Maximizing Your After Tax Earnings

Many of the tax breaks you have been enjoying are scheduled to expire in 2010. Are you ready? Are you planning for the changes?

In order to stimulate spending, the government allowed businesses the opportunity to reduce income, resulting in reduced tax liabilities, enabling small businesses to purchase equipment, hire staff, and market their business.

Note, this eight year opportunity is set to expire In 2010, so you may only be able to depreciate $25,000 on 2010 asset purchases.

How you purchase and depreciate your assets should follow your business goals and strategies, not the other way around. Due to the complexity of the options, this is a topic that should be discussed with your CPA - it can make a huge difference in your tax liabilities.

Bonus Depreciation: Along with Depreciation of assets there is a Bonus Depreciation. This is another tax benefit to stimulate spending.  The bonus depreciation allows you to write off ½ of your applicable property/assets in addition to the 179 asset depreciation described above. 

The bonus depreciation can dramatically increase your after tax earnings and can be used to generate a loss.  However, this is planned to expire in 2010, so discussions with your CPA are essential to ensure you are not increasing your income significantly, thus increasing your tax liabilities in following years.

Vehicles: Another topic that continually changes are vehicle deductions. In the past there were a number of loop holes in vehicle write offs. This is no longer the case.

The only vehicles that have a 100% write off are heavy duty work vehicles that way over 6000 lbs. These can be written off over a 7 year period.  However, If your vehicle is under 6000 lbs, then it is considered listed property and the write off amounts are: Year 1 - $10,960, and Years 2 through 7 - $2960

This now begs the question - should you depreciate your vehicle or use mileage allowance reimbursements. The vast majority of circumstances indicate utilizing mileage is a sounder financial strategy.  This again depends on the type of business.

Many companies buy vehicles in the company name so they can write it off? But, did you know that

buying a vehicle in the company name, makes you liable for Business Personal Property Tax (BPP). If purchased personally, there is no current tax on this property.  The counties are starting to ask and tax any property used in business whether owned personally or in a business name.  The first target is the realtors and their personally owned cars.

(Exceptions to this rule would include large fleets of vehicles that you tend to lease anyway.)

Ready for a remodel, think first before you begin in 2010.  From Oct 2004 to end 2009, businesses were allowed to improve their leases and write off the improvements over a 15 year period.

Unless there are changes to regulations, this is expected to expire in 2010, meaning businesses will have to write off remodelling expenditures over a 27.5 years for a rental property, and 39 years for non-residential - with no bonus depreciation! Something to consider before renovating.

Payroll: Out of habit, many businesses filed a 941 (quarterly). If your business pays less than $1000 annual liability for social security, Medicare, and withheld federal taxes, you must file the 944 (annually); this saves you money and time in quarterly tax preparation.

DIF Score: Another example of potential financial impact is surpassing  your  DIF score, which is line the IRS uses to determine who will be audited - your CPA can help you determine how to best invest, depreciate, and plan for the future without exceeding your DIF score.

Do not rely on the past ‘times are a changing,’ and I encourage you to work very closely with your CPA to ensure you are making the right decisions for your business.

We invite all of you to get a discussion going.  Please submit your comments at the end of this article, Thanks.

Jon Chester, CPA, MST, President and Managing Partner, Sterling’s Bookkeeping & Tax Service