With the end of 2010 quickly approaching, companies should think about year-end tax planning. Make the right moves between now and the close of the year, and you and your business could save plenty.
• Acquire needed business assets now. If you are thinking of buying significant assets for your business, you still have two more months to place them in use and qualify for bonus depreciation for 2010, allowing you to deduct 50% of the cost right away. The other 50% is recovered through regular depreciation. Bonus depreciation can be claimed on new assets with useful lives of 20 years or less, including machinery, equipment, land improvements and single-purpose farm buildings such as chicken coops. Act quickly, as this tax break ends after 2010.
Expensing is also available for purchased assets. In lieu of depreciation, businesses can claim an immediate write-off of up to $500,000 of the cost of assets placed in service in 2010. This higher cap -- twice the 2009 limit -- also applies for 2011. But keep in mind that in both 2010 and 2011, once you put more than $2 million of assets in use, the $500,000 ceiling is reduced by one dollar for every dollar of assets.
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Is a new business vehicle purchase likely soon? Buying it this year offers some big benefits. The maximum deduction for cars acquired and placed in use before Dec. 31 is $11,060. After that, the cap falls to about $3,000. And if you buy a new SUV with a loaded weight of over 6,000 pounds and place it into service in 2010, you get a triple scoop of tax breaks: Up to $25,000 of the cost can be expensed, half the balance is eligible for bonus depreciation and 20% of the remaining cost is recovered through normal depreciation. Assuming 100% business use, the total first-year write-off for a $50,000 new heavy SUV is a whopping $40,000. Large pickup trucks fare even better. For a pickup with a loaded vehicle weight of over 6,000 pounds and a cargo bed (separate from the cab) of at least six feet, you can deduct the full cost, if the vehicle is put to use in your business in 2010.
Take care not to inadvertently buy too many assets in the last quarter of 2010, though. It can cost you some depreciation deductions. If more than 40% of your 2010 asset purchases are made after September, regular depreciation on all assets put in use in 2010 is determined on a quarterly basis. That means that assets acquired near year-end only get 1.5 months of depreciation instead of six months’ worth. This special limitation doesn’t apply to buildings, where depreciation depends on the month put in use.
• Shift income and expenses between 2010 and 2011. Congress has not acted on extending the Bush tax cuts, so individual tax rates for next year are still uncertain. But we think Congress is likely to temporarily extend the Bush tax cuts for all filers, keeping the 39.6% top rate from returning and retaining the 15% top rate for dividends and long-term capital gains. Because that’s not a done deal, it is more important than ever to consider the tax implications of deferring versus accelerating income and deductions.
Professionals can delay year-end billings, or alternatively, speed them up if they expect to be in a higher tax bracket in 2011. Business owners can delay paying year-end bonuses so that recipients are not taxed until 2011 or pay them in 2010 if the company wants the deduction sooner. However, there are limits to bonus deferral. Delaying payment of year-end bonuses does not work for a majority shareholder if the bonus amount is fixed during 2010 and the corporation has the cash to pay the bonus. In that case, the law treats the shareholder as constructively receiving the money in 2010. Also, accrual method companies cannot deduct in 2010 bonuses that are deferred to 2011 if paid to a shareholder with more than a 50% stake in a regular corporation or to an owner of any stake in an S corporation, personal service company or partnership.
• Finally, consider having your corporation pay dividends in lieu of salary. Taxwise, this works out beneficially if the corporation is in a low tax bracket and the shareholder is in a high tax bracket. Dividend payments don’t earn a deduction for the corporation; however, because dividends are taxed at a maximum 15% rate and aren’t subject to payroll tax, the owner’s tax savings on the dividend can exceed the benefit of the corporation’s foregone deduction. Note that this tax saver won’t help personal service firms, which pay a flat 35% tax, or S corporations.
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