Accounting and Consulting

Tax changes for 2007 returns

By Erik Cassano

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It’s that time of year again — April 15 is just around the corner, and for businesses everywhere, that means tax season.

As your financial managers get set to file your company’s 2007 returns, Jim Bowen, a partner with Akron accounting and business advisory firm Bober, Markey, Fedorovich & Co., says there are tax law changes and expanded credits that you might want to keep in mind.

Among the changes is the expansion of the research and experimentation credit, which primarily affects businesses that perform a significant amount of research and development. In previous years, there were two methods for obtaining the credit, but a number of businesses were limited in their ability to use it.

“If your company had very high gross receipts or if you had trouble retracing records back to 1984 to ’88, you might find yourself very limited in your ability to use the R&E credit,” Bowen says. “Beginning in 2007, there is a new approach called the alternative simplified credit, and it basically eliminated those penalties.”

It’s a significant change because the credit is permanent and is a major tax-planning tool for companies that do research, such as automotive companies, chemical manufacturers, aerospace and defense companies, and information technology companies, among others.

“There should be an expansion of companies claiming this research credit because the rules have been eased,” he says.

Also new for ’07 returns are expanded rules for the work opportunity tax credit, which affects businesses that employ minimum-wage workers. The change was made by lawmakers in response to the Small Business Work Opportunity and Tax Act of 2007.

“This credit is another permanent tax benefit, and it’s paid on the first $6,000 of wages as a tax credit on corporate payroll taxes,” Bowen says. “Where it really becomes significant is that a lot of companies that are hiring these types of employees have high turnover. So they claim the credit on one employee, the position rolls over, they claim it on the next employee and so forth.”

To qualify for the credit, businesses must fall into certain targeted groups. For ’07 returns, those groups have been expanded.

“I would strongly suggest to companies to explore this credit because it is a fairly significant benefit,” he says.

A new accounting standard, called FIN-48, also goes into effect beginning in 2008. Although it doesn’t directly affect ’07 returns, Bowen says it will affect tax preparation this year.

FIN-48, the letters of which are an acronym for “financial interpretation,” is an accounting standard that will require businesses to itemize out their tax exposures in order to create transparency in a company’s financial statements.

“Companies are going to be required to itemize out their tax exposures to the extent that they’re taking positions that, on examination, are not going to be fully sustained,” Bowen says. “While I might not specifically have to say I’m taking this specific position in the state of Alabama, it would say that I have these state exposures described in a more general term.”

Bowen says that you need to start thinking now about what tax exposures you have and your historical filing positions as your company prepares to file 2007 taxes, which will be at risk for FIN-48 examination by the IRS.

“FIN-48 exposure must begin in 2008, so this is a fairly valuable item,” he says. “FIN-48 is one of the primary items affecting businesspeople and tax preparation people that doesn’t relate to the tax return itself.”

Tax prep for the rest of the year

You know already know that March and April are a time for tax preparation, but according to Jim Bowen, a partner with Bober, Markey, Fedorovich & Co., there are steps you can take the rest of the year to make sure tax season goes smoothly for your business.

First, recognize that tax laws are changing all the time, so keeping your company’s financial specialists abreast of the new and revised laws is a year-long process.

“In this field, it seems like thousands of new pages of legislation come out every year,” Bowen says. “New court cases also have the potential to change the interpretation of prior law. There really is no easy way to keep track of it all.”

Bowen says the best defense is to find a knowledgeable tax adviser who understands both the tax law and the unique challenges facing your business.

“You need to find yourself an adviser who understands the changing situation. But you also need to stay abreast of the changes, too. Make sure you are well-read from multiple sources. If you get information from the newspaper and other sources, you’ll gain a greater understanding of what you’re facing.”

Bowen says you should also make sure your financial managers are up to speed on any transactions your company is planning. The people who handle your money and taxes need to have a good grasp of any sales, acquisitions or other maneuvers that might have long-reaching financial ramifications.

“The best companies don’t wait when it comes to preparing themselves from a tax perspective,” he says. “Before you even enter a transaction, make sure your internal finance department or your external adviser knows the impending venture or new contract inside and out. It’s better to understand what is going on as it’s happening rather than have to revisit all the tax stuff in the end.”

HOW TO REACH: Bober, Markey, Fedorovich & Co., (330) 762-9785 or www.bobermarkey.com