Most tax planning is focused on taking action prior to year end. However, in the case of most businesses (including sole proprietorships) significant tax savings still can be generated by taking action before filing the 2008 tax returns.
Here are six of our favorite strategies that can be implemented in early 2009 to produce savings in 2008. Check back later this week for six more.
1. Carefully analyze (on an asset-by-asset basis) 2008 asset additions for qualifying bonus depreciation and section 179 expensing. Under bonus depreciation, first year depreciation allowances for new property placed in service during 2008 equals 50% of the cost of the property. Section 179 permits immediate expensing of up to $250,000 of the cost of new and used property placed in service in years beginning in 2008.
2. Conduct cost segregation studies to determine the correct class lives of fixed asset additions (and existing fixed assets if careful analysis was not performed in prior years). Asset costs are "recovered" (i.e., depreciated) over predetermined periods based on their class life. A cost segregation study is an indepth analysis of the costs associated with the acquisition or contruction of buildings or other major assets to correctly determine the assets classes to which they are assigned. The benefit of a cost segregation study is that it will identify more property that qualifies for faster write-off.
3. Accelerate placed-in-service dates by analyzing rules for asset additions. Property is considered placed in service when it is in a condition or state of readiness and available for a specially assigned function. Thus, an asset can be considered placed in service prior to its actual use.
4. Accelerate deductions by reviewing all intangible asset accounts to identify items that can be written off for tax purposes, but not for books. Compensation normally is the most likely expense to have been capitalized to an intangible asset account for book purposes.
5. Avoid costly IRS challenges to outdated uniform capitalization calculations by carefully studying the application of the section 263A rules to inventory and making a voluntary change to a method that more precisely measures the overhead that is required to be capitalized to inventory. The IRS is aggressively auditing these esoteric calculations and often is successful in forcing taxpayers to capitalize significantly more costs. However, you can “beat the IRS to the punch” and avoid interest and penalties and possibly adopt a more favorable methodology by making a voluntary change effective as of the beginning of 2008.
6. Adopt or change method of accounting for inventories to LIFO. Under LIFO inventory, the cost of costs sold during the year is determined by assuming that the last items acquired for sale are the first items sold to customers; thus, current year costs are written off against current year sales and any “gain” in beginning inventory resulting from price increases is preserved. In periods of rising prices, LIFO results in lower inventory values and lower taxable income. LIFO allows the user to deduct the amount of current year inflation included in the goods in ending inventory BEFORE the inventory is sold.