Business Tax Planning Ideas (After the Fact)

By Michael A. O'Shea, CPA (Jan, 2010)

When the ball dropped in Times Square on New Year's Eve ushering in the year 2010, some may have thought they dropped the ball on the chance to reduce their 2009 Federal income tax liability. For calendar year taxpayers, most tax planning strategies must have been implemented prior to the end of the year in order to realize the benefits in 2009. However, there are still some opportunities available to accelerate tax deductions back into 2009 that can be utilized after the end of the year.

For businesses on the accrual method of accounting, a close analysis of accounts receivable could identify specific balances that are either totally or partially uncollectible. These balances, if written off of the books instead of merely increasing the reserve, can be deductible for tax purposes in 2009. It's important to note that the analysis should be based upon an assessment of collectibility as of the end of the year.

A review of fixed asset additions can also produce significant tax savings due to favorable expensing provisions available in 2009. Under Section 179, a taxpayer can elect to write-off up to $250,000 of the cost of tangible fixed assets and prepackaged software placed in service in 2009. However, the Section 179 expensing amount for 2009 is reduced dollar-for-dollar once fixed asset additions for the year exceed $800,000.

If expensing under Section 179 is not available, taxpayers can still claim the first-year bonus depreciation allowance in 2009 of 50% of the cost of most new (not used) fixed assets and prepackaged software. Bonus depreciation is also allowable for AMT purposes, so individuals that are subject to AMT can still realize a tax benefit. (It should be noted that New York State, like many other states, does not allow the Federal bonus depreciation, so taxpayers will need to make an adjustment on their New York State tax return to claim depreciation under the "normal" method.)

For tax deprecation purposes, an asset is considered placed in service when it is in a condition or state of readiness and available for a specially assigned function. As a result, an asset can be considered placed in service for tax purposes even though it has not yet been used in the business. The higher Section 179 expense limit of $250,000 and the 50% first-year bonus depreciation are both currently set to expire at the end of the 2009 tax year. Therefore, it may also be worthwhile to review your equipment additions to determine if the placed in service date can be accelerated into 2009.

A cost segregation study could also be something to consider, especially if your business constructed a new facility or made major renovations in 2009. Cost segregation studies are in-depth, engineering based reviews of the costs of a construction project to determine, for tax purposes, the proper depreciable lives for each segment of the project.

The benefits of a cost segregation study come from identifying costs that are eligible to be reclassified from a structural component of the building (depreciable over 39 years if nonresidential property) to another class of property that is depreciable over a shorter time period. Along with shortening the lives, these assets could also be eligible for Section 179 expensing and 50% first-year bonus depreciation in 2009. (Section 179 and bonus depreciation is not allowed on nonresidential real property.)

The accounting methods being used for tax purposes by a business can also be reviewed after year end and changed retroactively to 2009 under IRS rules allowing automatic changes to certain methods of accounting. For example, a business could be eligible for an automatic change to the cash method of accounting from the accrual method. If your business qualifies, the change to the cash method of accounting could provide the best opportunity to postpone taxable income and accelerate deductions.

Other automatic accounting method changes that may be available include the accounting methods being used by a business for major items such as inventory (e.g. changes to LIFO method and Section 263A uniform capitalization), depreciation (e.g. changes from improper to proper depreciation methods or lives, write-off of previously disposed assets), and accruals (e.g. medical benefits, real property taxes and income taxes).

A simplified employee pension plan, or SEP, is an easy to administer, low cost version of an employer-funded retirement plan. An employer contributes a percentage of compensation to each employee's Individual Retirement Account (IRA). Once funded, the employee owns the IRA.

Unlike defined benefit and defined contribution plans, which must be established prior to the end of the employer's tax year, a SEP may be established up to the due date of the employer's tax return, including extensions. The ability to establish and fund SEPs after year-end make them a unique tax planning opportunity and one of a limited number that can be implemented after the ball drops!

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