Tax planning Featured

7:00pm EDT November 25, 2008

No one knows exactly what the tax landscape will look like in 2009. After a presidential election, a mortgage crisis, the downfall of several major financial institutions and a government bailout, the one thing we can be sure of is change.

The best tax planning advice possible for businesses and individuals is to take advantage of opportunities that exist today. It is always important to talk to your accountant prior to the end of a year to ensure there are no surprises come April 15 and that your company is positioned to fully benefit from the tax advantages available.

“Companies looking to make capital investments in 2009 should consider accelerating those purchases, assuming it makes good business sense, to take advantage of write-off opportunities,” says Clifford Sussman, CPA, director in the entrepreneurial services group at SS&G Financial Services, Inc.

Likewise, businesses that are in the midst of a buy-sell process should aim to wrap up dealings by year-end to benefit from the current capital gains tax rate and avoid a potential increase from the new administration.

Smart Business spoke with Sussman about tax opportunities for businesses and individuals and why now is the time to exercise one’s right to various deductions.

What legislation passed in 2008 will affect individual and business tax planning?

In early 2008, the Economic Stimulus Act gained public attention because of rebates granted to taxpayers. Meanwhile, this legislation afforded businesses enhanced expensing capabilities with respect to capital expenditures. The Section 179 deduction for qualifying fixed assets, placed in service in 2008, was increased from $128,000 to $250,000. The phaseout of the deduction was also increased from $400,000 to $800,000. The incentive was designed to encourage business owners to invest in their companies. Over and above the Section 179 deduction, business owners may qualify for an accelerated bonus first-year depreciation on qualified depreciable property. The bonus depreciation provides for 50 percent depreciation during the first year on qualifying assets and may include software and qualified leasehold improvements. Aside from tax opportunities created by the Economic Stimulus Act, the Housing Assistance Tax Act provided certain first-time homeowners a one-year credit of up to $7,500 for purchasing a house between April 9, 2008, and June 30, 2009.

How does the bailout affect tax planning?

In particular, the bailout package extended available research and development tax credits to businesses. On an individual note, the bailout legislation increased the alternative minimum tax (AMT) patch from $45,000 to $69,950 for joint filers. The purpose is to alleviate the burdensome tax from the middle class. An accountant can better advise how the R&D credit and AMT patch affect tax liability for individuals and businesses.

Why should businesses act now when it comes to buying or selling a business?

With a possible increase in capital gains legislation — some say up to 10 percent — businesses that are in the process of buy/sell transactions or are considering capital investments should work to complete those deals before the close of fiscal 2008. We can count on established capital gains tax rates today. But next year, there are no guarantees as to what the rates will be.

What should investors do to convert market losses into tax advantages?

Individual investors should sit down with their financial planners and discuss the current market and the performance of stocks and mutual funds in their portfolios. Based on that advice, it may be a good idea to consider selling nonperformers before year-end to realize the losses and tax benefits that come with them. Married individuals filing jointly can deduct up to $3,000 a year for capital losses. Harvest capital losses this month, before the calendar year turns.

What conversations should business owners have with lenders as they plan for 2009?

Business owners should be proactive and initiate discussions with lenders regarding debt. While this is more of a business strategy than a tax planning remark, in this economy, business owners should keep open lines of communication with lenders to ensure they are meeting the lenders’ requirements and really understand what their lenders are looking for. Review loan covenants and discuss any implications that might deter the business from meeting those requirements. With the state of the credit markets, these discussions are best not left on the back burner until 2009. Businesses should be open, ask questions and make sure lenders understand their market position and growth goals.

Will any additional tax benefits be available?

Individuals 70.5 years of age and older can donate up to $100,000 of their IRA to charitable organizations in 2008 and 2009 without recognizing reportable income and without taking a charitable deduction. This law ended in 2007, but was reinstituted through the Emergency Economic Stabilization Act of 2008. The extension of this provision will allow for additional tax and estate planning opportunities through 2009. As a result, individuals who do not need to take distributions from their IRAs and prefer to avoid tax on the minimum required distributions may again donate up to $100,000 in 2008 and 2009 with no reportable income and no deduction.

CLIFFORD SUSSMAN, CPA, is a director in the entrepreneurial services group at SS&G Financial Services, Inc. (www.SSandG.com). Reach him at (800) 869-1834 or CSussman@SSandG.com.