Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

It's still not too late for 2006 tax planning

- by Alan Duvall 

Published in Dayton Daily News   December 3, 2006 

January 1: Hangover Day.  That headache comes from more than boozing.  It's the realization your business missed some year end tax savings opportunities. 

But for now - still some time left for last minute tax planning.   

Many retirement plans may be established before year-end and still provide full-year 2006 funding.  And pension contributions may be deductible in 2006 even if made the following year (exact payment timing varies with form of plan).  This timing factor allows owners the benefit of next-year performance hindsight before committing to 2006 retirement funding. 

Businesses may annually deduct the purchase of a maximum $108,000 cost of qualifying fixed assets.  Thus, accelerating next-year acquisitions can likewise accelerate this year’s deductions.  However, such write-offs cannot generate overall business losses, so watch the bottom line before opening the checkbook. 

Owners of businesses taxed as Sub S corporations should also watch bottom lines.  Company net losses can only be deducted by owners to the extent of their “basis” investment.  Year-end cash infusions to the company may be needed to insure full owner deduction of flow-through losses. 

For cash-basis business taxpayers, life is relatively simple.  Income taxed when cash received.  Expenses deducted when cash paid.  Thus, to delay taxation of income – postpone collection of sales – delay billings for example.  Acceleration of deductions is achieved by merely pre-paying expenses.

Year-end planning is more difficult for accrual-based taxpayers.  Accrual basis taxation is based upon timing of economic events, as opposed to timing of cash.  Therefore, income is taxed when earned, whether physically billed or collected before year-end.  Likewise, expenses are deductible when amounts become payable. 

But timing opportunities still exist for those in the accrual world.  For example, bonuses declared for employees who own 50 percent or less of the company are currently business deductible even if paid the next year.  Recipient employees may not mind the delay since they personally benefit from a year’s delay in tax payment.  

Such timing opportunities are not available for business expenses payable to more-than-50 percent owners because companies cannot deduct such expenses until the year income is personally reported by the owners. 

So be alert and tax plan well before New Years. 

“Offer me solutions, offer me alternatives...It’s the end of the world as we know it and I feel fine.”  –REM. 

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.