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Clients Issues & Insights 2009 Year-end Tax Planning May Require Different Strategies
Clients Issues & Insights 2009 Year-end Tax Planning May Require Different Strategies | 2009 Year-end Tax Planning May Require Different Strategies |
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In the current economy, many businesses and individuals are experiencing cash flow challenges. So minimizing, or at least deferring, taxes is especially important this year.
But the year-end tax planning strategies you typically implement likely revolve around reducing taxable income and gains. When losses and market volatility are dominant, different strategies may be required. To further complicate matters, there are many tax breaks that are set to expire after this year, and it's uncertain whether they'll be extended. So here's a look at some strategies that you might find helpful in your year-end tax planning this year. Maximizing Depreciation-related Deductions If your business will need to purchase assets such as equipment or computer software - or make leasehold, restaurant or retail improvements - within the next several months, you may want to do so by December 31, 2009. This may allow you to take advantage of some extended and expanded depreciation-related breaks that might not be available next year: Higher Section 179 expensing limit. The Sec. 179 expensing election allows a current deduction for newly acquired assets that otherwise would have to be depreciated over a number of years. For 2009 (or your company's fiscal year that began in 2009), the limit is $250,000. Without further legislation, the limit will drop to $134,000 for 2010. The expensing election begins to phase out dollar for dollar when total asset acquisitions for the year exceed $800,000. Without further legislation, this limit also will drop for 2010 - to $530,000. So, if you haven't already made qualified asset purchases up to the 2009 limit, you may want to do so by year end. If you wait until next year, you may have to depreciate asset purchase costs that you could have expensed had you made the purchases this year. Bonus depreciation. For eligible assets, generally if acquired in 2009, a special depreciation deduction can be taken equal to 50% of the asset's adjusted basis. The following types of property qualify for this special depreciation:
As of this writing, bonus depreciation isn't scheduled to be available for 2010. So, again, if you don't make purchases of eligible assets by year end, you risk having to depreciate their costs under the normal rules next year, which will defer much more of your deduction. There's no limit on the amount of asset purchases on which you can take bonus depreciation. But if you're eligible for Sec. 179 expensing, keep in mind its $800,000 limit. Otherwise your purchases might result in a reduced or eliminated Sec. 179 deduction. Accelerated depreciation for leasehold, restaurant and retail improvements. A shortened recovery period of 15 years (as opposed to 39 years) for leasehold, restaurant and retail space improvements, as well as for certain new construction for restaurant property, is available through 2009. Like bonus depreciation, this accelerated depreciation isn't scheduled to be available for 2010, so you may want to act soon to ensure you can take advantage of it. Making Losses Work for You Many businesses have experienced losses this year. If you're among them, you may be able to turn your loss into a tax advantage: Net operating losses. Generally, when business deductions exceed gross income, the difference is a net operating loss (NOL) for tax purposes and may be carried back two years to offset income. This generates a tax refund, providing a cash infusion in times of loss. Any loss that's not absorbed is carried forward up to 20 years. For 2008 and 2009 losses, however, you may be eligible to carry back an NOL for three, four or five years. (If the business is a flow-through entity, special rules affect the NOL deduction that owners can take on their individual tax returns.) If you expect that your business will experience a 2009 NOL, consider strategies for maximizing it. For example, you may want to make asset purchases before year end, which can allow you to take advantage of 50% bonus depreciation to maximize your expense deduction and increase your NOL. Note, however, that this strategy doesn't work with Sec. 179 expensing, which can be used only to offset net income, not to reduce net income below zero and create (or increase) an NOL. For more information on NOLs and the five-year carryback option, refer to article Businesses Experiencing Operating Losses Now Have More Tax-Saving Options. Passive activity losses. If you experience an operating loss from a business in which you don't "materially participate," passive activity rules limit its deductibility - you generally can deduct such a loss only against income from other passive activities. You can carry forward the remaining loss to future years, but subject to the same limits. To materially participate, you generally must participate more than 500 hours during the year. (Special rules apply to real estate.) You may, however, be able to take action before year end that will allow you to deduct such a loss:
Riding the Stock Market Rollercoaster While the stock market has generally improved significantly during the last several months, it's still volatile and your investments may not yet have fully recovered. So you'll want to think carefully before disposing of stock: Selling. A stock may be worth less than what you paid for it, but as long as you're holding it there may still be a chance that it will recover. If you sell, you're locking in that loss. Realized losses are netted against realized capital gains. If net losses exceed net gains, you can deduct only $3,000 ($1,500 if you're married filing separately) of capital losses against ordinary income. You can then carry forward the remaining loss to offset capital gains in future years. If you have substantial gains in the next few years, a large loss carryover could become a valuable tax-saver. But if you don't, it could take years to deduct the entire loss. So it's important to calculate your year-to-date gains and losses before year end. You'll also want to consider the impact of long- vs. short-term capital gains treatment and your overall investment goals - tax considerations shouldn't be the only driver of your investment decisions. You can then determine what actions to take by December 31, 20009 to help you best achieve both your tax and investment goals. Donating. It's generally beneficial to donate appreciated publicly traded stock because not only can you take a charitable deduction equal to the stock's fair market value (assuming you've held it at least one year), but you also can avoid any capital gains tax you'd pay if you sold the stock. Donating stock that's worth less than what you paid for it is another matter. In most cases you'll be better off selling the stock so you can deduct the loss and then donating the proceeds to charity. Gifting. If the recipient will likely sell the stock soon after you gift it, you can reduce his or her income tax by gifting stock that hasn't appreciated significantly since you've owned it, because the recipient will take over your tax basis. On the other hand, if the recipient is eligible for the 0% capital gains rate, gifting highly appreciated stock can save substantial taxes. As with donations, you'll probably want to avoid gifting stock that has declined in value - again, it likely will be better to sell the stock so you can deduct the loss. And you can gift the proceeds to your loved one. Taking Advantage of Other Breaks Set to Expire Many additional tax breaks are set to expire after 2009. At least some will likely be extended, but some may not be. Here are two that you may want to take action on by December 31, 2009 to ensure you can benefit: 1. Vehicle sales tax deduction. This break, currently scheduled to be available only for purchases from February 17, 2009, through December 31, 2009, allows buyers of new cars, light trucks, motorcycles and motor homes to deduct the applicable state and local sales and excise taxes. The deduction isn't available for tax attributable to vehicle value in excess of $49,500, and it phases out for joint filers with adjusted gross incomes (AGIs) exceeding $250,000 and for other filers with AGIs exceeding $125,000. This break generally is most beneficial to taxpayers who don't itemize or who take the itemized deduction for state and local income taxes (rather than the deduction for state and local sales taxes). 2. Suspension of required minimum distribution (RMD) rules. Generally you must take annual retirement plan RMDs after age 70½ or if you inherited the plan. If you don't, a 50% penalty applies to the amount you should have withdrawn but didn't. For 2009, however, the RMD rules have been suspended. If you'd otherwise be subject to the RMD rules, consider whether you can benefit from reducing or skipping your 2009 distribution. This will extend the period of tax-deferred growth, and it also might prevent you from being pushed into a higher tax bracket this year. Changes on the Horizon Tax planning when there is much uncertainty about the economy as well as future tax law changes is a challenge. The economic situation is likely to continue to change over the coming year, hopefully for the better, and many more tax law changes are also expected. Please contact us for assistance with your year-end tax planning and for information on the latest tax law changes. Dan Jones is a Tax Partner at Armanino McKenna and can answer any questions regarding this article. Contact Dan at (925) 790-2600 or e-mail This e-mail address is being protected from spam bots, you need JavaScript enabled to view it Download this article in PDF format |
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