Still Time to Reduce Year End Taxes -Year- End Tips for Businesses and Individuals

Businesses and individuals, armed with an understanding of changes in the federal tax code, can still make decisions that may significantly impact their 2004 tax liability. "A small investment in time and understanding can serve at a minimum to reduce this years taxes and push off the tax liability to April 2006," said Craig Koop, Director of Implementation for International Profit Associates, Inc. and its International Tax Advisors, Inc. division in Buffalo Grove, Illinois. You can leverage this initial effort into 15 months of opportunity that is not only measured in interest gained on the amount you might have otherwise spent, but even better, the chance to implement other tax advantaged strategies."

(PRWEB) December 25, 2004 -- Businesses and individuals, armed with an understanding of changes in the federal tax code, can still make decisions that may significantly impact their 2004 tax liability.

A small investment in time and understanding can serve at a minimum to reduce this years taxes and push off the tax liability to April 2006," said Craig Koop, Director of Implementation for International Profit Associates, Inc. and its International Tax Advisors, Inc. division in Buffalo Grove, Illinois. You can leverage this initial effort into 15 months of opportunity that is not only measured in interest gained on the amount you might have otherwise spent, but even better, the chance to implement other tax advantaged strategies."

There are generally three basic strategies that can be employed to decrease income tax liability: 1) deferring or accelerating income; 2) accelerating expenses; and 3) taking advantage of available tax credits. These will be discussed following presentation of business and individual tax strategies for this year.

New For 2004 - Year-End Tax Planning for Businesses

Here are some changes for 2004 that could affect many business taxpayers:

As noted below, the Section 179 expense limit has increased to $102,000; the phase out begins with $410,000 of qualifying purchases.

The additional first-year depreciation (bonus depreciation) is increased to 50% (from 30%) for qualifying property (new, tangible personal property and leasehold improvements) placed in service on or after May 6, 2003. But that benefit expires at the end of this year.

SUV loophole closed. The new law limits the Sec. 179 expense deduction for an SUV to $25,000, effective for vehicles placed in service after October 22, 2004. The new law defines vehicles that qualify for the full Sec. 179 expense option.

Start-up expenses. Start-up expenses of up to $5,000 can be expensed in the year the trade or business begins. This change is effective for expenses incurred after October 22, 2004. Expenses over that amount can be amortized over 180 months (instead of 60 under prior law).

Keep in mind that businesses organized as S corporations, partnerships and LLCs pass their income and losses thru to the owners. Thus, the lower tax rates for individuals affect business planning for these entities.

New For This Year - Year-End Tax Planning for Individuals

The most important change for 2004 is that many of the tax benefits including the child tax credit, expansion of the 10% bracket, above-the-line deduction for teacher's expenses, alternative minimum tax exemption, etc. that were set to expire have been increased or extended. Here are some additional changes that could affect many taxpayers:

For 2004 and 2005, you can deduct either your state income tax or your state sales taxes. The IRS will be providing tables, but you can deduct what you actually spent based on receipts.

Vehicle (highway vehicle, boat, aircraft) donations after December 31, 2004 where the claimed value exceeds $500 require new substantiation from the charity. If the charity sells the vehicle without material improvement, your deduction will be limited to the selling price.

The marriage penalty has been further reduced by increasing the amount of the basic standard deduction for married filing joint and by increasing the size of the 15% tax bracket for joint filers.

There is now a uniform definition of a child for the dependency exemption, child tax credit, earned income tax credit and for determining head of household status.

The nonrefundable personal tax credits may be offset against both regular and alternative minimum tax liability.

The standard mileage rate is 37.5 cents per mile for business use (40.5 cents in 2005) and 14 cents per mile for medical, moving, and charitable work.

If you have employee business expenses, you can still take the 50% bonus depreciation on qualifying property, but that benefit expires at the end of this year. And you can claim no more than $25,000 of Sec. 179 expense on an SUV placed in service after October 22, 2004.

Deferring or Accelerating Income

Individuals with relatively stable income, who experience no significant movement between tax brackets, most commonly postpone payment of taxes by deferring income and accelerating deductions. For example, delaying a year-end bonus until January 2005 means the taxes are not due until April 15, 2006. One key objective may also involve shifting income into low tax-bracket years and maximizing deductions in high tax-bracket years.

On occasion, you may actually benefit by accelerating income from 2005 into 2004. For example, if you anticipate being in a higher tax bracket in 2005, or if you will need additional income in order to take advantage of an offsetting deduction or credit in 2004 that will not be available in the future, it may make sense to recognize that income in the current year.

Another tax-saving opportunity may exist through modifications to your retirement planning. Every time you put money in your 401k or other retirement plans that allow for pre-tax contributions, you reduce your current income taxes. In addition to obtaining a deferral on the recognition of this income until the money is withdrawn from the plan at retirement (or earlier in some cases), the tax savings (the deferred tax portion) remains in the account and acts to increase the compounding return on your investment. As a result, you obtain a tax deferral as well as an increased return on your investment.

Accelerating Expenses

To maximize the benefits of itemizing deductions, you should consider adjusting the timing of your deductible expenses so that they are higher in a tax year in which you may itemize those deductions.

Any taxpayer, whether a corporation, partnership, individual, trust or estate, may generally deduct all of its ordinary and necessary expenses which are incurred in carrying on an active trade or business. Included in these normal operating expenses would be insurance premiums, advertising, and professional fees (legal and accounting) provided that such fees are incurred in connection with matters related to the business. Some expenditures such as capital improvements, equipment, computers and computer software, are deductible over the assets useful life, as opposed to being entirely deductible in the year the expenditure is made. Similarly, the costs incurred in starting-up a business can be expensed up to $5,000, with the rest being amortizable over a period of not less than 180 months, beginning with the month in which the business begins.

Although traditional tax planning generally calls for the acceleration of deductions in order to reduce the current years income, when doing so, a taxpayer must determine whether they will be affected by the alternative minimum tax (AMT), which could completely eliminate the benefit of increased deductions," Koop points out. In fact, if a taxpayer is in an AMT situation, it may be more beneficial to accelerate income and take advantage of lower AMT rates in a year where it applies, as the top AMT rate is 28% and the top ordinary income rate is 35%.

Accelerating deductions on tangible personal property

With respect to tangible depreciable property acquired for use in the active conduct of a trade or business, taxpayers may elect (under Internal Revenue Code Section 179) to treat the cost of this property as an expense rather than a capital expenditure. The result is an immediate deduction as opposed to a series of deductions spread-out over the useful life of the asset. For the tax year 2005, the maximum annual deduction that may be taken under Section 179 was raised from $102,000, up from $100,000 in 2004, and up from $25,000 in 2003. For 2006 and beyond, the maximum deduction will be limited to $25,000 annually.

Home Office Expenses

When taxpayers use their personal residence for business purposes, the expenses associated with that use are generally not deductible unless certain tests are met. In particular, the expenses must be attributable to a specific portion of the home (or a separate structure) which is used only for the taxpayers trade or business. This area can be a room or other separately identifiable space. This means the area must be used exclusively and on a regular basis as the taxpayers principal place of business. Additionally, this portion of the home must be a place of business that is used by patients, clients or customers in the ordinary course of business, or in connection with the taxpayers business if the taxpayer is using a separate structure that is appurtenant to, but not attached to, the home. Where the taxpayer is an employee, the business use of a home must also be for the convenience of the employer.

Business Vehicle Depreciation (SUV expense now limited)

In 2003 and part of 2004, vehicles purchased during the year, weighing more than 6,000 pounds and used predominantly for business, were subject to more favorable treatment. These vehicles, which tend to be mid-size or larger Sport Utility Vehicles, are not subject to the luxury auto depreciation limitations, meaning they can be depreciated at a faster rate (over 6 years as opposed to 10 or more). Recent legislation, however, has limited the first year expense on depreciable tangible property in the year of purchase back to $25,000, instead of the higher Section 179 limitation of $102,000, referred to above.

Charitable Giving

Charitable giving is always a consideration in tax planning. When making charitable contributions, however, it is important to keep in mind that such contributions are subject to certain limitations based upon a percentage of AGI, as well as limitations linked to the type of property being contributed and the type of tax exempt organization receiving the donation.

Its still not too late to do some planning that will have an effect on your 2004 tax return. In particular, individuals have until April 15, 2005, to make a contribution to their IRA and still claim a deduction on their 2004 personal income tax return. Similarly, for employers that make contributions to a simplified employee pension (SEP), contributions are treated as made on the last day of the tax year if they are made by the due date of the employers tax return, subject to some limitations.

Disclaimer: International Profit Associates, Inc., and International Tax Advisors, Inc. provide the above information for the benefit of the readers. Every effort has been made to ensure that all information contained herein is accurate per the date of its original distribution; however, this information is subject to change. Furthermore, it is important to understand and convey that the tax and financial planning situation and needs of each business and individual are likely to be different. As a result, readers should always contact their tax advisors to obtain proper professional advice before any action is taken.

International Profit Associates, Inc., of Buffalo Grove, Ill., provides consulting services to small and medium sized businesses. More information about the company may be found at www.ipa-iba.com. Craig Koop is the Director of Implementation for International Profit Associates, Inc. and its International Tax Advisors, Inc. division that provides strategic tax planning services and representation of clients in resolving matters with tax collection agencies in the United States and Canada. Additional information, including a comprehensive resource center, may be found at www.internationaltaxadvisors.com.

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