As we enter the fourth quarter of our calendar year, tax planning becomes more of a focus for many business owners. The day-to-day challenges of running a business can sometimes contribute to overlooking some very favorable tax incentives that are set for expiration or reduction come year-end. The following are some items that you should consider as part of your year-end tax planning depending on your situation:
New Construction or Renovations
Certain improvements placed in service prior to December 31, 2011 are eligible for 100% bonus depreciation. For example, a typical auto dealership with new construction costs of $3 million will save, on average, over $200,000 in taxes simply by conducting a cost segregation study. Additionally, there are numerous tax deductions of up to $1.80 per square foot available for meeting certain energy efficiency thresholds.
For those who have yet to take advantage of cost segregation, not all is lost. The IRS permits the use of “look-back” studies to capture the accelerated depreciation you were entitled to take – but did not. This sometimes very large deduction is taken in a single year and is equal to the difference between what could have been depreciated vs. what you actually took. It gets even better because all this is done without having to file amended tax returns! Look-back studies can mitigate significant tax liabilities for the current tax year by creating a very large “catch up” deduction that can be used right away. Also, these types of studies can be used on a “loss carry-back” basis for two previous tax years to obtain tax refunds, to the extent you paid taxes in those years.
Considering a Lighting Upgrade?
There a few programs available to auto dealers which provide 100% financing for turn-key interior and exterior lighting upgrades. In most cases, upgrades have a payback of less than two to three years and are “cash neutral”. This means that the energy savings underwrite the monthly costs of the lighting program. In addition, there are a limited number of firms that will guarantee the operational savings and coordinate all grants and incentives available from state and local entities – as well as those from the utility companies! From a tax perspective, a large part of lighting upgrade projects will be subject to 100% bonus depreciation in 2011.
Planning a major building project in 2012?
Proper planning at the design stage can yield considerable benefits. The integration of your tax consultant with your design team will enable you to make informed decisions and maximize tax benefits. For example, an owner is making a decision on whether to use a traditional heating and air conditioning system vs. a geothermal system. At first glance, the geothermal system is more expensive; however, once the owner is made aware that the geothermal system is categorized as “Qualified Energy Property” and is subject to 100% bonus depreciation, the decision becomes a very easy one.
While the temporary tax incentives are set to be reduced on December 31, 2011 and to expire on December 31, 2012 there is still plenty of time to capitalize on the benefits and keep more cash in your pockets!