As we draw close to the end of the year, it is time to consider some tax saving opportunities for your business.  Devoting some time now to these tax considerations could save your business money at tax-time  - either now or in the future.  Some of these tax-saving considerations may apply regardless of the type of business entity; others apply only to a particular type of business organization.

Marginal Tax Rates

Whether you choose to take advantage of various tax rules that allow for taxable income or gains to be accelerated into 2005 or deferred until 2006 should depend, in part, on the marginal tax rate for each year projected for your business.  Your marginal tax rate is the rate applied to your next dollar of income or deduction.  Usually, unless your 2005 marginal tax rate will be significantly lower than your 2006 marginal tax rate, you should defer taxable income to 2006 as tax rules permit.  However, if your projections for 2006 reveal that you will likely be in a much higher marginal tax rate next year, you may want to consider accelerating taxable income or gains or delaying certain deductions as tax rules allow.

Related  Party Transactions

Accrual method taxpayers may not deduct salaries, bonuses, interest, rent and other expenses owed to related cash method parties until payments are made.  Related parties include: 

·         An individual and his or her more than 50 percent-owned corporation

·         Partnerships and their partners

·         S corporations and their shareholders

·         Two corporations having more than 50 percent common ownership

·         A corporation and a partnership, if the same persons own more than 50 percent of each entity

As a result, whether certain related party cash payments are made before or after your tax year-end can significantly change deduction amounts on your 2005 business tax return.

Depreciation Deductions

The timing of asset acquisitions is critical to obtain maximum depreciation deductions. Using other depreciation rules to your advantage will also reduce your taxes.  If you expect to buy property in 2006, you may benefit by accelerating the purchase so that you place the property in service in 2005. When you place assets in service during the year establishes the amount of depreciation. Generally, all personal property is subject to a half-year depreciation convention. In other words, one half-year's depreciation is allowable for the year in which the property is placed in service. A mid-month convention must be used for real estate.  If the total basis of personal property placed in service during the last three months of a tax year exceeds 40 percent of the total basis of personal property placed in service during the entire year, then a mid-quarter convention must be used instead of the half-year convention for all personal property placed in service during the tax year.

Personal Property Versus Real Property

For regular tax purposes, real property depreciation deductions are stretched out over 27.5 years for residential rental property and 39 years for nonresidential property. However, depreciation deductions may be accelerated for real property components that are essential to manufacturing or other special business functions.  If you have invested significant amounts in the acquisition or construction of real property, a cost segregation study to identify personal property and determine optimum depreciable lives for both new and prior acquisitions and construction may save you significant amounts on your taxes.

Asset Expense Election

Generally, if you purchase depreciable tangible personal property (including off-the-shelf computer software), you may elect to treat up to $105,000 as a deduction for property placed in service in the taxable year beginning in 2005.  However, the benefits of this election begin to phase out if more than $420,000 of qualifying property is placed in service. (The maximum amount that can be expensed ($105,000) is reduced “dollar for dollar” for eligible property placed in service in excess of $420,000).  If 2005 income is not sufficient to use the entire $105,000 asset expense election, the unused amount may be used in 2006 or subsequent years.

Succession and Family Business Planning

If your business organization is a family business, this is also a time to revisit your company's succession plan and, when the circumstances warrant, consider the transfer of your wealth to your heirs in a manner that minimizes transfer taxes.