June 19, 2007
- Review The Pension Protection Act of 2006. The Act introduces major changes to previous pension rules, with a primary focus on more stringent funding requirements for defined benefit plans and permitting the use of automatic enrollment in 401(k) plans. It also includes several significant tax incentives and retirement savings for your employees by making existing rules permanent. In addition, important changes are made to charitable giving, including a new provision allowing tax-free distributions from IRAs for charitable purposes.
- Review your deferred compensation plans. Complex new rules are in effect this year, even though the deadline for revising plan documents has been extended to the end of 2007. These rules affect plans that result in a compensation deferral and, if violated, can accelerate taxation to recipients, plus the payment of interest and penalties.
- Take advantage of the new I.R.C. Section 199 Domestic Production Activities Deduction. This deduction may reduce your taxable income by up to 3 percent for 2006 (6 percent for 2007 through 2009, and 9 percent when fully established in 2010). Potentially problematic issues within proposed regulations have been addressed in the final regulations, making the deduction more beneficial to contractors. See your Grant Thornton tax advisor to help you take advantage of Section 199.
- Utilize preferential capital gains tax savings. For tax years ending in 2006, you are entitled to 5 percent and 15 percent maximum rates on capital gains. These rates had been set to expire at the end of 2008. The Tax Increase Prevention and Reconciliation Act of 2005 extended these favorable capital gains rates through the 2010 tax year. Consult with Grant Thornton as to how you can maximize the tax benefits of capital gains rates.
- Examine your capital asset depreciation methods and lives. “Catch-up” deductions are possible on under-depreciated existing assets. You may be able to write off 100 percent of the under-depreciated amount in the current tax year without amending past returns by filing an automatic change in accounting method.
- Obtain a marketing edge by offering your customers more. Work with Grant Thornton to provide a turn-key cost segregation study to your customer with your completed project. We can assist in analyzing and appropriately classifying capital assets associated with the project into the most tax-beneficial depreciable lives.
- Analyze the structure of your business. How your business is organized can have a major impact on the amount of taxes you pay, especially in the areas of state, local and unemployment taxation. Consider the benefits of restructuring your business (for example, by establishing a partnership to provide inter-company services), while at the same time potentially reducing state, local and unemployment tax liabilities.
- Consider establishing a separate entity to own and lease fixed assets used in your business. Often referred to as “leasing companies” or “procurement companies,” these entities help manage your assets and may significantly reduce your sales and use tax – a tax you collect and remit regardless of whether your company is profitable.
- Determine if your company has overpaid sales and use taxes. Most companies pay a substantial amount of money to suppliers and state tax authorities, but often overlook potential sales and use tax exemptions. Where appropriate, Grant Thornton can assist you in filing a refund claim to recover sales tax overpayments that have already been made, and put a system in place to prevent future overpayments
- Review your accounting methods. The operations of contractors can result in the need for multiple methods of accounting. Be sure that you are using appropriate and advantageous methods. Ask Grant Thornton how we may assist you to defer revenue on projects where you use subcontractors.
For more information, please contact the Grant Thornton national construction industry practice at:
T 888-299-7269 E [email protected]
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This document supports Grant Thornton LLP’s marketing of professional services, and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.