What type of tax-planning opportunities can companies take
advantage of as 2006 comes to a close? What does 2007 hold?
“There are numerous issues that companies should be aware of,” says David
H. Benz, partner and director at Sommer
Barnard PC. “For instance, the Pension
Protection Act (PPA) passed this year
includes new rules and several important tax measures. Also, while not part
of the PPA, the Dec. 31, 2006 plan compliance deadline previously set for non-qualified deferred-compensation plans
has been extended to Dec. 31, 2007.”
Taxation may arguably be one of the
most complex areas of law, and Benz notes
that it’s important to keep up with changes
on an ongoing basis. “Clear communication with internal accounting teams and
good relationships with outside advisers
are crucial to success,” he says.
Smart Business recently asked Benz
to discuss some major considerations
for 2007.
How can businesses take advantage of
year-end planning opportunities?
Year-end planning is basically a combination of deferring income and/or accelerating deductions. For instance, cash-basis
companies can accelerate deductions into
the current tax year by pre-paying certain
expenses, such as utility costs, employee
benefits, and in some cases, rent. On the
other hand, if the expense is for a benefit
lasting longer than 12 months, pre-payment will not create a current deduction.
As for accrual-basis companies, bonuses
paid within the first 2 1/2 months of the
next tax year and certain other recurring
items can be deducted in the current year.
What last-minute items should a business
consider?
Year-end planning involves looking
back to the previous 11 months. For
example, this year’s deduction for
domestic production activities is equal
to 3 percent of the lesser of a business’s
total taxable income or the business’s qualified production activities income
for the year. However, the deduction is
further limited to 50 percent of the business’s W-2 wages paid during the year. If
a business engages in some year-end
planning, an otherwise available deduction that is limited by the W-2 wages paid
year-to-date can be increased by making
additional bonuses before year end.
What do businesses need to know about the
Pension Protection Act (PPA) passed this
year?
Primarily a reform effort aimed at
defined-benefit plans, the PPA also
includes several important tax measures.
For instance, there are new rules affecting
charitable donations, recordkeeping and
corporate-owned life insurance. The PPA
also makes permanent some of the tax
benefits enacted in 2001 that were originally set to expire in 2011, such as qualified
tuition programs and Roth 401(k) plans.
The PPA made favorable additions to
‘safe-harbor’ plan design for 401(k) plans.
Specifically, it added a new auto-enrollment/safe-harbor alternative. If a company
opts for auto enrollment and also complies
with certain requirements under the PPA’s
new safe-harbor rules, it will be guaranteed to pass the nondiscrimination tests that
have burdened some plan sponsors.
Neither auto-enrollment nor safe-harbor
plan design are new. Rather, I think the real
importance of these provisions is two-fold.
First, automatic enrollment should result
in increased participation by rank-and-file
employees. And second, the new provisions should make safe-harbor plan
designs more palatable to a wider group of
employers.
While some commentators are dubious
that these new provisions will be of much
use to large employers, I think all plan
sponsors should engage in some type of
cost-benefit analysis to determine whether
auto-enrollment/safe-harbor makes more
sense than the traditional nondiscrimination testing.
How can businesses prepare for 2007?
Arguably, one of the biggest changes
coming in 2007 is a financial accounting
interpretation. In preparing for tax planning in 2007, businesses should be familiar with and prepared for this new interpretation that is certain to have a profound and far-reaching impact on any
taxpayer issuing GAAP financial statements.
By examining tax return positions, FIN
48 will govern the way in which a taxpayer books income tax expenses and
balance sheet tax assets/liabilities. FIN
48 abandons a ‘probable’ standard in
favor of a two-step approach. First, the
taxpayer’s return position must be ‘more
likely than not’ correct, arguably a lower
standard than ‘probable.’ However, in
the second step, the taxpayer must
handicap its likelihood of ultimate success, considering not only the technical
merits of a position but also its willingness to settle for less than 100 percent. It
is the result of this second step that is
then booked on the taxpayer’s financial
statements.
DAVID H. BENZ is partner/director, Tax Group chair and a member of the Business Practice Group at Sommer Barnard PC. Reach
him at (317) 713-3500 or [email protected].