December 2006
Timing Business Asset Purchases
December 2006
Timing Business Asset Purchases
With the little late-year planning, you may be able to boost your company's 2006 tax deduction. Before you buy additional fixed assets, know how the depreciation rules work.
In General Usually, a business can claim a full half year's worth of depreciation for assets (other than real estate) if places in service at any time during the tax year. When this rule applies, a last-minute purchase of equipment may yield a generous first-year depreciation deduction.
Important Exception The general rule does not apply when the cost of assets placed in service during the last quarter of the year (other than real estate) represents more than 40% of the total cost of the year's non-realty asset acquisitions. In this case, assets acquired during the first quarter get the equivalent of 87.5% of the full year's depreciation, second-quarter assets get 62.5%, third-quarter assets 37.5%, and the last-quarter assets 12.5%
Have a Strategy You can maximize your business's first-year depreciation deductions by planning annual purchases to take advantage of these rules. For example, if most of this year's equipment purchases were made during the third quarter, you may want to monitor final quarter purchases to avoid the 40% rule. Note that assets you elect to expense under Section 179 of the tax code aren't included in the 40% calculation.
Factor in Section 179 This special election allows you to write off the cost of most types of depreciable non-realty assets all in one year instead of claiming depreciation deductions over a multi-year period. Suppose, for example, your business spends $30,000 on new equipment this year. Without the election, it will take several years to deduct the full cost. With the election, you can deduct the entire $30,000 as an expense this year. A few pointers:
We can help you review your business tax situation with these opportunities in mind.
M was awarded $70,000 in damages for mental pain and anguish and injury to professional reputation in connection with the a discrimination complaint against her former employer. Questions: Does the $70,000 represent taxable income?
Before 1996, federal tax law provided that amounts received in compensation for personal injuries or sickness were excludable from income. The code was revised in 1996 to allow the income exclusion only for damages (other than punitive damages) received on account of personal physical injuries or physical sickness.
Under this rule, awards for emotional distress and injury to reputation have been considered taxable. Now, however, a federal appeals court has held that taxing such awards is unconstitutional because a recovery for personal "income" within the meaning of the 16th Amendment. The government is expected to appeal the decision.
At the ripe old age of 32, individual retirement accounts (IRAs) are proving quite popular. According to recent research, individuals had $3 trillion in IRA investments at the end of 2003.* That's a significant amount - and some of it is likely to pass the IRA owners to their beneficiaries.
If you inherit a traditional IRA, the choices you make will determine your distribution options and the resulting tax consequences.
Surviving Spouses If you are the sole designated beneficiary of your spouse's IRA, you have three basic choices. One is to simply leave the account as it is. You will be able to withdraw funds without penalty, although your income tax will be due on the distributions (except for amounts that represent a return of nondeductible contributions). Annual distributions of a minimum amount will be required. They can be delayed until your spouse would have reached age 70, if desired.
Nonspouse Beneficiaries If you inherit an IRA from someone other than your spouse, the choices and tax consequences are a little different. You can leave the IRA in the deceased owner's name, but you can't postpone distributions. You generally must begin taking annual minimum distributions, spread over your life expectancy, right away. (In certain circumstances, the entire account must be distributed within five years.) And, of course, income taxes will be due on the distributions.
Beginning in 2007, you may also choose to roll over the IRA into an IRA in your own name. Unlike spouse-beneficiaries who may postpone distributions, however, you will generaly have to begin taking distributions (and paying income tax on them) immediately.
*"The Individual Retirement Account at Age 30: A Retrospective," Investment Company Institute Perspective (February 2005), Investment Company Institute.
Moe decided to buy Harvey's Hardware for one reason: He loves nuts and bolts. He made a reasonable offer. Harvey accepted, and the deal was done. Only then did Moe find out about the three key supplies that hadn't been paid for months.
Woe is Moe If hypothetical Moe had allowed time for proper due diligence, he would most likely have learned about the outstanding bills - and who knows what else - before purchasing Harvey's headaches. Due diligence is the thorough, in-depth investigation of a target business conducted before a sale or merger occurs. The information gathered helps the potential purchaser make a more informed decision, and minimizes the number of unwelcome surprises that might crop up later should the sale or merger go through.
Help From the Pros Conducting due diligence can be tricky. The target company may not want to reveal that it is for sale, making it difficult to get information from employees, vendors, and competitors. Also, some information, such as sales data, is confidential. Potential buyers should rely on the help of their accountant and a lawyer with experience in due diligence.
No Crystal Ball Gathering information is an important step. So is putting together an advisory team to review the information. A group of key company employees and outsiders will be able to ponder the possible outcomes better than a single person or pair of anxious buyers.
Are your business computers connected to the Internet? If they are, here are some precautions you should be taking.
V Is for Virus New threats appear on the Internet every day in the dorm of worms and viruses. Your first line of defense is to keep your hardware and software protection up to date. Be sure you always have the most recent virus definitions, software patches, firewall updates, and spam filters.
P Is for Policy Develop security policies that clearly spell out what is acceptable and unacceptable Internet behavior for employees. For instance, are downloads permitted? Are there restrictions on which websites employees may visit?
If your company doesn't have an IT manual, consider including Internet policies and procedures in your employee manual. Then, make sure your employees fully understand the rules - and the repercussions of violating them.
New Statement of Financial Accounting Standards No. 157, Fair Value Measurements defines fair value, discusses methods of measuring fair value, and requires expanded financial statement disclosure about the use of fair value to measure assets and liabilities. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
The IRS is reminding small businesses that have made payments to subcontractors, attorneys, architects, and other service providers that the payments may need to be reported to the IRS on Form 1099-MISC. For more information about the reporting requirements, please contact us.
Speaking of 1099-MISC forms, several Hollywood stars involved in the Academy Awards show should be receiving them this year. The IRS says the entertainers need to report the value of the gift bags they received as taxable income.
Rising energy prices have significantly affected 43% of business surveyed by the National Small Business Association in mid-2006 and moderately affected another 32%. Price increases and reduced business travel were the most commonly cited methods for coping with the costs.
Carla and her husband recently divorced. As she begins this new phase of her life, Carla wants to make sure her finances are in order.
Like most newly single adults, Carla should review her financial goals. What are her plans for the future? Saving for retirement, a house, her children's education, or continuing her own education may be some of her goals. She should have a plan in place for meeting each of them.
Carla should review her investments, too, to determine if she should make any changes. An appropriate mix of asset types and adequate diversification are crucial to building a strong portfolio.
Making sure her insurance coverage - health, disability, and life - is adequate should also be a priority. Proper coverage is especially important if Carla has children at home, and there are college expenses somewhere in the future.
With only one income to rely on, Carla should try to accumulate an emergency fund of three to six months' living expenses to give herself some breathing room. And she should keep her credit card and other high-interest debt to a minimum.
Finally, contributing to her employer's retirement savings plan, if available, or to an individual retirement account will help Carla build her retirement nest egg.
If you're newly single, we can help you review your financial situation and plan for the future. Please contact us at your convenience.
Question: After an IRS audit of my father's estate-tax return several years ago, I agreed (as executor of the estate) that his stock in our family business (a regular C corporation) should be valued for estate-tax purposes as $5 million, less a 20% discount for lack of marketability. I inherited the stock and plan to sell it to my brother. Do I have to use the discounted value as my basis to figure my gain on the sale or can I use the full $5 million, thus reducing my taxable gain?
Answer: A similar question arose in a recent case involving an art collection that had been discounted for federal estate-tax purposes and was being sold by the heirs. The court held that the heirs were bound by a duty of consistency to figure their sale profit using the discounted estate-tax value.
Question: Is home equity loan interest deductible even if the borrowed money isn't spent on improving the home?
Answer: Interest on up to $100,000 of qualified home equity indebtedness is deductible, regardless of how the proceeds are used.