|
The
past five years have seen a flurry of changes to the Tax Code and
regulations and 2005 has proven to be no exception. With provisions enacted
in earlier tax laws set to expire, new measures effective for 2005 only, and
other recent additions, it is more likely than ever that business clients
can benefit from year-end tax
planning.
Entity
forms
One
consideration of growing importance in year end
business planning is the evaluation of the form in which business should
continue to be conducted. While there is no magic benefit to selecting year
end to switch the entity form in which business is conducted, it
often is easier to collect data using the calendar year and comparing it to
past years, as well as to the tax models for alternative business forms.
Alternative forms of business include the limited liability company
partnerships or single-member entities, S corps, partnerships with a variety
of profit and loss allocations, and regular, "straight-up" C
corps. What's more, some businesses find a switch at year
end makes for a more predictable transition for both book and tax
accounting purposes. Cyclical businesses, however, may want to time
switching either immediately before or after an annual upturn in business.
Equipment
purchases
Many
business owners face the decision of whether to make equipment purchases in
the current year or delay them until another tax year. The bad news is that
bonus depreciation rates that have been available in recent years expired
last year. However, the Section 179 deduction for capital purchases that
would otherwise have to be depreciated stands at $105,000 for 2005 (rising
to $108,000 in 2006 after inflation adjustment), and can be applied to
purchases of up to $420,000. Scheduled for reduction back to the previous
$25,000 limitation after this year, the higher limit was extended by the
2004 Jobs Act through 2007. Since the limit is computed on an annual basis,
timing equipment purchases to take advantage of the higher $100,000§limit
should start before year
end 2005.
New
manufacturing deduction
Businesses
should also not forget the Code Sec. 199 domestic production activities
deduction, which applies to manufacturers and many businesses not normally
considered to be in manufacturing. The deduction amounts to three percent of
either taxable income derived from a qualified production activity or all
taxable income, whichever is less, but limited to 50 percent of the W-2
wages paid during the calendar year. The amount of the deduction will
gradually increase, reaching nine percent of qualified production activity
income by 2010.
Energy
Act opportunities
The
Energy Tax Incentives Act of 2005 provides tax credits for builders of new
energy-efficient homes sold or acquired in 2006 and 2007 and for
installation of fuel-cell power plants. There is also a deduction available
for the cost of energy-saving improvements to commercial buildings. The key
effective date in that case is the "placed in service" date, which
must be after December 31, 2005, to qualify. The energy-efficient commercial
building property must be installed as part of interior lighting systems,
the heating, cooling, ventilation, or hot water systems, or the building
envelope and must meet a 50 percent energy-reduction standard. The maximum
deduction is generally $1.80 per square foot.
Business
vehicles
Many
small businesses depend on vehicles owned or leased either by the company or
by the proprietor. Business owners should be aware of several changes that
may affect their decisions in using vehicles for business purposes. To
counter the effects of rising gasoline prices, the IRS increased the
standard mileage rate for business use of vehicles to $0.485 per mile,
effective from September 1 to December 31, 2005. The standard mileage rate
for business use prior to September 1 is $0.405 per mile, and owners must
not have taken depreciation on the vehicle at any time. The IRS stated that
it will delay announcement of the standard mileage rate for 2006 until
December to better gauge the direction in which prices are moving. The rate
is expected to be less than $0.485 per mile.
While
the standard mileage rate is advantageous for owners of
inexpensively-operated vehicles, businesses that use more costly
transportation may wish to use expensing and depreciation. While the
expensing limitation for SUVs with a gross vehicle weight of 6,001-14,000
lbs. has been reduced from $100,000, it still allows up to $25,000 to be
expensed. For 2006, smaller passenger vehicle depreciation remains at $2,960
for the first year in service, the same as in 2005, although second-year
depreciation increases by $100 to $4,700. Light trucks and vans are entitled
to an additional $300 the first year.
Hybrid
vehicles
Business
owners may receive additional breaks for purchasing hybrid vehicles. The
energy bill changes the deduction for purchase of such vehicles to a tax
credit, worth roughly $2,000, depending on the vehicle's fuel efficiency.
The new law also provides a credit for the purchase of fuel cell cars and
light trucks that can be worth as much as $12,000. The new credits apply to
vehicles first placed in service after December 31, 2005.
Employee
benefits
Establishing
employee benefit plans, qualified retirement plans and medical or health
reimbursement plans can provide tax savings to both employees and the
business. Congress has made a variety of alternatives available to employers
and their employees in both areas, and the IRS and Treasury have followed
with significant regulatory activity to clarify and expand on these
provisions.
Roth
401(k)s
Beginning
in 2006, employers who offer 401(k) plans for employee retirement savings
will now have the opportunity to offer the so-called "Roth
401(k)." This plan allows employees to elect to make contributions to
401(k) plans on an after-tax basis and receive qualified distributions tax
free, just as they would with Roth IRAs. The advantages to this plan are
that there are no income limitations as with Roth IRAs and that they can
contribute up to $15,000 annually ($20,000 for employees over age 50).
Employers
must note that the Roth 401(k) provision requires an amendment to their
current plan documents to allow for this election. There is also a
requirement that designated Roth contributions, as they are called, must be
accounted for separately from contributions to traditional 401(k) plans. The
provision is set to expire after the 2010 calendar year, but the separate
accounting requirement would remain in force until all such contributions
have been distributed. Finally, employers who match employee contributions
cannot designate them as Roth contributions; they must be treated as
contributions to traditional plans.
Medical
savings plans
Several
changes have been made to the rules governing medical savings plans as well.
New enrollments for Archer Medical Savings Accounts will no longer be
accepted but Health Savings Accounts (HSAs), plans that 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, are
gaining in popularity. New regs have been released that explain the rules
for comparable employer contributions to HSAs.
Also,
the IRS and Treasury have announced the implementation of a 2 1/2 month
grace period for Flexible Spending Accounts (FSAs) for medical and dependent
care. This grace period allows employees until March 15 after the calendar
year for which contributions have been made to use up those contributions.
The
"use-it-or-lose-it" provision has been a primary reason why
employees fail to participate in FSAs. This option, as the option for
allowing reimbursement of over-the-counter medicine, however, is at the
employer's discretion because the plan must be amended before it can offer
either benefit. An employer must weigh the administrative costs of each.
Hurricane
relief
In
response to the devastation caused by Hurricane Katrina, Congress created
several temporary tax benefits available to business outside the affected
area. The Katrina Emergency Tax Relief Act makes the charitable contribution
deduction for food inventory available to all business entities and enhances
the book donation deduction for C corps.
A
major benefit was created with the waiver of the limitation on corporate
charitable contributions. Normally restricted to 10 percent of taxable
income for the tax year, corporate contributions are unlimited to the extent
that they are made between August 28 and December 31, 2005, in cash and to a
qualified charitable organization for hurricane relief efforts. The Katrina
EmergencyTax Relief Act also provides a work opportunity credit for
employers outside the affected area that hire displaced workers. These
provisions all expire at the end of 2005.
|
