Plan ahead

If you pay income taxes you know the Internal Revenue Code is continually in a state of flux, always changing, never remaining the same. Many of the changes Congress makes to the Internal Revenue Code are not permanent. Many changes have expiration dates. In the past Congress has acted in the 11th hour to extend the dates of expiring provisions, but sometimes they haven’t. Several deductions are set to expire this year.

Some of the tax breaks scheduled to end after this year for individuals include the option to deduct state and local sales and use taxes instead of state and local income taxes, the standard or itemized deduction for state sales tax on the purchase of motor vehicles, the “above the line” deduction for qualified higher education expenses (tax credits for qualified higher education expenses are not expiring), tax free distributions for charitable purposes from individual retirement accounts by those individuals that are 70 ½ and older, and the $250 deduction for educators expenses.

For most Arkansas and Oklahoma residents, losing the option to deduct state and local sales taxes in place of state income taxes is not an issue. For the majority of us the state income tax we pay is greater than the sales tax we pay. The deduction for state income taxes is not expiring.

If you bought a new vehicle with a gross vehicle weight rating of 8,500 lbs or less or a motor home between Feb. 17, 2009 and Dec. 31, 2009, you can deduct sales and excise taxes assessed on the portion of the cost that does not exceed $49,500. You just can’t make too much money to qualify. The deduction is phased out for taxpayers with adjusted gross income between $125,000 and $135,000 ($250,000 and $260,000 on a joint return). Those claiming the standard deduction will also qualify for this deduction. If you are shopping for a car or truck, a completed purchase before Dec. 31, 2009 can result in tax savings.

The tax law allows taxpayers to deduct from gross income up to $4,000 in qualified tuition and related expenses if your modified adjusted gross income does not exceed $65,000 ($130,000 if filing a joint return) or $2,000 if your modified adjusted gross income does not exceed $80,000 ($160,000 if filing a joint return). This provision expires Dec. 31, 2009. However, higher education tax credits will remain.

Since 2006, taxpayers 70 1/2 and older have been allowed to make a distribution from their individual retirement accounts up to $100,000 to a qualified charitable organization without the distribution being included in their gross income. This provision expires Dec. 31, 2009.

A couple of the widely used tax breaks for businesses scheduled to end after this year include first year 50% bonus depreciation for new machinery and equipment and the exceptionally high $250,000 Section 179 expensing limitation.

Unless a business qualifies to expense machinery and equipment under Section 179, it must be depreciated (deducted) over several years. The number of years depends on the asset’s “class life”. For machinery and equipment purchased in 2008 and 2009, a 50% first year bonus depreciation is available. To illustrate how the 50% bonus depreciation works assume the equipment purchased has a class life of 5 years and cost $10,000. Without the bonus depreciation provision the depreciation deduction for the first year would be $2,000, or 20% of the new machinery and equipment’s cost (using MACRS depreciation rates). With the bonus depreciation provision the first year depreciation deduction would be $6,000, 50% of the cost of the new machinery and equipment ($5,000) would be immediately deducted in the year purchased plus 20% of the remaining $5,000 ($1,000).

The election to expense machinery and equipment and other fixed assets except for real estate in the year purchased is, in my opinion, one of the most used and useful deductions Congress has allowed. It’s a exceptionally generous deduction in 2009 allowing businesses to expense machinery, equipment and other fixed assets up to $250,000. The $250,000 limit is reduced dollar for dollar for assets placed in service during 2009 that exceeds $800,000. After 2009 the limit on the election starts to fall, rapidly. In 2010 the Section 179 election limit decreases to $134,000 and is reduced dollar for dollar when asset purchases exceed $530,000. In 2011, the limit is further reduced to $25,000 with the dollar for dollar reduction starting when asset purchases exceed $200,000.

Today’s theme is expiring tax deductions. This is just a sample of tax laws changing this year and doesn’t even include all the provisions expiring on Dec. 31, 2009. If there is ever a year to engage a certified public accountant for tax planning, it is 2009. The tax laws are changing with great velocity and I expect with our country’s trillion dollar budget deficits they will continue to change rapidly.

Save yourself some money. Plan ahead.

David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

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