New Year’s Day may be a great time to start a new diet and set fresh goals for personal growth, but it’s a little late for reflection and goal setting in the business world, especially concerning tax planning. And, in this economy and election year, planning has never been more important.
“Business owners and shareholders should be looking no later than November at how they think their year will unfold from an income tax perspective,” says Robin Bell, co-leader of the tax practice at Brown Smith Wallace LLC. “It’s important to be proactive. Ask yourself questions and engage in tax-related and financial-planning discussions with your team of advisers before year-end.”
Smart Business spoke to Bell about tax mitigation tools and planning techniques so business owners are aware of opportunities to minimize their tax consequences.
What are the opportunities in research and development?
Evaluate your research and development to determine if your company is eligible for the Research and Development Tax Credit.
The credit is based on a percentage of total, eligible expenditures, which includes wages, subcontractors/hired professionals, the cost of trial and error studies, and costs incurred during product development. The amount of credit depends on the specific business type and the amount of qualifying expenditures. If you have not determined previously that you qualify for the credit, you are eligible to amend prior ‘open’ year returns.
If you have taken the R&D credit in the past, it’s a good idea to re-evaluate your calculations and determine whether there is an opportunity to increase your benefit. This credit opportunity has cash flow impact.
How can efforts to improve energy efficiency pay off?
The Energy Efficiency Deduction rewards companies, large and small, that have built a new facility or renovated an existing building between Jan. 1, 2006, and Dec. 31, 2008. The facility must be in service by the end of this year. The new building or renovation must increase energy efficiency by 50 percent. This can include heating and cooling systems, water heaters, and interior lighting. If you meet the 50 percent energy-efficiency requirement, you may deduct up to $1.80 per square foot. The minimum deduction for energy efforts (that qualify) is $0.60 per square foot. Certification is required to qualify for an energy-efficiency deduction. Keep this deduction in mind and ask contractors and other professionals to document the energy-efficiency level of items that possibly qualify. Some contractors offer certification as a part of their building services.
What opportunities can businesses that produce and sell domestically realize?
If your company produces goods, constructs property, develops software, or produces electricity or gas, you may qualify for a Domestic Production Activities Deduction. This deduction is available to companies that have taxable income. The past few years, businesses could deduct 3 percent of ‘qualified production activities income.’ For years 2007 through 2009, the percentage increases to 6 percent. Depending on what happens after the election, that deduction is scheduled to increase to 9 percent for 2010 and beyond. Increasing deduction percentages could make calculating ‘qualified production activities income’ worth your time and effort.
Have tax benefits improved or changed for businesses that export goods?
If you export a minimum of $1 million in goods each year, you should think about a tax-advantaged Interest Charge-Domestic International Sales Corporation (IC-DISC). Here’s how this benefit works: If ‘Company A’ realizes $1 million taxable net income on exported goods, it would normally pay a 35 percent tax on that $1 million. By setting up an IC-DISC, Company A can pay a commission to the IC-DISC, with certain limitations. The commission income to the IC-DISC is then paid out of the entity as a qualifying dividend and taxed at 15 percent to the stockholders of the IC-DISC. Depending on the company’s export scenario, this arrangement can significantly mitigate tax consequences. This is one of the last tax advantages specifically available for exporters and could likely suffer if the qualifying dividend rate of 15 percent changes after the presidential election.
What if you have obsolete inventory?
If you have obsolete inventory that is taking up costly warehouse space, you should work to reduce or completely remove this inventory for tax purposes. Consider donating inventory, recycling it or discounting it to sell it quickly. For GAAP financial statements, the inventory would be written down or off when the value is less than cost or worthless. The deduction for tax purposes is different. You must dispose of the inventory.
What about capital expenditures?
The service has reinstated ‘bonus’ depreciation for 2008. For eligible property, you can deduct 50 percent of the eligible cost, with no limitation. These rules are very similar to prior ‘bonus depreciation’ rules.
Bottom line, take a proactive approach to tax planning and set aside time with your adviser well before year-end to discuss potential tax reduction opportunities. There are opportunities available today that can provide relief to growing businesses. You just need to know what business activities may result in tax benefits.
ROBIN BELL is co-leader of the tax practice at Brown Smith Wallace LLC. Reach her at (314) 983-1217 or RBell@bswllc.com.