Tax benefits for hybrid vehicles
January 2009

The trend toward buying energy-efficient vehicles continues. If you bought a hybrid car last year-or if you're searching for a new car this year-consider all the tax implications.
Under the current tax law, you may be entitled to a credit of up to $3,000 for a 2008 model or one of the newer '09 models. The credit replaced the previous “clean-air deduction” for vehicles.
However, be aware that the tax credits may be reduced for the most popular models. At a certain point, the credit no longer is available.
Reason: The IRS certifies a particular make and model as being eligible for the credit. The exact amount of the hybrid vehicle credit depends on a computation involving the mileage savings and the fuel economy for the car's weight class. The better the car's performance, the higher the credit.
Under the 2005 energy law, the credit begins to phase out in the second calendar quarter after the calendar quarter in which at least 60,000 of the manufacturer's qualified passenger automobiles and light trucks have been sold. Once the manufacturer hits the 60,000 mark, the credit for all hybrid models it produces are reduced by 50% for a six-month period and then by 75% for the following six-month period. Finally, the credit disappears for good.
We can help you determine the available tax benefits for purchasing a hybrid vehicle. Do not hesitate to call our office to obtain more information.

Very truly yours,
John W. Northup, CPA

P.S. Don't overlook the potential tax benefits in this area. Call (530) 367-3520 to schedule a consultation.

How to avoid accumulated earnings tax

In the current economic climate, it's a good idea for your company to save money for emergencies. However, if a company keeps too much in the way of earnings and profits, it could be socked with an "accumulated earnings tax" on top of regular corporate income tax.
The accumulated earnings tax was designed to avoid excessive accumulations within a company. It applies to "accumulated taxable income" (i.e., taxable income, with certain adjustments, less the dividends-paid deduction and an accumulated tax credit). The minimum credit for this purpose is $250,000 ($150,000 for personal service corporations). So if you keep the accumulation below the $250,000/$150,000 mark for the year, you're in the clear.
Prior to 2003, dividends were taxed at ordinary income rates reaching as high as 39.6%. So high-income business owners had a powerful tax incentive to stockpile profits and earnings instead of paying out highly taxed dividends. But a 2003 tax law reduced the tax on qualified dividends to 15%. At the same time, the rate for the accumulated earnings tax was lowered to 15%.
The 15% tax rate has since been extended through 2010. Then it reverts to the scheduled 39.6%
Even with the current 15% rate, this is a stiff price to pay for keeping emergency funds on hand. What's more, the situation will become dire in a couple of years.
Fortunately, if you exceed the minimum credit amount, there's a fallback position. No penalty tax is imposed on amounts accumulated for a "reasonable business need." To qualify under this safe-harbor, you must show that you have a definite plan for using the money and that the plan was in place during the applicable tax year.
We can help your company devise a strategy for avoiding the accumulated earnings tax while it preserves a reasonable amount of corporate assets. Call our office to arrange an in-depth consultation.

Very truly yours,

John W. Northup, CPA

P.S. The penalty for excess accumulations in 2009 is greater than it's been in recent years.

The Tax Strategist www.TheTaxStrategist.net

 

Six ways to make your business “Go Green”

Besides helping to save the planet, your small business can actually save taxes by “going green.” Here are six prime examples:

1. Encourage use of mass transit. Your firm can offer mass transit passes to your workers. These passes, or reimbursements to obtain transit fare, are tax-free up to an annual limit indexed for inflation. For 2008, an employee may receive mass transit benefits of up to $115 per month, without paying income tax.
2. Set up car pools. Employees may ride back and forth from work in a company-owned “commuter highway vehicle.” The tax-free limit for 2008 is $115 per month per employee.
3. Allow employees to work from home. Although there's no specific tax break on the books for at-home workers, employees may qualify for home office deductions if the arrangement is made for the employer's convenience.
4. Build up energy tax savings. A business owning a commercial building can claim a special tax deduction for meeting certain energy-efficient standards. If you qualify, the deduction is equal to $1.80 per building square foot less any aggregate deductions claimed in prior years.
5. Drive a better tax bargain. You can claim a tax credit for hybrids or other vehicles that use alternative fuel sources. The credit for a hybrid vehicle may range from $250 to $3,400 depending on its fuel economy.
6. Write off equipment fast. Under section 179, your business may be able to currently deduct up to $250,000 of the cost of energy-efficient equipment placed in service this year. What's more, you can also claim the 50% “bonus depreciation” deduction for new equipment purchased this year. Best of all, the Section 179 deduction can be combined with bonus depreciation.

Very truly yours,
John W. Northup, CPA

P.S. These tax strategies can be adapted to your firm's situation. Call us at (530) 367-3520 to examine your particular facts and circumstances.We can help you develop an overall plan of action that meets your objectives. Give us a call to learn more.

The Tax Strategist www.TheTaxStrategist.net

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Generate energy tax breaks

Several clients have asked us about the tax incentives for energy savings contained in the new economic stimulus law (the American Recovery and Reinvestment Act of 2009). The new law changes may benefit both individual and business taxpayers. Following is a brief overview.

For individuals: The new law triples the residential energy credit to 30% of qualified expenditures (up from 10%). Furthermore, the lifetime $500 dollar cap is eliminated. It's been replaced by an overall limit of $1,500 for 2009 and 2010 combined. The changes are effective for energy-saving installations made after 2008 and before 2011.
The enhanced residential energy credit covers a wide range of improvements, including insulation materials; exterior windows (including skylights); exterior doors and central air conditioners.
The new law also removes the dollar caps for the separate 30% credit for expenditures on qualified solar hot water property, geothermal heat pumps and wind energy property. Caveat: A $500 cap per .5 kilowatt hour of capacity applies to qualified fuel cell property costs.
For businesses: A business building owner may claim a tax deduction equal to $1.80 per square foot of new or existing commercial buildings that meet certain conditions. Alternatively, partial deductions of up to $.60 per square foot are available for eco-friendly improvements affecting the building envelope, lighting systems or heating and cooling systems.
Under last year's Emergency Economic Stabilization Act, deductions may be claimed for property placed in service after 2006 and before 2014 if certain conditions are met.
Finally, the 2009 Stimulus Act includes numerous other technical modifications. For instance, it extends the credit for electricity produced from renewable sources through 2013 (through 2012 for wind facilities).
This is only a brief summary of the key rules. Call our office to determine how you may benefit from the tax law changes.

Very truly yours,

John W. Northup, CPA

P.S. It is important to understand these tax breaks and what documentation to secure before you make any energy-saving installations. Contact us at (530) 367-3520 to obtain an assessment.

The Tax Strategist www.TheTaxStrategist.net

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Bailout law strategies    December 2008

The Emergency Economic Stabilization Act of 2008-informally called the “bailout law” in the media-extends a wide variety of tax breaks that had expired after 2007. Generally, the extensions continue through 2009.
There are several strategies that may provide benefits for taxpayers under the new law. For example:

o Pay next semester's tuition. Under the bailout law, the above-the-line deduction for qualified higher education expenses is restored.
o Buy a 'big-ticket' item. The new law reinstates the optional deduction for state and local sales taxes. Even if you use the IRS tables, you can tack on the sales tax for certain big-ticket items.
o Give to charity from your IRA. If you're age 70_ or older, the tax law allows you to transfer contributions of up to $100,000 from an IRA to a charity without incurring any tax.
o Add on property tax deductions. Earlier this year, the new housing law authorized a one-time property tax deduction for nonitemizers. Now the bailout law extends the special deduction for another year.
o Resume business research activities. The new bailout law revives the tax credit for qualified research activities conducted by a business. In addition, it enhances the alternative simplified credit while repealing the alternative incremental credit.
o Claim faster building write-offs. Generally, it takes 39 years to write off the cost of most building improvements. However, Congress previously authorized a 15-year write-off period for qualified restaurant and leasehold improvements. The bailout law extends this tax treatment through 2009.
o Donate business goods to charity. The new law revives enhanced deductions for donations of food, books and computers through 2009.
Of course, this is only an overview of provisions in the new law that may work to your tax advantage. For more information, call us to set up a meeting.

Very truly yours,

John W. Northup, CPA

P.S. We can help you develop a personalized plan geared to your particular situation. Call (530)367-3520 with questions and to schedule an appointment.

The Tax Strategist www.TheTaxStrategist.net

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Avoid new employment tax crackdown

The IRS has announced it is teaming up with more than half the states to crack down on employment tax violations. These information-sharing agreements, which are included under the IRS' Questionable Employment Tax Practice (QETP) initiative, are intended to provide a centralized and uniform means for improving compliance.

State agencies, the U.S. Labor Department, the National Association of State Workforce Agencies, the Federation of Tax Administrators and the IRS all worked together on various aspects of the agreements.
As of this writing, 29 states have agreed to participate. They are: Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington and Wisconsin. Others may soon join the fold.

The IRS and the states hope joint efforts will reduce fraudulent filings, uncover tax avoidance schemes and ensure proper worker classifications. In particular, distinguishing which workers should be treated as independent contractors and which should be classified as employees has long been a point of contention.
As a result, it is recommended that employers consult with their business advisors to ensure they are in full compliance with both federal and state employment tax laws. You may schedule an in-depth evaluation by calling us at (530)367-3520 (ph & fx) 24/7 (answer machine equipped).

Very truly yours,John W. Northup, CPA

P.S. The risks are substantial. If the IRS assesses additional taxes, an employer may also owe interest and penalties, which can double the cost.

The Tax Strategist www.TheTaxStrategist.net

 

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