MC Magazine

Tax Planning for 2006 and Beyond

Precasters can find some golden opportunities to ease the tax burden if they know where to look.

By William Atkinson

William Atkinson is a freelance writer who covers business and safety issues.

If it weren’t for business tax breaks, you’d probably go broke in no time. Knowing where to find these breaks and how to apply them are a critical part of playing the tax game. The good news for manufacturers – including precasters – is that there are several new laws on the books that can help you reduce taxes, plus there are some not-so-well-known strategies that can help you take the best advantage of some older tax laws.

Section 179 expensing
One of the most useful tax laws for precast concrete business owners is Section 179 expensing.

In 2006, the law allows business owners to deduct up to $108,000 of the full cost of newly purchased and placed-into-use assets. (These assets are defined as new or used tangible personal property that would otherwise have to be depreciated.) However, if you place more than $430,000 worth of assets into service in the year, then you end up having to start paying a phase out. “This is a dollar-for-dollar phase out,” explains Judith Dacey, CPA and owner of J.D. Sumter & Associates in Summerfield, Fla.

For example, if you purchase $430,000 worth of assets, you can deduct $108,000, then depreciate the remaining $322,000. However, if you purchase $435,000 worth of assets, you can only deduct $103,000 ($5,000 less than the maximum $108,000, because it is $5,000 more than the $430,000 ceiling), then depreciate the remaining $332,000.

As such, it makes sense to watch the timing of your purchases of these fixed assets. For example, if you plan to purchase $500,000 worth of assets this year and $200,000 next year, it may make sense to purchase $430,000 this year (the ceiling amount before the phase out kicks in), and $270,000 next year.

“Also, if you have not taken advantage of this in the past, it is a good idea to go back and recompute your taxes and file amended returns for previous years in order to get your refund,” says Dacey. You are allowed to go back a maximum of three years, meaning that you can go back to tax year 2003. Of course, it is important to realize that the dollar amounts were different in previous years, so you need to learn these and take them into account as you are doing your recomputations.

So far, Section 179 expensing has been extended to 2009.

Paul Olivas, chief financial officer for Jensen Precast in Sparks, Nev., is one financial executive who appreciates this deduction. “It really works out well for a lot of small precasters,” he says. “However, the really large ones may not get much advantage from it.”

Olivas also emphasizes the importance of timing. “Of course, you don’t want to make purchasing decisions solely on the basis of tax issues,” he cautions. “You should make purchases based on when it makes sense to help you run your business. However, if timing doesn’t make that much of a difference, consider the tax consequences of your various options.”

Manufacturing credit
The manufacturing credit is a new tax law passed in 2005 that unfortunately, according to Dacey, is not often used. “I have found that a lot of tax professionals don’t know how to use it,” she says. “I have even talked with some who didn’t know it existed.”

Under the law, if you manufacture something in the United States, such as precast concrete products, you can qualify for the credit. You cannot take the credit if any of the income comes from offshore activities. In addition, you must actually create the product – you can’t merely alter or modify a product.

The law was put into effect to offset some of the rulings by the World Trade Association that repealed tax breaks for U.S. exporters.

You can take a tax credit of up to 3 percent of the income that is created from the products you manufacture. The credit does not apply to income derived from transporting your manufactured products anywhere for sale or use. It applies only to income received for activities related to the creation of the products.

“In addition, you can’t take more in credit than up to 50 percent of the wages you pay for the creation of the products,” says Dacey. Furthermore, you must show a profit for your business. “This is a credit against profit,” she explains.

In sum, for the year 2006, the deduction is 3 percent of taxable income or 50 percent of wages paid, whichever is less. In 2007, the credit rises to 6 percent of income. By 2009 and in later years, it is scheduled to be a 9 percent credit.

This is another law that Olivas appreciates. “It was triggered by the trend of so much manufacturing going overseas, which doesn’t affect the precast industry, but, since we are manufacturers, we can still benefit from it,” he explains. “That is, it works out well for the precast industry, because we have a lot of resale element to our product.” Olivas expects this to be an excellent credit for his company and others in the industry over the next few years.

Depreciation
While everyone knows about deprecation, not everyone knows that, by taking the time to classify assets in their proper categories, you may be able to expense (deduct) some items that you would otherwise end up having to depreciate. “Updates to tax laws in this area came out this October, especially related to capital investment in machinery and other equipment,” explains James Harnsberger, CEO of Tax Smart America in San Diego (www.taxsmartamerica.biz), a company that provides CPAs, enrolled agents and tax professionals with a business model to develop their professional skills and practice. “Many owners misclassify their assets for purposes of depreciation and ultimately diminish their tax value. You need to make sure that all of your assets are grouped and classified consistent with their use,” he says.

“You also need to distinguish between repair and improvement,” adds Harnsberger. An improvement is something that extends the life of the asset, while a repair is something that simply allows the item to be used once again after damage. If you improve something, according to Harnsberger, you must amortize or depreciate it. However, if you repair it, you can fully charge it off in the year the expense was incurred and paid. “Some business owners misclassify repairs as improvements, which causes them to end up paying more in taxes,” he says.

Another thing to consider in the area of depreciation relates to your plant itself. If you are building a new facility or buying a facility, it definitely makes sense to conduct a cost segregation study, according to Ryan McEntire, CPA, a director with Brown, Edwards & Co. LLP in Lynchburg, Va. “If you are building a new plant, arrange to have your CPA work with your architect to break out the costs during construction into the different classes,” he says. “Otherwise, everything will end up being depreciated over 39 years.”

If you break things out into the specific classes, certain items can qualify for accelerated depreciation. Examples include specialty wiring and specialty pads for equipment. “These and certain other costs associated with the building can be broken out,” he explains. “If you take the time to do this, you may find that between 15 percent and 40 percent of the cost of the building can be depreciated over five to 15 years, instead of 39 years.”

Another example is the parking lot. This can typically be depreciated over 15 years, but if you don’t bother to take the time to break it out, it will end up being depreciated over 39 years.

Enterprise zones
For many businesses, federal, state and/or local enterprise zones can provide a significant amount of tax relief. It is important to review these options with your tax professional to make sure you are not missing anything related to these enterprise zone credits. In fact, many businesses that are currently located in qualified enterprise zones don’t realize they are entitled to these credits.

Federal enterprise tax zones, called federal empowerment zones, are designated by HUD. “The goal is to create jobs and growth in challenged areas, which includes areas of many cities in the United States,” says Mike Noretto, CPA, a partner with Rea & Associates Inc. in New Philadelphia, Ohio. “It allows a credit on the first $15,000 of wages paid to individuals working in that enterprise zone.”

Local enterprise zones provide other types of tax credits, such as alleviating or mitigating sales taxes and employment taxes. They may even alleviate or mitigate property taxes.

“There are a lot of enterprise zones,” says Dacey. However, it is important to consider all the consequences of locating your business in one of them. “These are specific geographic areas targeted for economic revitalization,” she explains. “Frankly, there are a lot of these areas you probably don’t want to walk around in at night, and you need to be aware of this, because they tend to be high crime areas.” As such, she recommends being careful about planning a move to one of these areas.

Olivas agrees that enterprise zones are appealing, and also agrees that decisions should be made carefully. “Certainly you don’t want to seek out an enterprise zone in which to place your plant simply because it’s an enterprise zone,” he says. “However, if you have two or three choices, all of which are relatively equal, and one is an enterprise zone, then the tax advantages may tip the scales in that direction.”

When Jensen wanted to open a plant in Arizona, its CPA firm identified some potential enterprise zones. “It turned out that one was a good fit for us,” he says. “The result is that we have been successful in getting some hiring credits and investment credits.”

Olivas adds that few precasters will have someone on staff who is familiar with all of the ins and outs and all of the benefits of enterprise zones. “As such, you definitely need to work with a CPA on this,” he says.

Tax planning
It is important to review the structure of your business every few years, according to Harnsberger. “The sole proprietorship pays a significant amount more in taxes than the shareholder of an ‘S’ corporation,” he says. While this has always been true, there is an even more compelling reason for considering a shift if it is feasible. “The limit on self-employment tax has been increased to $90,000 in taxable earnings, and it will continue to increase. Congress is even considering taking the cap off completely, making all self-employment income subject to self-employment tax.” Profits that are distributed to a shareholder of an “S” corporation, on the other hand, are not subject to the self-employment tax.

Another tax planning recommendation: If you are a closely held corporation, you should be looking at succession planning as a way to keep the business going when the owner retires or is incapacitated, according to Noretto. “Review the estate and maximize the estate deductions,” he suggests. In 2006, every individual is allowed a lifetime exclusion of $2 million. There were two serious bills in Congress in 2006 that were designed to change the estate tax calculations in future years. “They were not passed, but all indications are that there will be some changes in estate tax law prior to 2009.”

Employee tax issues

There are several tax laws related to employees that bear review.

One is the recently passed Pension Protection Act. “This created some major changes in the pension area of tax law,” says Noretto. “For example, if you have IRAs, there are implications in terms of the beneficiaries of your IRAs in your estate.” For this reason, it is important to review your plans. Under the new law, certain beneficiaries of IRAs are able, with the proper language, to roll over the IRA received from an estate and take proceeds from it over a lifetime, instead of the five-year withdrawal period. “The new law also allows more direct payment from IRAs to charities without negative tax consequences,” he adds.

Harnsberger recommends reviewing your payroll taxes and workers’ compensation taxes (in states or situations where you pay into a state workers’ compensation system, rather than paying premiums to a private insurance provider). “There have been significant changes in these areas,” he says. “Many businesses continue to pay more taxes than required.” Tax Smart works with an organization called CompuPay, which offers resources and information in the areas of payroll and workers’ compensation taxes. (See Resources below.)

And don’t forget the tax advantages associated with hiring one or more of your children to work for you in the business. “To qualify, the child must actually perform work and receive fair and reasonable compensation for what they’re doing,” explains McEntire. “For example, you can’t hire your 4-year-old to take out the trash for $50,000 a year.”

According to McEntire, a child can earn approximately $5,000 a year without having to pay any federal income tax. “These children can also use the money to make Roth contributions, since the wages are considered earned income,” he adds. “This helps them get well on their way to financial security.” If you employ your college-age children, they can earn up to $20,000 a year, take advantage of their education credits and not have any federal income tax.

Do you like to entertain your employees? If you take employees out for a meal, the cost comes under the IRS’s meal deduction, so the deduction is limited to 50 percent. However, according to Dacey, if you bring food into the workplace to serve the employees, you can deduct 100 percent of it. “That’s because it is ‘for the convenience of the employer,’“ she says. “As such, it is considered an on-premises work expense.”

One more bonus
If you pay for something by check or cash on December 31, of course, you can deduct it in that tax year. However, conventional wisdom suggests that if you pay for something by credit card, you can’t deduct it until you actually pay the credit card bill, which is probably going to be the following January or February.

Well, that depends on which credit card you use. In some cases, according to Dacey, you can buy now, deduct now and pay later. “You can deduct expenses charged on non-store credit cards or purchased on installment loans, even if you don’t pay for them until the following year,” she says. You cannot do this if the purchases are made on store credit cards, though. For example, if you purchase $2,000 worth of business products on your VISA at Office Depot in December, you can deduct the $2,000 in 2006. “However, if you purchase the $2,000 on an Office Depot card, you cannot deduct it until you pay it.”

Recommendations
Olivas offers a final recommendation to financial executives in the precast industry: Work closely with your external CPAs and attorneys. “Finding good external advisors and staying in touch with them is very important,” he says. “They stay on top of these issues, and they can offer a lot of good ideas.” While the job of a CFO is to know some things about taxes, his or her real job, where it relates to taxes, is to identify the best tax experts and work closely with them,” he says.

Resources
Dacey recommends a book titled “Lower Your Taxes Big-Time,” 2006-2007 edition by Sandy Botkin. “It is written in an easy-to-read format, has excellent tips and focuses on things that small businesses want to know about,” she says.

For more information on employment taxes, send an e-mail to taxsmart@compupay.com.

“Lower Your Taxes Big-Time” by Sandy Botkin is available through The NPCA SHOP. For more information, contact Denise Bradburn at (317) 582-2325 or dbradburn@precast.org.

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