New Legislation
The Jobs Creation and Workers Assistance Act of 2002 was enacted on March 9, 2002. The new law includes many new provisions which will affect most individuals and corporations. The act is retroactive to September 2001.
- Additional first-year depreciation allowance for MACRS property, with a recovery period of 20 years or less, property must be placed in service after September 10, 2001.
- First-year luxury automobile depreciation limit increase from $3,060 to $7,660 for automobiles placed in service after September 10, 2001.
- The net operating loss (NOL) carryback period has expanded from 2 years to 5 years.
- The percentage of NOL that can offset alternative minimum taxable income has increased.
- The new Special New York Liberty Zone rules have created benefits for certain real property and leasehold improvements.
- Retroactive extensions on various tax credits.
Planning Ideas for 2003
Business Entity
Whether you currently own a business or are thinking of starting a new venture, deciding on the proper business entity will be one of the most important considerations you will have. Options such as the C Corporation, S Corporation, Partnership, Limited Liability Company and Proprietorship exist depending on the number of owners your business will have. Each of the above-mentioned entities has substantially different tax effects and should be carefully considered before forming.
If you are considering the formation of a corporation, I.R.C. Sec. 1244 should be considered as a precautionary measure. Any losses from the disposition of your stock under this code section would be considered ordinary losses as opposed to capital losses and deducted fully in the year of disposition.
Additionally, some corporations may qualify for the small business stock gain exclusion. When certain requirements are met, non-corporate investors who have held "qualified small business stock" for more than five years may exclude from income 50% - 60% of the gain realized on the disposition of the stock. The remaining gain is taxed at 28% however, for an effective tax rate of approximately 28%. The taxpayer may also elect to rollover the entire gain by reinvesting the gain into replacement stock and deferring any tax liability until the replacement stock is sold.
Accounting Rules
When a new business is formed there are a multitude of expenses to get the business up and running. Travel, advertising, training employees are just a few examples of pre-opening costs a new business owner might experience. These costs are defined as Start-up Costs by the internal revenue code. Start-up costs cannot be currently deducted but rather amortized over a period of at least 60 months provided the taxpayer makes the proper elections on the initial business tax return. If the proper elections are not made, the expenses are not deductible and must be capitalized.
Accrual basis taxpayers, those taxpayers that record income when earned and record expenses when incurred have the following deferral opportunities:
- Delay shipments until the following year.
- Consider shipping F.O.B. destination for year-end shipments. Income is not earned until title passes which would be in the next year.
- Expenses such as bonuses, vacation pay, etc. can be deducted if the expenses will be paid within 2 1/2 months after the close of the tax year.
Cash basis taxpayers may want to delay billings at year-end for income purposes and pay all expenses by year-end.
Depreciation
Due to new legislation enacted early in 2002, taxpayers may be able to benefit from a new provision, which provides an additional deduction of 30% of the cost of qualifying property. The bonus depreciation is available for most non-real estate assets and certain leasehold improvements and is in addition to regular depreciation.
Section 179 expensing is still available and will be limited to $25,000 of the first $200,000 of assets placed in service. Section 179 allows the taxpayer to treat $25,000 of eligible property as an expense in the year the asset is placed in service.
Business Automobiles
Due to new legislation enacted early in 2002, a taxpayers first-year depreciation deduction has been increased by $4,600 for luxury automobiles placed in service before 2005. Taxpayers may also consider using the mileage method of expensing a vehicle.
Health Insurance
The health insurance deduction is now a 100% deduction for individuals who are now self-employed.
Retirement Plans
The use of retirement plans is probably the best way to defer tax liability while investing in the future of the business owner. Simple, 401(k), SEP-IRA, Keoghs are just an example of different types of plans available depending on how your business is organized.
The tax planning ideas mentioned above are just the tip of the iceberg. Many of the tax planning ideas mentioned in this article will vary depending on the type of business formation. Careful planning with a tax advisor should be on the top of your priority list as we enter the fourth quarter of the calendar year.
Mr. Presogna is a CPA and CVA and has provided tax strategies, valuation, merger, and acquisition related services to a wide range of clients. He is president of Presogna and Company, the Northeast office of Vercor, and co-founder of Vercor. He has provided business valuation services in the areas of liquidation and reorganization, mergers and acquisition, economic loss analysis, business disputes, and estate and gift taxes. He has helped provide negotiating strategies, business valuations, financing, marketing, consulting and tax advice on more than 300 business exchanges.
