If you have been putting off a year-end tax
meeting with your accountant, it is important to take stock of your business expenses, determine your tax liability and explore
opportunities to maximize deductions before
the calendar rolls over.
“The sooner a business owner discusses
tax planning with an accountant, the better,”
says Adam Berebitsky, CPA, managing director of SS&G Financial Services, Inc. “Once
New Year’s Day hits, it is usually too late to
take advantage of opportunities to reduce
your tax liability for the prior year.”
Smart Business spoke to Berebitsky about
some of the 2007 tax code changes of which
businesses and individuals need to be aware.
Were there any major changes in the tax law
this past year that will affect businesses?
While there are a few enhancements to certain tax deductions and credits that were
available in prior years, for the most part, the
last several tax acts have not substantially
created a tax windfall to businesses or individuals. That is why it is essential to meet
with your tax adviser to go over the normal
year-end tax planning strategies (i.e. maximizing retirement plan deferrals, noncash
charitables and maximizing depreciation)
while also making sure you are aware of
some of the enhanced tax benefits.
What are some examples of the enhanced
business deductions?
Two examples are increases in business
depreciation expense and the domestic production activities deduction (DPAD). Section
179 allows businesses to expense up to
$125,000 of qualified purchases in 2007, subject to phase-out at $500,000. Qualified purchases can include tangible personal property, like computers, machinery and even some
computer software. By taking a Section 179
deduction, the business is deducting depreciation in the initial year rather than over the
life of the asset. This deduction is designed as
an incentive for business owners to make
capital expenditures.
The domestic production activities deduction, Section 199, has been increased from 3
percent to 6 percent for 2007. Businesses that
range from architecture firms to home builders can take advantage of the 6 percent
deduction on qualified production activities
income. The deduction can provide significant tax savings for companies with qualified
domestic production, such as manufacturing
tangible personal property, the production of
electricity, natural gas or water, construction,
engineering, architectural services and more.
How will taxpayers benefit from the Work
Opportunity Tax Credit (WOTC) and FICA tip
credit this year?
The WOTC and the FICA tip credit will no
longer be subject to individual and corporate
alternative minimum tax (AMT) limits. Prior
to 2007, both of these credits were only
allowed to be used to reduce regular tax liability and not AMT. Thus, many businesses
and owners were unable to take advantage of
the credits. Since this change is effective for
credits generated in tax years beginning after
Dec. 31, 2006, most taxpayers will see a favorable impact on their 2007 tax returns.
Are there any major tax changes of which
individuals should be aware?
The IRS is casting a bigger net over the
shifting of income from parents to their children. Several years ago, the Kiddie Tax said
that children under 14 who had unearned
income of more than $1,700 were taxed at the parents’ marginal rate. However, after two
recent tax acts, children ages 18 and younger
and full-time students under age 24 will be
subject to these rules. The Kiddie Tax states
that unearned income, such as dividends,
interest or capital gains, can only be taxed at
the lowest rate for the child for the first
$1,700. Earnings that exceed this are subject
to the parents’ marginal rate. There are other
factors as well, so it’s important to consult
your accountant.
What tax incentives won’t be available after
this year?
2007 is the last year for the nonbusiness
energy property credit. Individuals that
invest in energy-efficient windows, lighting,
insulation, furnaces, air conditioning or other
systems are eligible for this credit.
The opportunity to make charitable deductions from IRAs (Individual Retirement
Accounts) ends in 2007. If you are over 70
years old, the maximum charitable contribution out of the IRA is $100,000. Be aware,
though, that more stringent documentation
requirements exist for charitable contribution deductions, which started in August
2006 and will continue for 2007 and beyond.
Hybrid vehicle purchases are still applicable for a tax credit, which varies depending
on what type of car was purchased and
when. While this credit is not set to expire, it
is important to understand that the credit is
not eligible to offset AMT tax liability, which
a majority of taxpayers will be paying in 2007.
Why is year-end planning important?
Year-end planning provides an opportunity
to discuss changes in the taxpayer’s business
or industry which may have occurred during
the past year. Your CPA can help identify if
any of these events allow for additional tax
strategies not previously utilized.
Meeting with your tax adviser prior to year
end lets you know your tax situation several
months before the April filing deadline. This
will help you avoid surprises when filing your
tax returns.
ADAM BEREBITSKY, CPA, is managing director of SS&G
Financial Services, Inc. in Cleveland, Ohio. Reach him at (440)
248-8787 or [email protected].