How to prepare your company for new tax changes
Recent economic conditions have ledto federal and state tax changesdesigned to provide tax breaks to companies as parts of stimulus packages. The changes range from simple oneslike increased mileage rates to complexrevisions regarding the expensing andcapitalization of property purchases.Whether they are simple or complex, onething is certain: the changes will change.
Because of this, Steven C. Hartstein,CPA, JD, a partner in the Tax Planning &Preparation Department of Skoda Minotti,advises companies to act quickly to takeadvantage of the tax breaks included inthe stimulus packages that hopefully willlead to an economic recovery.
“Allow the proper lead time to completeyour tax planning before the end of theyear, which isn’t that far off,” Hartsteinsays.
Smart Business spoke with Hartsteinabout the tax changes that will affectcompanies with this year’s tax returnsand how they can benefit from them nowand in the future.
Which federal tax changes will affect companies’ 2008 tax returns?
Congress passed several tax acts in 2008that affect companies. The mileage ratesincreased from 50.5 cents per mile effective Jan. 1 through June 30, 2008, to 58.5cents beginning July 1, 2008. This maychange again at some point, since oil prices have dropped precipitously recently. Itis something companies should keep theireyes on, as they should all tax changes.
A significant tax change involvesSection 179 of the Internal Revenue Code.IRC 179 allows taxpayers to elect todeduct the cost of certain types of property as an expense, rather than requiring theproperty to be capitalized and depreciated. In 2007, companies could expense$125,000 of their purchases, providingthey did not purchase more than $500,000worth of property. In 2008, that amount is$250,000, and the maximum annual qualifying property purchase amount is$800,000. That represents a substantialsavings for companies considering buyingproperty — but they have to acquire it by the end of this year to qualify. Just for therecord, that qualifying amount is scheduled to drop back to $125,000 in 2009 and2010, and down to $25,000 in 2011.
Congress did a second thing. Not onlydoes it allow companies to write off newpurchases, but it also provides a bonusdepreciation. That concept developedafter Sept. 11, 2001, when the governmentwas looking for ways to stimulate theeconomy. Congress provided a bonusdepreciation that allowed companies toaccelerate the depreciation allowed on anew purchase. The Economic StimulusAct, which passed in 2008, allows companies to deduct up to 50 percent of additional depreciation on qualifying property.
This means companies can actuallydeduct 60 percent of the total purchaseprice of most new tangible property aftertaking into account the bonus and normaldepreciation. In addition, if the companycan use the aforementioned Section 179,it may be able to deduct 80-90 percent ofthe new purchase. That is one ofCongress’ ways of stimulating the economy, by allowing companies to take amuch larger depreciation deduction onproperty purchases.
Are there any changes in Ohio law that willaffect companies?
There are a couple noteworthy changes.One applies to monthly sales tax returns.Now, they need to be filed online at OhioBusiness Gateway. Also, it is important torealize that, after 2008, Ohio will no longerhave personal property tax returns, andthe state is phasing out the franchise taxreturn. The state’s franchise tax return isnow 20 percent of the total tax liabilitythat would have been there under the oldfranchise tax rules. That is because threeyears ago the state replaced both the personal property tax and the franchise taxwith the Commercial Activity Tax (CAT),which has raised a great deal of revenuefor Ohio. So, beginning with the secondquarter of 2009, the CAT rises to its finaltax rate of .26 percent on all gross receiptsin excess of $1 million.
What happens to companies that are not prepared to deal with these new tax changes?
They will pay more taxes than they haveto, and they may miss out on certaindeductions and breaks that they areafforded. They should not have to doeither, if they prepare properly to takeadvantage of the breaks offered by thetax changes — and they should bepreparing every day of the year.
Should companies work with professionalfinancial advisers to help them account forthe new tax changes?
As state and federal tax codes becomemore and more complex, it is increasingly important for companies to stay current on the various tax laws. Companiescan utilize financial professionals’ knowledge and experience and let their ownstaff members work at running the company. The relationships that result savecompanies time, money and the aggravation of coping with the tax changes thatcan have adverse effects on their profits ifthey don’t stay current.
STEVEN C. HARTSTEIN, CPA, JD, is a partner in the Tax Planning & Preparation Department of Skoda Minotti. Reach him at(440) 449-6800 or firstname.lastname@example.org.