific strategies to consider that include taking advantage of recently introduced or revised tax deductions and credits.
Expanded Net Operating Loss (NOL) tax relief for business—Recent legislation, the American Recovery and Reinvestment Act of 2009 (ARRA), expanded the NOL carryback period from two to five years for smaller businesses. In November 2009, the Worker, Homeownership, Business Act became law and expanded that carryback provision to apply to larger businesses as well. Essentially, this enables your businesses to deduct recent losses from taxes paid in previous profitable years and generate significant tax refunds. (For more information, see “Tax Implications,” in this issue.)
Section 179 Expense Elections still attractive—While the Section 179 (Internal Revenue Code Section 179) expense election limit is lower for 2010 than in recent years, it still offers considerable tax savings opportunities for companies planning to purchase new equipment.
Section 179 allows a company to expense the first $134,000 of furniture and equipment placed in service by December 31, 2010. This deduction is reduced by one dollar for each dollar spent above $530,000. For more information, consult related IRS instructions.
Reduced time frame for S Corporation Built-in Gains Tax—The time period for built-in gains tax that applies to C Corporations converting to S Corporations has been reduced from 10 years to seven years. If you have considered converting your C Corporation to an S Corporation, now may be time to reexamine that option.
Increased Domestic Production Activities deduction—For 2010, the Domestic Production Activities deduction increases to 9%, up from 6% for 2009. The deduction is available to clothing, goods and food manufacturers, as well as farmers and some other businesses. The deduction is based on:
taxable income derived from qualified production activities, or
taxable income for the year (not counting the deduction).
The deduction cannot exceed 50% of W-2 wages allocable to domestic production gross receipts. For more information, consult related IRS resources.
Expanded target group for Work Opportunity Tax Credit—Workforce expansion follows early phases of economic recovery, and the Work Opportunity Tax Credit (WOTC) provides an opportunity to attain tax credits while also hiring needed employees.
As part of the ARRA, the WOTC was expanded to include unemployed veterans and disconnected youth among target groups. The credit covers targeted workers hired after Dec. 31, 2006, and before Sept. 1, 2011. The WOTC equates to about 40% of the first $6,000 paid in wages, with a credit limit, per employee, of $2,400. Consult related IRS resources for more information.
Questions to Consider

Are you aware of various “green” tax credits and benefits available? During the past several years, the federal government has introduced a variety of tax credits and incentives to promote greater energy efficiency and less reliance upon fossil fuels. Some of those credits apply to renovations of existing buildings or construction of new facilities, as well as the installation of equipment for generating alternative fuel, such as wind or solar power. Credits exist as well for purchases of hybrid vehicles or vehicles that use alternative fuels. The U.S. Department of Energy lists various credits.
Additionally, ARRA provisions include tax benefits to encourage greater use of public transportation, car-pooling, and bicycle transportation by company employees. Employers may offer mass transit passes to employees for a value up to $230 per month, without it being considered a taxable employee benefit. For car-pooling and vanpooling services, that same $230 per month credit applies, if the vehicle seats at least six people, and is used 80% of time or more for employee transportation. At least 50% of the seating capacity must be occupied for employee trips. Bicycle commuters are also eligible for a $20 per month nontaxable fringe benefit. For more information, consult this related IRS article. State and local governments may offer additional incentives too, so you might be missing opportunities with the ever expanding “green” tax benefits available, so plan to discuss with your CPA early in 2010.

Are you effectively monitoring inventory? Are the accounting methods for recording and assigning value to inventory appropriate, accurate, and consistent? Also, are you carrying inventory that is damaged or obsolete? Writing off that damaged or obsolete inventory yields tax savings.
Are you addressing bad debts? How much money is owed to your company? Ensure that you are making appropriate efforts to collect on overdue accounts. If you’re unable to collect your receivables, write off such debt as uncollectible. The IRS generally allows you to deduct such debts, provided you have documentation (telephone logs, letters, correspondence, contracts with collection agencies, etc.) to prove you tried to collect those obligations. Recordkeeping is key in substantiating bad debt deductions.
Will you need to focus on hiring and retaining employees? The need to hire more workers follows the early phases of economic recovery. Federal and state credits may help you in meeting staffing needs.
Now is a good time, too, to either implement or enhance a retirement plan as a means of attracting and retaining employees. Various qualified pension plans allow employees to defer some compensation, with a relatively small match by the employer. Existing plans can be made more appealing by either raising the employer matching percentage or the percentage of earnings an employee may contribute. Eligibility requirements can be correspondingly adjusted to require longer vesting periods. Consult a benefits advisor to determine which plan may work best for your business.

How do state and local tax laws affect your business? Tax regulations vary immensely among states and localities. Where you have a physical business presence or sell products or services presents tax questions. Where a company logo or other intangibles are used may be the basis for tax nexus, too. Being aware of state and local tax laws enables you to gauge the cost of conducting business in various localities. It also helps you recognize various incentives, credits and other opportunities. State tax laws are becoming increasingly complex. Have you had a “state and local tax check up” with your state tax advisor?
Have you thought that Research & Development Credits (R&D) are just for big businesses? R&D credits aren’t just for new product development efforts launched by large corporations; they may also apply to small business activities pertaining to a new function, performance, reliability or quality of a business component. Check them out with your tax professional to see if your company qualifies for a R&D credit. There are some complications to the law in this area so it is paramount to discuss the topic with a qualified tax or financial professional.
As you know, each year brings many complicated tax law changes and related business opportunities. Schedule a time early in the year to consult with your tax or financial advisor about the best strategies for this year and beyond.