Once December 31st has come and gone, your tax liability for the 2009 tax year will be set in stone. Until then, and especially now that your final tax picture for 2009 is becoming more clear, year-end tax planning presents a unique last chance to lower your tax bill. It is an investment in time well worth considering.  Year-end tax planning is made more urgent in 2009 because of some significant tax law changes.  We have highlighted many of these changes, as well as, some areas of law where the IRS may be increasing their scrutiny.

2009 Year-end Tax Planning

Homebuyer Credit. Congress extended the homebuyer tax credit, which allows a refundable credit for up to $8,000 ($4,000 for married filing separately) for qualifying first time homebuyers. Eligible taxpayers who enter a binding contract to purchase by April 30, 2010 and close on the purchase by June 30, 2010 may receive the credit. Congress also established a credit up to $6,500 ($3,250 for married filing separately) for homes purchased after November 6, 2009 by taxpayers who have owned and used the same residence as their principal residence for any five consecutive year period during the previous eight year period.

5-year NOL carryback. For businesses, the Worker, Homeownership and Business Assistance Act enhances the ability to carry back Net Operating Losses. All businesses may be eligible to elect to carry back applicable NOLs and obtain cash refunds. The new rules apply to 2008 and 2009 NOLs. Many variables factor into taking this benefit, with some of them able to be changed by year-end tax planning before 2009 NOLs are set in stone. 

Work opportunity credit for employers hiring unemployed veterans. The Work Opportunity Credit allows a credit up to $2,400 per employee for employers who hire individuals in certain targeted groups. A new law passed in 2009 expands the credit to include unemployed veterans.  The IRS defines unemployed veterans as those who have served on active duty for 180 days, have been discharged from the Armed Forces at any time during the last five years, and received unemployment compensation for at least four weeks during the year prior to being hired by the employer. Certain certification requirements are required to claim the credit. If you think your business may benefit from this credit, please contact our office.

Required Minimum Distributions waived for 2009. Individuals who have reached age 70 ½ are required to receive minimum distributions from their retirement accounts based on a specific calculation. For 2009, required minimum distributions are not required by the IRS.

Tuition credit. The American Opportunity Tax Credit replaced the Hope Scholarship Credit for 2009 and 2010, and now applies to the first four rather than the first two years of a student's post-secondary education. The maximum credit was increased to $2,500 per eligible student.

Green incentives.  When considering home improvements, do not forget a variety of federal tax incentives that can help you save money. One of the more popular tax breaks is the residential energy property credit. The credit is 30 percent of the sum of expenditures for qualified energy efficiency improvements, including windows, furnaces, water heaters, heat pumps, and more, which are placed in service in 2009 and 2010. The credit is limited to $1,500 for both 2009 and 2010. (Example: If you claim $1,000 in 2009, you may only claim $500 in 2010.) The improvement must meet strict energy efficiency standards. If it does not, you cannot claim a credit. This is a common error and it can be a costly one.

The Tax Code also rewards taxpayers who purchase "green" vehicles, such as hybrid vehicles and soon to be available plug-in electric drive vehicles. As with home improvements, the vehicle must meet certain energy efficiency standards. The IRS has certified the eligibility of many hybrid vehicles for the alternative vehicle tax credit. Additionally, the credit has been enhanced for taxpayers who in the past did not benefit from these credits due to AMT tax. Do not forget, also, that as a bonus for purchasing any new vehicle by the end of 2009, you may deduct the sales tax that you pay on up to $49,500 of the purchase price, depending on the amount of your adjusted gross income. 

Military personnel.  Individuals serving in the U.S. armed forces are eligible for a variety of tax incentives. For example, the Worker, Homeownership and Business Assistance Act extends the homebuyer credit for members of the U.S. uniformed services, Foreign Service, and intelligence community on qualified official extended duty outside the U.S. to purchases made before May 1, 2011 (or July 1, 2011 for taxpayers with binding contracts). Additionally, there are special taxpayer-friendly rules for certain distributions from retirement accounts and for the treatment of differential pay. These provisions may be overlooked because they are not as well known. If you, a family member or friend is serving in the armed forces, please contact our office for a complete review of all the tax incentives for service personnel.  

Business vehicles.  Many small businesses depend on vehicles owned or leased either by the company or by the proprietor. The standard mileage rate for business use of vehicles is 55 cents per mile for 2009. (The rate for 2010 will be 50 cents per mile.) Alternatively, you may use the actual cost method. Under that method, you may take deductions for depreciation, lease payments, registration fees, licenses, gas, insurance, oil, repairs, garage rent, tolls, tires and parking fees. If you have not compared the two methods recently, please contact our office. Regardless of the method you use, if your vehicle is used for personal as well as business purposes, only expenses or mileage attributable to the percentage of business use are deductible. There are separate considerations involved in leasing a car for business.  Also keep in mind a mileage log or other qualified substantiation is required. Please contact our office if you are unsure of the record keeping requirements for vehicles.

Employee benefits.  Establishing employee benefit plans, qualified retirement plans and medical or health reimbursement plans can provide tax savings to employees and your business. Recently, the Obama administration and the IRS unveiled a new initiative to encourage small businesses to offer retirement savings plans. The initiatives expand opportunities for automatic enrollment in retirement plans and provide guidance for employers who choose to allow employees to contribute payments for unused vacation or other similar leave to their retirement plan.  The guidance also helps employees and employers understand their tax-favored rollover and other savings options. Our office can help you choose or refine a retirement savings plan that best fits your business. 

Qualified small business stock.  Earlier this year, Congress expanded the 50 percent exclusion from tax for capital gains realized on the sale of qualified small business stock held for more than five years to 75 percent. The exclusion is limited to individual investors. The enhanced exclusion will expire after December 31, 2010.

Life changes.  Year-end tax planning is not only about what is happening in Congress and at the IRS. Addressing the changed circumstances in your life has always been a large part of year-end tax planning. Changes in your employment status, family, investments, or retirement plans raise new tax issues:  

• Self-employment, severance pay, sign-on bonuses, stock options, moving expenses, rollovers, and COBRA health benefits, to name a few employment-related events, all present unique challenges. 
• In your personal life, marriage, divorce, a larger family, and child care or eldercare expenses arising in 2009 can impact your tax situation. 
• Investments, too, generally benefit from year-end tax strategies. You can take steps to balance out gains and losses. You also should take a year-end tally of dividends and interest to make certain that you are paying the correct estimated tax.

Timing: Should you accelerate deductions in 2009?

2009 has been a year of significant change, but some experts expect even bigger changes to the tax code in 2010.  Unfortunately, we cannot be sure of what changes are in store.  Taxpayers who believe they will be in a higher tax bracket in 2010 may want to delay year-end purchases or opt out of Sec. 179 or bonus depreciation in 2009.  Deductions are more valuable in years when the tax rate is higher.  The following tax planning tips involve the timing of deductions.  Consideration should be given to the future expected tax rates when utilizing these strategies.

Timing of expenditures.  Planning for deductions and credits at year-end can get complex but can be rewarding. Timing and qualification rules create traps and opportunities:  

• Pre-paying certain expenses, such as real estate taxes or mortgage interest, does not necessarily translate into a larger deduction this year. 
• Paying a spring college tuition bill in late December instead of early January, however, can impact whether you maximize the benefit of the new American Opportunity Tax Credit for both 2009 and 2010. 
• Year-end charitable giving generally has been a smart way to reduce current year taxes but strict timing rules and revised substantiation requirements for property donations cannot be overlooked. However, some taxpayers may believe the deduction will be more valuable in 2010.

Roth conversions.  In 2010, the opportunity to convert any IRA into a Roth IRA without the long-time $100,000 income restriction has many individuals already setting aside funds. Some individuals, however, may do better to convert to a Roth IRA before the end of 2009, when the value of their accounts, and the consequential income that must be recognized on conversion, are at historic lows.

Code Sec. 179 expensing.  For 2009, a business can immediately deduct up to $250,000 for qualifying equipment purchases, including computers and software. The property must be used more than 50 percent for business. To take the deduction for 2009, qualified equipment must be placed in use by December 31, 2009. Please contact our office if you are considering an equipment purchase or other qualifying purchase before year-end. This tax break is scheduled to end in 2010.

Bonus depreciation.  A related, and also temporary tax break, is 50 percent first-year bonus depreciation of the adjusted basis of qualifying property. The property must be (1) eligible for the modified accelerated cost recovery system (MACRS) with a depreciation period of 20 years or less; (2) water utility property; (3) computer software (off-the-shelf); or (4) qualified leasehold property. Only new property qualifies. In addition, it must be "placed in service" before January 1, 2010.

Hot IRS Topics: Should you reexamine your circumstances to ensure you are compliant?

Employer vs. independent contractor.  Classifying employees and contractors correctly is a serious issue.  The IRS is currently reviewing the relationship companies have with workers to determine if those workers are employees or contractors.  Even if you provide the individual with a 1099, the IRS can still reclassify, which will subject you to payroll taxes and stiff penalties.  Businesses that have profit sharing plans could also risk having their retirement plans disqualified if employees are reclassified, which could result in even larger amounts of additional tax.

Some industry insiders believe that tax returns where 80% of revenue comes from a single payer will be pulled for review of the payer.  If you have contractors who likely receive 80% or more of their income from your business, you will want to examine your circumstances to make sure they have been classified correctly.  Please contact our office if you have any doubts about the classification of contractors.

Hobby losses.  A business must have a profit motive to deduct losses.  Whether or not a business is operated for profit is determined by the facts and circumstances of each case.  Taxpayers who have a small “side” business that has losses each year, may want to examine whether that business is truly operated for profit. 

S Corporations with W-2s to shareholders.  Health insurance paid on behalf of shareholder-employees must be included in the gross wages of the shareholder.  The amount paid for health insurance should be included in Box 14 of the Form W-2.  The shareholder-employee can deduct the health insurance on his or her individual tax return.  However, payments for health insurance are not included in Social Security and Medicare wages on the Form W-2.  Shareholders must have a Form W-2 filled out in this manner in order to take the medical insurance deduction on page one of their tax return, which results in the most favorable tax treatment.

Whether right here in Macon, Warner Robins, or anywhere else in the country, tax planning is critical.