Tax Planning Opportunities for 2011

Tax planning shouldn't be just a year-end activity because of the number of variables that can affect how much tax you pay and when you pay it. By regularly reviewing where you stand on year-to-date basis, you may be able to reduce your current year tax liability.

Equipment Purchases

If you have or will be purchasing any major equipment for your showroom or shop in 2011, you have some opportunities to expense the cost of the assets in the year you place them in service, rather than depreciating them over a number of years:

Bonus Depreciation - the 2010 Tax Relief Act allows businesses to deduct the capital expenditures of most new tangible personal property between September 8, 2010 and December 31, 2011 by permitting the first-year write-off of 100% of the cost as depreciation. The bonus depreciation rate will drop to 50% in 2012. Bonus depreciation can be taken whether or not you have a loss from the business

Section 179 - if you have purchased used equipment that does not qualify for bonus depreciation, you might be able to deduct them under Section179. Congress increased the expensing limit to $500,000 for the calendar year 2011 for your dealership's fiscal year that starts in 2011. This tax break begins to phase out dollar for dollar when total asset acquisitions for the tax year exceed $2,000,000. You can't use this expensing election to create or increase a loss from the business.

Cost Segregation Study

If you've recently purchased or built a building or are remodeling existing space, consider a cost segregation study. It identifies property components and related costs that can be depreciated over five, seven or 15 years instead of 39 years. The acceleration of depreciation into 2011 will defer your tax expense.

Retained Worker Credit

The credit is the lesser of $1,000 or 6.2% of a retained worker's wages during the 52-consecutive-week period. A retained worker is a worker who 1) Qualified for the payroll tax holiday, 2) was employed by the employer on any date during the tax year, 3) was employed for 52 consecutive weeks and 4) whose wages for the last 26 weeks was equal to or greater than 80% of the wages for the first 26 weeks.

Work Opportunity Credit

To be eligible, the employees must be from a disadvantaged group such as food stamp recipient, disabled veteran or ex-felon. The credit is 40% of the first $6,000 of qualified first-year wages of a qualified employee up to a maximum credit of $2,400 per employee.

Small Employer Health Insurance Credit

This credit is available to small employers who provide health insurance for their employees. The maximum credit is 35% of the group health coverage premiums paid by the employer. To be eligible, the company must meet all of the following requirements:

• Employs no more than 25 full-time equivalent employees during a tax year.
• Pays average annual full-time equivalent wages of $50,000 or less
• Has a qualified health insurance plan or arrangement that requires the employer to make a non-elective contribution of at least 50% if the premium costs, on a uniform percentage basis, on behalf of all of its employees who enroll in the plan

Salary vs. Distributions

Due to the differences between tax structures, there may be tax planning opportunities in whether shareholders take money from the company in the form of distributions or draws.

S corporations - to reduce their employment taxes, shareholder-employees may want to keep their salaries relatively low and increase their distributions of company income. However, to avoid penalties, they must take a "reasonable" salary which varies with facts and circumstances, but it is generally what the company would pay an outsider to perform the same services. While distributions are not taxed at the federal level, there may be state tax implications; for example, distributions from Tennessee S corporations are subject to the Hall Income Tax. Also, if S corporations have more than one owner, distributions must be done on a pro rata basis.

C corporations - shareholder-employees may prefer to take more income as salary because the overall paid by both the corporation and the shareholder-employee may be less.

While opportunities exist, remember that the IRS is cracking down on the misclassification of corporate payments to shareholder-employees, so you will need to tread carefully.