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As tax preparation time draws near, we would like to highlight several potential tax-saving opportunities. Anything that you can do to reduce taxes is a step toward preserving your business’s profitability.

Business Deductions

Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses and dependents as an above-the-line deduction, without regard to the 7.5% of AGI floor.

Equipment Purchase: If you are in business and purchase equipment, you may make a “Section 179 Election,” which allows you to expense (i.e., currently deduct) otherwise depreciable business property.  In general, you may elect to expense up to $105,000 of equipment costs (with a phase-out for purchases in excess of $420,000) if the asset was placed in service during 2005.

NOL Carryback Period: If your business suffered net operating losses in 2005, you may apply those losses against taxable income going back two years.  Thus, for example, the loss could be used to reduce taxable income-and thus generate tax refunds-for tax years as far back as 2003.

Hurricane Tax Relief Acts of 2005

During 2005, two acts were passed which included both tax breaks and financial incentives to encourage rebuilding in the areas ravaged by Hurricanes Katrina, Rita and Wilma.  These were the Katrina Emergency Tax Relief Act of 2005 (KETRA) and the Gulf Opportunity Zone Act of 2005 (GO Zone Act).

The GO Zone Act defined various zones in Louisiana, Alabama, Florida, Mississippi and Texas.  In Louisiana, the Katrina GO Zone encompasses 31 parishes: Acadia, Ascension, Assumption, Calcasieu, Cameron, East Baton Rouge, East Feliciana, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Pointe Coupee, Plaquemines, St. Bernard, St. Charles, St Helena, St. James, St. John, St. Martin, St. Mary, St. Tammany, Tangipahoa, Terrebonne, Vermillion, Washington, West Baton Rouge and West Feliciana.

In Louisiana, the Hurricane Rita GO Zone includes 21 Louisiana parishes: Acadia, Allen, Ascension, Beauregard, Calcasieu, Cameron, Evangeline, Iberia, Jefferson, Jefferson Davis, Lafayette, Lafourche, Plaquemines, Sabine, St Landry, St. Martin, St. Mary, Terrebonne, Vermillion, Vernon and West Baton Rouge.  (Note: Allen, Beauregard, Evangeline, Sabine, St. Landry and Vernon are the only Louisiana parishes not already included in the Katrina GO Zone).

The following is a brief summary of certain key provisions of the acts.

Work Opportunity Tax Credit: Under current law, 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.  The act temporarily creates a new target group under the WOTC, called Hurricane Katrina employees.  The target group is comprised of individuals who, prior to the hurricane, lived in the Katrina GO Zone. Employers located in the Katrina GO Zone eligible for such assistance may claim the WOTC with respect to hurricane Katrina employees hired over the next two years.  Employers located outside of this area may claim the WOTC with respect to Hurricane Katrina employees hired through the end of the 2005 calendar year.

Employee Retention Tax Credit:  Employers located in any one of the GO Zones may claim a credit through the end of the 2005 calendar year if they retain an eligible employee on their payroll.  The tax credit equals 40 percent of the first $6,000 of wages paid to the employee between August 28, 2005 and December 31, 2005 for the Katrina GO Zone and wages paid between September 23, 2005 and December 31, 2005 for the Rita GO Zone.  The credit is available to employers whose business is inoperable as a result of damage sustained by Hurricane Katrina, Rita or Wilma.  The credit is not affected if the employee reports to work at another location while the business is inoperable.

Cash Donations by Corporations: Under current law, corporations may deduct charitable donations up to 10 percent of their taxable income.  The 10 percent income limitation is waived for cash donations related to the Hurricane Katrina, Rita or Wilma relief efforts if the donations were made before January 1, 2006.

50% Bonus Depreciation: The act provides a 50% first-year bonus depreciation allowance to help businesses rebuild in the Katrina GO Zone.  This write-off applies to the cost of most new property investments made in the zone, including purchased computer software, machinery and equipment, leasehold improvements, and certain commercial and residential rental real estate expenses.  For property qualifying for the first-year write-off, all depreciation (including the bonus amount) is exempt from the Alternative Minimum Tax (AMT).  The 50% bonus depreciation applies to property acquired by purchase after August 27, 2005 and placed in service before 2008 (before 2009 for real property).

Increased Sec. 179 Expense: The maximum Sec. 179 expense allowance is increased by $100,000 for qualified Katrina GO Zone property placed in service during the tax year.  Additionally, the phase-out limitation increases by $600,000.  These changes are effective for property placed in service in the zone after August 27, 2005 and before 2008.

Expanded NOL Carryback: An NOL generated in the Katrina GO Zone is eligible for a special five year carryback period, instead of the regular two years.  The NOL eligible for the five year carryback is limited to the aggregate amount of: qualified GO Zone casualty losses, certain moving expenses, certain temporary housing expenses, depreciation deductions for qualified GO Zone property for the tax year the property is placed in service, and deductions for certain repair expenses resulting from Hurricane Katrina.  The five year carryback applies for losses paid or incurred after August 27, 2005 and before 2008.

IRS Publication 4492 (Information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma) explains in detail the major provisions of the Katrina Emergency Tax Relief Act of 2005 and the Gulf Opportunity Zone Act of 2005.  IRS Publication 584 (Casualty, Disaster and Theft Workbook) is designed to help calculate the loss on personal use property.

These are just a few areas that should be explored by contractors in order to reduce taxes. The above is merely a summary of the provisions.  A tax professional should be consulted for more details relating to these provisions.

Laura Monroe is a Certified Public Accountant and the managing partner of the tax division of Hannis T. Bourgeois, LLP.  She has a specialization in the construction industry and has 23 years of experience in public accounting.  She can be reached at lmonroe@htbcpa.com or (225) 928-4770.