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If you utilize the services of a tax professional, consider making an appointment with him or her before the end of the year to discuss tax saving strategies. A tax professional can assist you in a thoughtful analysis of your business and/or personal finances to determine if you can take any steps that might make paying your 2007 income taxes less painful.
Business deductions: Businesses may still receive a generous depreciation deduction on purchases of vehicles that weigh more than 6,000 pounds. The SUV Section 179 deduction limit is still $25,000. For ordinary luxury automobiles, the first year depreciation limitation is $3,060. Standard mileage rate for business travel is 48.5 cents for the entire year. The Section 179 deduction for other qualifying equipment purchases is $125,000 for 2007.
If you are shareholder/officer of a small corporation, you should establish a formal policy to reimburse for legitimate expenses you incur on behalf of the company, such as buying office supplies and vehicle expenses. If the expenses are not reimbursed, employee/shareholder expenses are deductible on Schedule A as an itemized deduction, but are subject to a 2 percent of AGI limitation and might not save any tax due to the alternative minimum tax.Pre-pay recurring expenses, such as rent, office supplies and insurance before year end. However if you expect to earn more money in 2008, you may wish to defer paying expenses until January 1. If you are a sole proprietorship, consider deferring some billing until 2008.
If you have children that work in your business, consider paying them a wage for services rendered, and use that income to fund an Individual Retirement Account, Roth IRA or other retirement investments for those children. This may shift income to a lower tax bracket — but watch out for the “kiddie tax.”
Establish your retirement plan to make sure you are getting the maximum deduction. Employer profit sharing contributions are limited to the lesser of 100 percent of compensation or $45,000 per participant, and not greater than 25 percent of total compensation paid to all participants. Employee 401(k) contributions are limited to $15,500 if under age 50, and $20,500 if over age 50. Employee Simple IRA contributions are limited to $10,500 if under age 50, and $13,000 if over age 50.
If you are considering having a holiday party, employer-sponsored events for employees, such as summer picnics and holiday parties, are 100 percent deductible (as opposed to 50 percent for general meals and entertainment expenses).
Individual deductions: Sales tax paid is still deductible for 2007. If you itemize, sales tax paid on certain items such as cars, boats, airplanes and home improvements can be added to standard IRS sales tax deductions. I encourage clients to “save those receipts,” because even if they do not buy any bi- ticket items, actual sales tax paid will generally exceed amounts determined by the tax tables.
For charitable contributions after August 17, 2006, it is important that you have some record of your giving, such as a cancelled check or receipt from the charitable organization. Charitable contributions of $250 or more in any one day to any one organization must have written substantiation from the organization. A canceled check is not sufficient to support the deduction. The acknowledgment letter must be received the earlier of the date of the tax return is filed for the year of the contribution or the due date for filing, including extensions. Purchases made at charitable auctions, are generally deductible to the extent the amount bid and paid exceeds the fair market value of the item purchased. You should have a receipt from the organization indicating the fair market value of the items purchased in order to compute the charitable portion of your purchase.
Vehicle travel expenses for charitable endeavors are deductible at the rate of 14 cents per mile.
Gifting: From an estate planning perspective, gifting is an option for transferring wealth. Cash gifts of up to $12,000 are allowed to any person in 2007. A husband and wife can make gifts up to $24,000 to any one individual. Note that wealth transfer gifts are not income tax deductible.
For estate tax reporting purposes, gifted property must be properly valued at fair market value (FMV) as defined by the Code, regulations, case law, and IRS pronouncements. Failure to use FMV can result in the imposition of penalties on both you and the individual who prepared the valuation.
On the horizon: As 2007 winds down, House Ways and Means Committee Chairman Charles Rangel, D-NY has introduced a dramatic tax bill, the Tax Reduction and Reform Act of 2007. The bill offers good news to many taxpayers by extending several temporary tax provisions to 2008. Most importantly, this bill would extend the current Alternative Minimum Tax (AMT) enhanced exemption amount for 2007 to $66,250 for joint filers and $44,350 for individuals. If the enhanced exemption is not extended, many taxpayers will be unpleasantly surprised in early 2008 when they have to pay the Alternative Minimum Tax.
(Editor’s Note: Information provided in this article is of a general nature only, and application of the tax planning strategies may or may not apply to your situation. Taxpayers should consult their tax professional for further information. Chris Mutchler is a Certified Public Accountant, Certified Valuation Analyst (CVA) and Certified Fraud Examiner (CFE). He is a team member with the Firm of Southard, Beckham, Atwater and Berry, CPAs, PS in Port Orchard and can be reached at 360-876-491, or cmutchler@sbabcpa.com.)
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