The end of 2008 is happening upon us faster than we think. With the year drawing to a close, now is an ideal time
to review your tax situation and evaluate strategies that may help minimize your tax bill. Once December 31 passes,
your 2008 tax bill is essentially set. Taking certain steps before then, however, can make a difference.
As is the case year after year, favorable changes to the tax laws made in 2008 are also accompanied by unfavorable
modifications. This year end, of course, our unprecedented financial crisis looms large. This crisis generates tax
loss situations that we may not have faced in recent years, as well as a more urgent need to maximize current income
that involves taking steps to minimize tax payments whenever possible.
TRADITIONAL TAX STRATEGIES
Year-end tax planning tips typically fall into two general groups: (1) the traditional strategies that have proven
themselves useful year after year, and (2) new opportunities and pitfalls that have arisen from recent changes to the
tax laws.
Tried and true tax planning techniques can help virtually every taxpayer save money; some, of course, more than others.
How much you can save depends on your individual circumstances, but examination of the following general areas is worth
a look --in addition to considering the tax impact of any special circumstances in which you might find yourself this year.
Income shifting
One of the most fundamental year-end tax planning techniques involves accelerating deductible expenses in 2008 and
deferring income, if economically feasible, into 2008. By delaying taxable income you defer taxes. Delaying taxable
income may also prevent you from losing lucrative tax breaks that can be reduced or eliminated altogether as your
income level rises and propels you into a higher tax bracket.
With only a few months left until the end of the year, you can probably anticipate with reasonable certainty what
income and deductions you will be reporting on your 2008 tax return. You may also be able to predict with relative
accuracy what your income and expenses for the first few months of 2009 will include. The ability to gauge your income
and expenses for 2008 and into 2009 provides a golden opportunity to shift income or expenses into one year or the
other depending on what will save you the most overall taxes.
Shifting income, however, is not always a matter of simply delaying receipt of funds. Tax rules may require you to
recognize certain types of income when you have earned the right to receive it, even if you arrange for its delayed
payment. This office can help you recognize and navigate the differences.
Deduction management
Essential year-end tax planning requires determining whether you will take the standard deduction or whether you
will itemize your deductions. Consider "bunching" deductible expenses into one or the other year depending upon whether
the standard deduction may be taken in one year or whether the adjusted gross income limits for medical (7.5 percent) or
miscellaneous itemized deductions (2 percent) may be more easily met.
Even if you know you will itemize deductions, accelerating or deferring them is often a question of determining your probable
tax bracket for year end and the next year to maximize their after tax value. Sometimes planning is as simple as paying your
state estimated tax or real estate taxes in one year or the other; at other times, it's a question of making certain you
gather the right proof and follow the proper steps in time to be entitled to a deduction in one year or the other. Again,
this office can help
Portfolio timing
The end of the year is the right time to examine your investments (winners and losers over the course of the year)
to take the steps necessary to minimize your capital gains income and maximize the benefit of any capital losses. Especially
this year, when the stock market took its roller-coaster ride, gathering your portfolio's records for the entire year can
make a difference in not only what you might buy or sell in November and December but what estimated tax you will need to
pay (or not pay) for the fourth quarter of 2008.
Long-term capital losses can be used to fully offset long-term capital gains. Losses taken in excess of gains can also be
used to offset up to $3,000 in ordinary income (or $1,500 for a married couple filing separately). The strategy for short-term
gains and losses follows a similar game plan, although coordinating the two sometimes takes special care. Unlike excess
business losses that can be carried back two years to net an immediate refund in many cases, an individual's net capital
losses unfortunately can only be carried forward.
In calculating gains or loss for purposes of balancing your gains and losses at year end, remember that, for tax purposes,
it's not how much your stocks have gone down for the year but rather have much gain or loss you've realized since purchasing
them. For example, you still may owe capital gains tax on stock acquired in 2001 at $15/share even though it may have dropped
$20 in 2008 from a high of $65 to $45 when you sold it. You still have capital gain of $30/share on the sale
Retirement planning
Year-end planning for 2008 also involves maximizing annual contributions to your retirement plan accounts, since one
year's limit cannot be added to the next year's if not taken in time. While contributions to IRAs may be applied retroactively
if made before the filing deadline, an individual's elective deferral contribution made as an employee to a qualified plan must
be made before the end of the calendar year.
Maximizing contributions to your retirement plan (or plans) before year end also allows you to reduce your adjusted
gross income in direct proportion to those contributions. This in turn can give you the benefit of increasing the
deductibility of medical and other deductions subject to adjusted gross income floors.
As many 401(k) plan account owners have realized in 2008, managing a tax-deferred retirement account is not a "set it
and forget it" proposition. Although sheltered from tax, a 401(k) or other defined contribution plan also requires
careful management of the performance of those investments and re-allocation of assets whenever appropriate. Unfortunately,
losses on any 401(k) plan are not tax deductible; nor can they offset capital gains in non-tax sheltered accounts
Gift-giving
Slow and steady estate planning can yield dramatic results. Nowhere is that more apparent than devising an annual gift
giving plan to family members. Before year-end 2008, you can transfer up to $12,000 per person, per year, without
paying gift tax on the amounts transferred. Married couples can gift $24,000 per person by "splitting" their gifts.
In 2009, the annual exclusion rises to $13,000 ($26,000 for couples). This strategy not only avoids the possibility
of paying a hefty estate tax later, but it removes earnings from those gifts from your taxable income bracket into
that of the lower-bracket gift recipient.
NEW OPPORTUNITIES
Tax law changes constantly, and therefore so must individual tax planning. Tax year 2008 is no exception. While fundamental
techniques should not be overlooked, attention to tax legislation is equally important for most taxpayers. In 2008, Congress
passed a host of provisions to encourage consumers to jumpstart the economy by having more money in their pockets to spend.
In addition to the Economic Stimulus checks that were mailed out -for the most part- before this past September, tax
legislation in 2008 renewed or enhanced many benefits for individual taxpayers, some only for 2008 and others for both
2008 and 2009. Maximizing these tax benefits between 2008 and 2009, therefore, requires care in respecting a variety
of effective dates.
AMT patch. The Emergency Economic Stabilization Act of 2008 (EESA) included among its many provisions
a so-called alternative minimum tax(AMT) "patch." For the 2008 tax year, the AMT exemption amounts are raised to once
again insulate most middle-income taxpayers from the reach of the AMT. The patch is only for 2008. Hopes are high that
in 2009 Congress finally will face up to the need to find a permanent solution to the AMT and pass AMT reform rather
than yet another patch.
Income for forgiveness of mortgage indebtedness. Those principal-residence homeowners who have part
of their mortgage debt forgiven as part of a workout or foreclosure have been spared having to pay income tax on that
forgiven income. The Mortgage Indebtedness Relief Act of 2007 first applied this tax-free treatment to debt forgiveness
taking place from 2007 through 2009. The Emergency Economic Stabilization Act of 2008 extended it through 2012.
State and local sales tax deduction. Despite being one of the more popular tax breaks, the deduction
for state and local sales taxes is not permanent and had been set to expire at the end of 2007. Under this deduction,
taxpayers who itemize deductions the option of claiming either state and local income taxes or state and local general
sales taxes. The Emergency Economic Stabilization Act of 2008 extended this deduction for 2008 and 2009.
Tuition and fees deduction. Taxpayers may continue to deduct qualifying tuition and fees paid in 2008
that are required for the student's enrollment or attendance at a post-secondary school. The tuition and fees deduction
is an above-the-line write-off that, depending on adjusted gross income, can reduce taxable income by as much as $4,000.
They are frequently more valuable than taking a Hope or Lifetime learning education credit. Since this deduction also has
been extended for 2009, deciding in which tax year an upcoming tuition payment will be made can help maximize your overall
education deductions and credits.
Classroom deduction. Full-time teachers, instructors, counselors, and other educators can deduct up to
$250 worth of books, supplies, software, and other qualifying materials that they provide out of pocket expenses. The
deduction had been set to expire at the end of 2007, but Congress now has extended it for 2008 and 2009. Educators should
remember that this deduction is based on the calendar year rather than the school year.
Tax-free IRAs charitable contributions. The EESA extends through December 31, 2009, the opportunity for
certain taxpayers age 70 1/2 or older to make tax-free distributions from IRAs for charitable purposes. This contribution
can include any required minimum distribution that the taxpayer would be otherwise required to take.
Residential energy property. The high cost of energy is encouraging many people to make energy efficient
improvements to their homes. If you are contemplating installing energy-efficient doors and windows, water heaters or other
items in 2008, you may want to wait until 2009.
Several years ago, Congress created a residential tax credit for installing energy efficient doors and windows, water heaters
and similar items. The nonrefundable lifetime credit could reach as high as $500. However, the credit expired at the end of
2007. Surprisingly, the EESA reinstates the credit but not for 2008. The new law reinstates the credit for 2009 through 2016.
The EESA also expands the credit to include certain stoves that use renewable plant-derived fuel along with other enhancements;
so while the credit is not available for 2008, the expanded credit for 2009 may be worth waiting for.
Another incentive is available in 2008 for certain energy efficient improvements. Solar electric property, small wind energy
property and some heat pump property may qualify for the residential alternative energy tax credit. Additionally, you can use
the residential alternative energy credit against AMT liability in 2008.
Biking to work. Another new tax break that doesn't begin until 2009 is a new employer- provided transportation
fringe benefit. In addition to transit passes and van pooling, employers starting in 2009 can offer their employees up to $20/month
as a tax-free benefit if they commute to work by bicycle. To inaugurate this benefit starting in January, however, employers
must incorporate it into their written fringe benefit plan, a process that should start soon.
Vacation Home Conversions
Gain from the sale of a principal residence that is allocable to periods of "nonqualified use" can no longer be excluded from
the taxpayer's gain realized on its sale. A technique that has been used by many vacation home owners is to eventually convert
that second home into a principal residence before its sale and claim a full $250,000 principal residence exclusion ($500,000
for joint filers) on the gain. Due to a loophole closing provision in the 2008 Housing Assistance Tax Act, any conversion made
after December 31, 2008, cannot shelter the portion of that gain allocable to post-2008 appreciation.
Free Tax Projection
To see how the new tax laws affect you, visit Fast Tax Returns Online.
Their helpful and easy to use tax preparation software allows you to prepare a 2008 tax projection free of charge.
2008 Business Year-End Tax Planning
Tax planning for year-end 2008 presents unique opportunities and challenges for small business taxpayers to
reduce or defer federal income tax liability. While traditional planning techniques remain fundamentally
important considerations this year, new opportunities and pitfalls born from recent legislation and changes
in the tax laws in response to our current financial crisis provide planning variables unique to this year
end. This letter discusses important year-end tax planning strategies -- from the tried and true techniques
to new considerations for our economic situation -- that can operate to reduce the tax burden for your small
business.
BUSINESS STRUCTURE
The structure of your business determines how business income will be taxed. While C corporations are subject
to two levels of tax, income, losses, deductions, and credits of S-corps, partnerships and limited liability
companies (LLCs) are passed through to the owners and reported on their individual income tax returns. Plain-vanilla
sole proprietorships, too, have their place in tax planning, with a traditional Schedule C attached to Individual
Form 1040 for a business enterprise engaged in either full or part time sometimes the best choice.
Not only is the structure of the business important, but with sole-proprietorships and pass through entities,
the individual tax situation of their owners is a particularly significant factor in year-end tax planning.
In regular C corporations, year-end planning can mean deferring some of the profits by deferring dividends
into the next year.
ACCOUNTING METHODS
The accounting method used by your business is a factor that impacts year-end tax planning strategies. Your
accounting method is important to tax planning because it affects your ability to time and shift income and
deductions between 2008 and 2009. Whether your business operates on a cash or accrual basis will determine
when income must be recognized for tax purposes and when expenses are deductible.
Cash-basis business that anticipate being in the same or lower tax bracket in 2009 than 2008 because of the
economy can smooth out their taxable income by deferring income to 2009 and accelerating deductions this year.
To push income into 2009, cash-basis businesses can delay billing clients or customers (for example, wait until
mid-January) for services and products so that payment is not received until 2009. Alternatively, if you anticipate
your business's taxable income to be lower in 2008, you may want to accelerate income in 2008 and defer deductions
until next year.
For accrual basis taxpayers, the right to receive income, rather than actual receipt, determines the year of inclusion
in income. Expenses are deductible in the year in which all events have occurred to establish the liability of an amount
certain. Accrual method businesses might consider deferring income by delaying the shipment of products or provision of
services until the beginning of the 2009 tax year.
DEDUCTIONS
Deduction planning is an integral aspect of year-end business tax planning. There are many important deductions beyond
the Code Sec. 162 deduction for ordinary and necessary business expenses that may benefit many small businesses by lowering
their tax liability.
Bonus depreciation. The Economic Stimulus Act of 2008 provided 50 percent bonus depreciation of the adjusted basis of
qualifying property. This accelerates an additional 50 percent of depreciation that would be allowed on business property
into the first year in which it is acquired. However, the property generally must be purchased and placed in service during
calendar year 2008 to qualify. In 2009, the tax law reverts to its regular depreciation allowances.
Enhanced expensing. Most small businesses are eligible for the Code Section 179 deduction, a generous and lucrative tax break
that enables businesses (especially those that are capital intensive) to immediately deduct equipment purchases that otherwise
would have to be depreciated over a number of years. There are limits to this deduction, however. Looking at the tax law as it
now exists, the limits for 2008 are far more generous than for 2009.
The Economic Stimulus Act of 2008 almost doubled the amount of deductible Code Sec. 179 expensing for tax years beginning in
2008 to $250,000 and increased the threshold for reducing the deduction to $800,000. After 2008, the expensing limits revert
to prior inflation-adjusted caps, anticipated for 2009 to be $133,000 for the deduction limit and $530,000 for the start of the
phase-out. Of course, another economic stimulus package may be passed in 2009 to keep these amounts higher, but businesses likely
to make purchases of qualifying property soon should consider at least maximizing amounts for 2008.
Domestic production deduction. The Code Sec. 199 deduction for qualifying domestic production activities benefits a broad array
of businesses, including construction, engineering, architecture, and farming. For 2008 and again for 2009, the deduction generally
equals six percent of the lesser of (1) qualified production activities income for the tax year, or (2) taxable income that does
not take the deduction into account for the tax year. However, the deduction cannot exceed 50 percent of W-2 wages allocable to
domestic gross receipts. The deduction applies for both regular and alternative minimum tax (AMT) liability. Starting in 2010, the
deduction jumps to nine percent. Maximizing this deduction over all three years of the 2008-2010 period first requires a run-through
on various computations and allocations.
Compensation and bonus deductions. If your business operates a qualified retirement plan, consider maximizing 2008 contributions
to qualified retirement plans since the contributions are tax deductible in the year that they are made to plan participants.
For employees with 401(k) balances especially hard hit by the recent downturn in the markets, these contributions will take on
an added luster this year.
Year-end bonuses also require care. Paying year-end bonuses in December or January can create a significant compensation-based
business deduction. For example, businesses can deduct in 2008 a bonus paid in 2009, as long as the obligation is paid within
two and one-half months of the close of 2008. Accrual businesses can take a deduction in 2008 for bonuses not actually paid to
employees until 2009 as long as (1) the employee does not own more than 50 percent in value of the business's stock, (2) the
bonus is properly accrued on the company's books before the end of 2008, and the bonus is paid within two and one-half months
of 2009.
LOSS DEDUCTIONS
Business losses sustained during the tax year generally can be deducted. For pass through entities such as S corps,
LLCs and partnerships, losses will be passed through and deducted on the owners' personal income tax returns. Loss
deductions can be taken for:
Bad debts;
Casualty and theft losses;
Capital losses;
Losses on the sale of business assets; and
Net operating losses.
Net operating losses, in particular, will be something that many more businesses unfortunately will need to become
familiar with during the present economic downturn. A trade or business has a net operating loss (NOL) when its allowable
deductions exceed its gross income for the tax year. Generally, an NOL can be carried back 2 years and carried forward 20
years--the carryover period (businesses in specially designated disaster zones may be entitled to a 5 year carryback).
The first year of the carryover period is the year after the NOL arises; thus, it becomes important to determine the
correct year in which gross income is recognized and deductions are taken. The carryback period is especially valuable
since the carryback can immediately reduce any taxable income for those prior two years, entitling the business to an
immediate cash tax refund upon filing an amended return.
EXTENDED INCENTIVES
Thanks to the Emergency Economic Rehabilitation Act of 2008, businesses no longer need to guess whether certain tax
breaks would be extended to apply for 2008 and beyond. They were extended, leaving businesses with the pleasant decision
--in connection with these incentives-- of how to plan to maximize their use over 2008 and 2009.
Among the most significant changes made by the new law are a revised research tax credit, extension of accelerated
depreciation for leasehold and restaurant improvements, and enhanced deductions for certain charitable contributions
of food, books and computer equipment. Especially notable for small businesses, an "alternative simplified credit"
has not only been extended but raised to a level at which smaller businesses have a greater tax incentive to spend
money on research. Also good for both the environment and a lower bottom line tax, the new law has extended the energy
deduction for energy efficient commercial buildings through 2013. Planning to take full advantage of these changes
should start now.
AMT PLANNING
The alternative minimum tax (AMT) is not a challenge reserved solely for individual taxpayers; it may affect your
small business as well. While Congress again enacted another round of temporary AMT relief for individual taxpayers,
retroactive to the start of 2008, in the Emergency Economic Stabilization Act, more comprehensive reform must wait
until 2009.
The 2008 AMT exemption amount for corporations is $40,000, subject to an income-based phase-out starting at $150,000.
The AMT income tax rate for businesses is a flat 20 percent rate. Small corporations that meet an annual average
gross receipts test (GRT) under Code Sec. 55(e) are exempt from the AMT. To qualify under the GRT, a corporation's
average annual gross receipts for all three tax year periods beginning after 1993 and ending before the current year
can not exceed $7.5 million. Computing the AMT is complicated and time-consuming, both for the business or for the
business owner.
NOW'S THE TIME TO ACT
Most tax laws work based on the calendar year. Once December 31 passes, the opportunities to change your business's
fate as to what it must pay in income taxes for the year significantly diminish.
