News

Dear Client:

Tax planning for year end 2007 presents new opportunities and new challenges for small business taxpayers to reduce or defer federal income tax liability. While traditional planning techniques remain fundamentally important considerations this year, new opportunities born from recent legislation and changes in the tax laws provide for significant savings or deferral of taxes in 2007. This letter discusses important year end tax planning strategies - from the tried and true techniques to new opportunities that can help to reduce the tax burden for your small business.

Equipment expensing - Most small businesses are eligible for the Code Section 179 deduction, a generous and lucrative tax break that enables businesses to immediately deduct up to $125,000 in 2007 for equipment purchases that otherwise would have to be depreciated over a number of years.  In addition, the Gulf Opportunity Zone Act of 2005 allows an additional $100,000 of Code Sec. 179 expensing deduction for qualified Go Zone property placed in service by December 31, 2007.

To qualify for the deduction, equipment must be used more than 50 percent for business purposes and must be in use by December 31, 2007. The deduction applies to new and used equipment, as well as computer and software purchases.

Code Sec. 179 deduction is not allowed for small business taxpayers that do not have taxable income from any trade or business in the year in which the property is placed in service.  Also, the expensing deduction begins to phase-out by the amount by which qualifying property placed in service during the tax year exceeds the investment limitation, which is $500,000 for 2007. This means that, for 2007, the maximum amount that you can expense under Code Sec. 179 is reduced dollar-for-dollar for eligible property placed in service during the tax year in excess of $500,000.  For qualified Go Zone property, the phase-out levels are increased to $1,100,000.

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

The 50% bonus depreciation was extended through 12/31/2010 for certain Go Zone property placed in service within the following seven parishes - Calcasieu, Cameron, Orleans, Plaquemines, St. Bernard, St. Tammany and Washington.  The extension applies to nonresidential real and residential rental property which is placed in service on or before 12/31/2010, and to personal property used in that building which is placed in service no later than 90 days after the building is placed in service.

Manufacturing deduction - The Code Sec. 199 deduction for qualifying domestic production activities benefits a broad array of businesses, including construction, engineering, architecture, and farming. For 2007, the deduction generally equals six percent of the lesser of (1) qualified production activities income for the tax year, or (2) taxable income before the deduction. However, the deduction cannot exceed 50 percent of W-2 wages allocable to domestic gross receipts. The deduction applies for both regular and alternative minimum tax (AMT) liability. Code Sec. 199 rules are extremely complex and calculating the deduction is complicated as taxpayers must make numerous allocations. Our office can help you determine the amount of the deduction under Code Sec. 199 you may be entitled to.

FICA Tip Credit - Under the 2007 Small Business Tax Act, the FICA tip credit will continue to be based on the old minimum wage of $5.15 per hour, rather than the new minimum wage.  As a result, even though the minimum wage has increased, the amount of the tip credit will not be reduced.  This applies with respect to tips received for services performed after December 31, 2006.

Compensation and bonuses - If your company operates a qualified retirement plan, consider maximizing 2007 contributions to qualified retirement plans since the contributions are tax deductible in the year that they are made to plan participants.

Moreover, paying year end bonuses in December or January can create a significant business deduction. Accrual businesses can take a deduction in 2007 for bonuses not actually paid to employees until 2008 as long as (1) the employee does not own more than 50 percent in value of the business’s stock, (2) the bonus is properly accrued on the company’s books before the end of 2007, and (3) the bonus is paid within two and one-half months of 2008.

Start-up costs - If you just launched your business in 2007 and you incurred expenses before the business actually began operating (start up costs), you may be able to deduct these expenses. As long as the business is up and running by the end of 2007, you can elect to currently deduct up to $5,000 of start up expenses. Once start-up costs exceed $50,000, the $5,000 limit is reduced dollar for dollar. The remainder of the costs must be deducted ratably over a 180-month period.

Family Business Tax Simplification - A new law implemented on May 25, 2007 may help a family business.  Under the new law, a married couple who operates a joint venture and who files a joint return can elect not to be treated as a partnership for federal tax purposes.  This treatment is available for tax years beginning after December 31, 2006.  Each spouse would take into account his or her share of income, gain, loss, and other items as a sole proprietor.  They would not have to file a partnership return (Form 1065) and report two Schedule K-1s.  Instead, couples would each report their share of income on Form 1040, Schedule C.

EXPIRING TAX BREAKS

Unless Congress extends them, this year will be the last chance for businesses to take advantage of certain tax breaks set to expire in 2007, such:

• Qualified leasehold and restaurant improvements. For property placed in service before 2008, qualified leasehold improvements and qualified restaurant improvements can be deducted over a 15 year period (in lieu of 39 years) using the straight-line depreciation method.
• Qualified environmental remediation costs. Taxpayers can elect to treat qualified environmental remediation expenses paid or incurred before 2008, and that would otherwise be chargeable to a capital account, as deductible in the year paid or incurred.
• Research credit. The incremental research credit may be claimed for increases in business-related, qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research.

AMT PLANNING - The alternative minimum tax (AMT) is not a challenge reserved solely for individual taxpayers; it may affect your small business as well. While it is anticipated that Congress will enact another round of temporary AMT relief before year’s end, whether such relief will come in the form of another “patch” or more comprehensive reform is uncertain.

Small corporations that meet an annual average gross receipts test (GRT) under Code Sec. 55(e) are exempt from the AMT. To qualify under the GRT, a corporation’s average annual gross receipts for all three tax year periods beginning after 1993 and ending before the current year cannot exceed $7.5 million. Computing the AMT is complicated and time-consuming. For help determining your business’s potential AMT liability, please call our office today.

Don’t miss out on the opportunity for year end tax planning.  Once December 31 passes, the opportunities to change your business’s fate as to what it must pay in income taxes for the year significantly diminish. As you may gather from those opportunities and pitfalls outlined in this letter, virtually every business can benefit from a year-end tax plan. Please call our office if you have any questions or need assistance in customizing a plan for your business.

Sincerely yours,

Hannis T. Bourgeois, LLP