Did You Miss Your Wake-Up Call?
The 2006 tax clock is ticking
It may seem impossible, but the clock for the 2006 tax year already is ticking, and now is the time to plan year-end strategies that will make your wake-up call a little easier.
Expensing extended
Section 179 allows you to expense, rather than depreciate, up to $108,000 of qualified business assets you put in service before year end. Be aware, however, that a dollar-for-dollar reduction in that deduction is triggered when purchases exceed $430,000. Thanks to a recent extension, these amounts will continue to be annually indexed through 2009.
You also can continue to take advantage of the manufacturers’ deduction, which allows you to deduct up to 3% of net income from qualified production activities. The deduction is limited to 50% of the W-2 wages you pay that are allocable to domestic production gross receipts. For partnerships and S corporations, each partner’s share of W-2 wages paid is the lesser of his or her share of allocable wages paid by the partnership or corporation, or 6% of the qualified production activities income allocated to him or her for the tax year. Calculating it before the end of the year may help you decide whether to accelerate or delay income and expenses.
Of course, one fundamental rule for tax planning is to accelerate expenses and delay income so you pay as little income tax annually as possible. Businesses that use the accrual method of accounting have less flexibility in this area, because they must report income and expenses as they are earned and incurred, regardless of when they are actually received or paid.
If you use the cash method, however, you may want to wait to send invoices until the end of the year, and prepay as many of your January bills as possible. That and similar strategies will allow you to delay taxes for a year on income you put off receiving until January, and take advantage of deductions a year early on December expenses.
An exception to the rule is when you’ve experienced a bad year. If you have no profits, or will be in a lower tax bracket, you’re better off accelerating income and delaying expenses.
Other strategies to consider before year end include:
Charitable donations. C corporations generally can deduct charitable donations up to 10% of their taxable income, and carry over the excess for five years. A charitable donation before the end of the year may help you at tax time.
Energy tax incentives. You may be eligible for a wide variety of tax incentives if you use or produce energy-efficient devices. Even if you don’t fully qualify this year, it’s not too soon to start planning activities so you can take full advantage of energy conservation tax breaks.
MACRS. Under the Modified Accelerated Cost Recovery System (MACRS), you may claim generous depreciation deductions for the balance of asset purchases you don’t expense under Sec. 179. But bear in mind that, if the cost of depreciable assets placed in service in the last quarter of the year is more than 40% of the cost for the entire year, the deductions may be reduced.
If you’re making plant repairs, you can deduct those you made before the end of the year, but you’ll have to capitalize any capital improvements to your physical facilities. Thus, consider separating records for minor repairs from those for capital improvements.
Don’t let time run out
These are just some of the multitude of tax provisions that affect manufacturers. The tax code is complicated and constantly changing, so consult your tax advisor before taking too many steps. It can be to your advantage, however, to do that before the time runs out on the 2006 tax year.
For more information about our services to inventory based businesses,
Contact: Mark Walker, Partner, Director of Inventory Based Businesses Practice at 817.882.7724.
The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.