Carolyn Valenti, CPA, Tax Partner
Eric Lasch, CPA, Senior Tax Manager

There are a number of end of year tax strategies businesses can use to reduce their tax burden for 2011. Here’s the lowdown on some of the best options.

Purchase New Business Equipment

Section 179 Expensing. Business should take advantage of Section 179 expensing this year for a couple of reasons. First, is that starting in tax year 2010 and continuing into tax year 2011, the maximum Section 179 expense deduction for equipment purchases increased to $500,000 ($535,000 for qualified enterprise zone property) and the bonus depreciation increased to 100% for qualified property. Beginning in tax year 2012 however, the Section 179 deduction is scheduled to drop to $125,000 and the bonus depreciation to be reduced to 50 percent and then be phased out completely.

In other words, in 2011 businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to $500,000 (subject to a dollar-for-dollar reduction in that $500,000 for property placed in service that exceeds the maximum amount of $2,000,000).

Qualified property is defined as property that you placed in service during the tax year and used predominantly (more than 50 percent) in your trade or business. Property that is placed in service and then disposed of in that same tax year does not qualify, nor does property converted to personal use in the same tax year it is acquired.

Note: Many states have not matched these amounts and, therefore, state tax may not allow for the maximum federal deduction. In this case, two sets of depreciation records will be needed to track the federal and state tax impact.

Historically, Code Sec. 179 expensing has been available only for tangible personal property, but the Small Business Act of 2010 carved out a limited-time-only exception for certain types of real property.  Specifically under Code Sec. 179 (f)(1), for any tax year beginning in 2010 or 2011, a taxpayer may elect to treat up to $250,000 of qualified real property as Code Sec. 179 property.  Unless Congress changes the rules, otherwise eligible property placed in service in tax years beginning after 2011 generally will have to be depreciated over 39 years via the straight line method.

What is qualified real property for expensing purposes? Qualified real property is:

(A) qualified leasehold improvement property described in Code Sec. 168(e)(6)

(B) qualified restaurant property described in Code Sec. 168(e)(7), and

(C) qualified retail improvement property described in Code Sec. 168 (e)(8).

The qualified property must be depreciable and acquired for use in the active conduct of a trade or business .  Other special rules apply as well.

Please contact our office if you have any questions regarding qualified property and bonus depreciation.

Bad Debt Deductions. As economic doldrums continue, you may have trouble collecting payment for products delivered or services performed earlier in the year.  If you don’t receive payment before 2012, you may be able to deduct the amount as bad business debt in 2011 if your business uses the accrual method of accounting.  Generally, an accrual-basis business can deduct bad business debts when they become totally or partially worthless.  The current deduction must reflect any partial debt previously deducted.

Tip: Keep detailed records of collection attempts to support claims of worthlessness.

Review Production Activities. Under Section 199, a business may be able to claim a special deduction relating to qualified production activities.  For 2011, the deduction is generally equal to 9% of the lesser of taxable income from qualified production activities or overall taxable income.

Tip: Determine if your business qualifies for this write-off. The Section 199 deduction isn’t limited to traditional manufacturers.  For example, construction firms and architects may qualify, but painters generally cannot. It may also be available to businesses that sell, lease or license manufactured goods.

Tip: The production activities must be performed in “significant part” in the United States.

Repairs Deduction. There’s a significant tax difference between repairs and capital improvements.  Repairs to a business building are currently deductible, while the cost of improvements must be added to the property’s basis and depreciated over a number of years.

Tip: Authorize minor repairs before 2012.  A repair keeps property in a normal operating condition without adding appreciably to the property’s value or prolonging its useful life.  But, an improvement adds to the value of the property, prolongs it useful life or adapts it for a new use.

Tip: The IRS may say that repairs should be lumped in with a capital improvement cost if the repair work is done at the same time as improvement work.

Other Year-End Moves To Take Advantage Of

Partnership or S Corporation Basis. Partners or S corporation shareholders in entities that have a loss for 2011 can deduct that loss only up to their basis in the entity. However, they can take steps to increase their basis to allow a larger deduction. Basis in the entity can be increased by lending the entity money or making a capital contribution by the end of the entity’s tax year.

Caution: Remember that by increasing basis, you’re putting more of your funds at risk. Consider whether the loss signals further troubles ahead.

Retirement Plans. Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2011.

Credits. Nail down the work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2011.  Under current law, the WOTC won’t be available for workers hired after this year.

Make qualified research expenses before the end of 2011 to claim research credit, which won’t be available for post-2011 expenditures unless Congress extends the credit.

Dividend Planning. Reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders, which continue to be taxed at the 15 percent rate through 2012.

Budgets. Every business, whether small or large should have a budget. The need for a business budget may seem obvious, but many companies overlook this critical business planning tool.

A budget is extremely effective in making sure your business has adequate cash flow and in ensuring financial success. Once the budget has been created, then monthly actual revenue amounts can be compared to monthly budgeted amounts. If actual revenues fall short of budgeted revenues, expenses must generally be cut.

Tip: Year-end is the best time for business owners to meet with their accountants to budget revenues and expenses for the following year.

For more on this topic, look for next week’s blog and Facebook posts “Three Most Common Budgeting Errors”.  The article will also be in our November 21 newsletter. If you need help developing a budget for your business don’t hesitate to call us today.

Call Us First

These are just a few of the year-end planning tax moves that could make a substantial difference in your tax bill for 2011. But the best advice we can give you is to give us a call. We’ll sit down with you, discuss your specific tax and financial needs, and develop a plan that works for your business.