News

Dear Client:

As 2006 draws to a close, it is time to plan ahead for 2007. In this letter, we’ll examine how recent federal tax legislation may impact your planning. Because every business is unique, we’ll look at the “big picture” in this letter. Remember, our office can help you put together a tax strategy that maximizes every available tax incentive and sets in motion a fluid and dynamic strategy that will deliver results.

First, let’s take a look at some steps you can take to possibly generate tax savings:

Employee benefits. If you’ve been thinking about establishing an employee benefit plan or expanding an existing plan, now is a good time to set your plans into motion. Establishing employee benefit plans, qualified retirement plans and medical or health reimbursement plans can provide tax savings to both you and your employees. Health savings accounts (HSAs) are one popular option. These accounts allow employees and their employers to contribute to tax-free income-producing accounts when the employee has coverage under a High Deductible Health Plan (HDHP) only.

Expensing. Are you taking full advantage of the Code Sec. 179 small business expensing deduction? The Code Sec. 179 deduction for capital purchases that would otherwise have to be depreciated stands at $108,000 for 2006 and is projected to rise to $112,000 in 2007 when adjusted for inflation. The Gulf Opportunity Zone Act of 2005 allows an additional $100,000 of Code Sec. 179 small business expensing deduction for qualified GO Zone property acquired on or after August 28, 2005 and placed in service before December 31, 2007. When used strategically, the Code Sec. 179 expensing deduction can yield significant tax savings.

Bonus depreciation. Taxpayers meeting certain criteria can claim an additional 50% bonus depreciation allowance for Gulf Opportunity Zone business property that is place in service before 2008 (before 2009, for nonresidential real property and residential rental property).

Domestic production activities deduction. This tax break is surprisingly off the radar for many businesses and it shouldn’t be. The Code Sec. 199 domestic production activities deduction applies not only to traditional manufacturers but to a varied group of taxpayers. It is extremely broad in scope, and your business activity may qualify for it even if it is outside traditional manufacturing. The Code Sec. 199 deduction amounts to a percentage of either taxable income derived from a qualified production activity or all taxable income, whichever is less. There are limits, and the rules can get complex. Don’t let the complexity of this valuable deduction scare you. Our office will examine your business activity, and if it qualifies for the deduction, you could realize some tax savings.

Hybrid vehicles. Have you considered investing in hybrid vehicles for your business? Not only would you realize some fuel savings, you also may be eligible for a federal tax break. The tax incentives differ depending on the type of vehicle you purchase. If you are thinking of a hybrid or alternative fuel vehicle, give our office a call before you make a purchase. We can explain the tax savings in greater detail and help you get the biggest tax break.

Telephone tax refund. The telephone tax refund is a one-time payment available only on your 2006 federal income tax return. It is designed to refund previously collected long-distance federal excise taxes. For this purpose only, the 2006 income tax return is the income tax return for calendar year 2006 or for the first taxable year including December 31, 2006. It is available to anyone who paid long-distance taxes on landline, cell phone or Voice over Internet Protocol (VoIP) service.

Work Opportunity Tax Credit. Employers are allowed to claim the Work Opportunity Tax Credit (WOTC) if they hire individuals from certain target groups who are considered to face barriers to employment. The credit generally equals 40 percent of the first $6,000 of wages paid to the employee in the first year (i.e., the maximum credit is $2,400). Also, a new target group is created under the WOTC called Hurricane Katrina employees. This target group is comprised of individuals who, prior to the hurricane, lived in an area that is now eligible for individual and public assistance under the Stafford Act. Employers located in an area that is eligible for such assistance may claim the WOTC with respect to Hurricane Katrina employees hired in 2005 and 2006.

These are just a sample of steps you can take to implement your tax planning strategy. Next, we’ll highlight some of the important tax provisions in three tax laws that Congress passed this year: the Pension Protection Act (PPA), the Tax Increase Prevention and Reconciliation Act (TIPRA), and the Tax Relief and Health Care Act (TRHCA).

Pension Protection Act. Your business may offer a traditional pension plan. If it does, we encourage you to give our office a call. The reforms in the PPA that impact traditional pension plans are far too numerous and too complex to discuss in this letter. You need to know about them and be ready to implement them.

If you don’t offer a traditional pension plan but offer a 401(k) or similar arrangement, you still need to be aware of many important changes. Many of these changes are employee-friendly. Changes include permanent higher contributions for 401(k)s, IRAs and other savings vehicles. The new law also makes Roth 401(k)s permanent and enhances fiduciary protection for plans that offer automatic enrollment in 401(k)s and similar arrangements.

Tax Increase Prevention and Reconciliation Act. TIPRA is best known for extending the lower capital gains and dividend tax rate cuts. These had been scheduled to expire after 2008. They are now extended through the end of 2010.

Tax Relief and Health Care Act. This new law retroactively restores some popular expired tax cuts to the beginning of 2006; however, there is much more. The new law also enhances some important tax incentives, bolsters Health Savings Accounts, revises deadlines for certain excise taxes, extends some expiring energy credits, makes critical “technical corrections” to existing tax laws, and includes an impressive list of “miscellaneous” tax relief.

Go Zone bonus depreciation. The new law extends the placed-in-service deadline to December 31, 2010, for taking the 50 percent bonus depreciation deduction for certain GO Zone property placed -in-service within the following seven parishes: Calcasieu, Cameron, Orleans, Plaquemines, St. Bernard, St. Tammany, and Washington.

More than ever, the complexity of the Tax Code requires proactive planning. Don’t miss out on the opportunity to get the ball rolling on tax savings for 2007.

Sincerely yours,

Hannis T. Bourgeois, LLP