Tax Breaks You Won't Want to Miss for 2005

It's still early enough to take advantage of these smart tax strategies for your 2005 taxes.

Think you're getting all the tax breaks you can? There'sstill time to be sure you haven't overlooked any--especiallythose that expire at year-end.

If money is worth making, isn't it worth keeping--or atleast spending as you choose? These simple tax-planning steps canhelp you retain more of your earnings for 2005:

Look before you accelerate. One thing that might surpriseyou is how many more taxpayers are subject to the AlternativeMinimum Tax (AMT) each year. Under the new tax rules, about 40million Americans are affected and, as a result, would find nobenefit in prepaying certain taxes that, in the past, have been astaple for accelerating tax deductions. Accordingly, you should runprojections first to see whether or not you're in the AMTposition.

If you're not in AMT, then you could benefit by acceleratingyour estimated tax payments, such as quarterly estimates or realestate taxes. That means December is the time to pay your state andlocal income taxes; fourth quarter estimated taxes typically due onJanuary 15; and any property taxes that will be due in early 2006.You should also make charitable contributions in 2005 that you weregoing to make in early 2006.

Businesses, particularly those operating on a cash basis, mightalso consider accelerating deductions by increasing expenses in thetax year for operating supplies and repairs, and making some fixedasset additions to take advantage of the aggressive taxdepreciation rules.

Check out these income deferral dos and don'ts.Though deferring income by pushing off a significant year-end bonusinto January falls into the tried-and-true category for some, ifyou're a business owner or someone with an interest in aflow-through entity, such as a partnership or S Corporation,don't do it. It offers no tax advantage.

You might want to think about designing a profit-sharing orpension plan that allows you to defer compensation in a plan with along vesting schedule, so that the majority of satisfied fundsaccrue to those who stay the longest.

And if you're in the process of selling your business andit's getting close to the new year, you might want to seal thedeal in January instead of December to push off income for anotheryear.

Determine your eligibility for newer tax-savingsopportunities. You can benefit from the reduced income tax rateof 5 percent by bringing your income from foreign subsidiaries backinto the United States by year end, instead of the 20 percentincremental rate.

And be sure to take any Section 199 Qualified ProductionActivity (QPA) deductions to which your business is entitled.Companies are allowed to deduct 3 percent as a QPA deduction fortheir "qualified" manufacturing or construction income.It takes some effort to analyze your processes and operations todetermine the optimal tax benefit, but it could be rewarding.

Take advantage of tax breaks expiring at midnight on December31, 2005.

  • Consider purchasing any off-the-shelf software you've beenplanning to buy for your business--you can expense it immediately.After the end of the year, you'll have to capitalize it andamortize it over a 3-to-5-year period, depending on the life of thesoftware.
  • Evaluate whether you should take the sales tax deduction, whichapplies only for 2004-2005, instead of the income tax deduction.This applies to individuals in states with no income tax, such asTexas and Florida, and could be advantageous if you're not inAMT and have a year with major expenditures, such as serving asyour own contractor to build your own house.
  • If you want to buy an SUV, or any auto weighing more than 6,000pounds, to use for business, make your purchase before year-end towrite off $25,000 for first-year depreciation, down from $100,000in 2004. Could this be the year to benefit from reduced SUV pricesand a tax break to make a marquee SUV part of your in-storedisplay?

Do a good deed. Hire a worker displaced by HurricaneKatrina. The Hurricane Katrina emergency relief act signed onSeptember 23 makes available a Work Opportunity Tax Credit of 40percent of the first $6,000 paid in wages to businesses that hireworkers displaced by the hurricane between August 28, 2005, and theend of the year. The maximum credit is $2,400 per employee.Businesses affected by the hurricane have an extension to February28, 2006, for filing their tax returns and may fully deduct theexpense of any losses that they pay out of pocket. Later taxreturns must be amended to reflect any reimbursement byinsurance.

You might also want to donate food to any 501(c) 3 organization,or textbooks to public schools between August 28 and the end of theyear. There's no taxable income limit to the amount for whichbusinesses can receive a deduction. The deduction is two times thecost of the gift as long as the fair market value is greater thanthat. But make sure you keep records to justify the deductions!Under the old rules, the deduction was up to 10 percent of totaltaxable income.

Finally, keep in mind these two general planning basics.Be sure your business is structured so you won't suffer doubletaxation upon exit when selling your assets. If you're theowner of a C corporation and not an S corporation, a partnership,an LLC or another "flow-through entity," which allowscompany profits to be reported on your personal tax return,it's important to ask "Why not!?"

And clean up your portfolio to offset realized gains withunrealized losses before the end of the year.

No matter what you end up doing, take time every year to planahead. It feels great to get a tax refund, especially whenyou've found ways to get back all the funds you're entitledto.

Paul Schlather, CPA, is a senior tax partner withPricewaterhouseCoopers' Private Company Services practice. Hecan be reached at

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