Smart Tax Moves

By Pam Morris, CPA and Tom McCormick, CPA Tax Partners, Lattimore Blac k Morgan & Cain, PC

Whether you just wrapped up your year or your company’s year-end is right around the corner, it is always good to know where you stand in regard to taxes. Here are a few provisions that you should consider when preparing this year’s tax return and in planning for 2010.

New equipment. The 2009 economic stimulus law extended the enhanced Section 179 deduction for another year. The maximum deduction in 2009 for business assets is generally $250,000. In addition, you may be able to claim a 50 percent "bonus" depreciation deduction on any excess cost.

Important qualifier: To qualify for either tax break, you must have "placed the property in service" before 2010. Take your best shot at collecting debts. Due to the recession, your business may have had trouble securing payment for goods or services. If your business records income on an accrual basis and has totally worthless debts, you can write them off as business bad debts, thereby reducing your tax liability. Keep detailed records of the efforts -- such as phone calls, e-mails and correspondence -- that can prove the worthlessness of a debt if the write-off is challenged by the IRS.

Hire "target" workers. A special jobs credit -- called the Work Opportunity Tax Credit -- is available to employers who hire workers from certain disadvantaged groups. The credit is generally equal to 40 percent of the first $6,000 of wages for a maximum credit of $2,400 per employee. If you hired eligible workers and they started before year-end, the credit can offset taxes.

Take advantage of new NOL rules. Normally, a net operating loss can be carried back just two years before being carried forward for up to 20 years. The economic stimulus law allowed a five-year carryback for NOLs in 2008 for certain small businesses. New legislation enacted last November enables a business, regardless of size, to carry back NOLs in 2008 or 2009 for up to five years.

Caveat: The carryback to the fifth preceding year can only offset 50 percent of taxable income.

Deduct sales tax on auto. If you meet certain income limitations, you can deduct the sales tax on a vehicle purchased prior to 2010 up to $49,500 in value. If you do not itemize deductions, the sales tax deduction is added to your standard deduction.

Donate stock. Shares of stock may be contributed to charitable organizations for a charitable deduction. If the contributed shares have appreciated in value and have been held for over one year, the charitable contribution will be its value on the day of donation. The taxpayer avoids the tax on the appreciated value and receives appreciated value as a charitable deduction. If the shares of stock have depreciated in value, then the shares should be sold, and the cash given to the charity and a capital loss taken as a tax deduction.

Buy your first home. Recent Congressional action extends the first time homebuyer credit to home purchases with a sales contract by April 30, 2010 and a closing date of no later than June 30, 2010. In addition, the eligible individual income limitation has been liberalized to an AGI of $125,000-145,000 and $225,000-$245,000 for joint filers). The credit is the lesser of $8,000 or 10% of the purchase price.

Buy another home. A further extension of the home buyer’s credit is available to "long-time residents" to buy and receive a credit of the lesser of 10% of purchase price or $6,500. Long–time resident is any individual (and, if married, the individual’s spouse) who has maintained the same principal residence for any three consecutive- year period during the eight years prior to purchase of the new home.

Convert a regular IRA to a Roth. In 2010, any taxpayer, regardless of taxable income, may convert a regular IRA into a Roth IRA. The converted amount is taxable income, but subsequent distributions from the Roth IRA including the earnings are tax-free. There is also a special election to defer the payment of tax until 2011 and 2112 tax years.

Your tax adviser can help determine if one or more of these year-end techniques is appropriate for your business.