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Column by Barbara Weltman
New Tax Breaks for 2007
Tax code changes made before the congressional break give small-business owners more ways of keeping tax bills down.
Tax law changes effective in 2007 -- those enacted in 2006 as well as earlier laws -- present money-saving write-offs for savvy entrepreneurs. Here are three important ways to save on your taxes in the year ahead.
Domestic production deduction
The American Jobs Creation Act of 2004 introduced a new type of tax write-off to encourage manufacturing and other activities within the U.S. and to discourage shipping jobs offshore. Last year, manufacturers and other businesses that built, grew, extracted or generally made something within the U.S. could deduct 3 percent of their net from these activities. In 2007, the deduction is doubled to 6 percent; in 2010 it will jump to 9 percent. The beauty of this deduction is that it requires no additional cash outlay by a company; it applies merely because of the type of income generated by the business.
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Strategy: Plan payroll decisions in light of this deduction. The maximum deduction is limited to 50 percent of W-2 payroll, so self-employed individuals as well as companies relying primarily on independent contractors cannot take full advantage of this no-cost deduction. If additional labor is needed in 2007, weigh the added employment tax cost against the potential domestic production activities deduction.
Also consider whether or not to move production offshore or remain domestic. Only income generated within the U.S. qualifies for the deduction, so factor this into planning activities.
Cut health care costs
Dramatic changes in the rules for health savings accounts (HSAs) made by the Tax Relief and Health Care Act of 2006 (signed into law on December 20, 2006), make it easier than ever to help staff pay for medical coverage. Here's how it works: The company obtains a high-deductible (low-cost) health plan, paid by the business, the employees or both. Then tax-deductible contributions can be made to savings accounts -- HSAs -- to pay medical costs not covered by insurance. Income earned in these accounts builds up on a tax-deferred basis. Withdrawals to pay medical costs not covered by insurance are tax free, but unused funds can be withdrawn at any time for any purpose (although they're taxed and there's a 10 percent penalty for withdrawals for non-medical purposes before age 65).
For 2007, the annual deduction is up to $2,850 for self-only coverage, or $5,650 for family coverage. The contribution is no longer limited to the policy's deductible and no pro-ration of the contribution is required for those who become eligible for HSAs during the year.
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New break: Employees can fund HSAs via a one-time transfer from an IRA, a flexible-spending account or a health reimbursement account (limits apply so check with a tax advisor); no deduction can be claimed for these funding options.
Upgrade equipment
Buying rather than leasing computers, machinery, and other equipment for a business can generate tax savings -- up to $112,000 of the cost of equipment placed in service in 2007 can be immediately deducted rather than depreciated over five years, seven years or other periods fixed by law (depending upon the type of equipment). For 2006, the limit had been $108,000.
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Important: This break applies to both new and pre-owned equipment whether it is purchased outright or financed in whole or in part.
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Caution: State income tax rules may not allow this federal tax break and require businesses to depreciate their equipment purchases. Current legislation to increase the minimum wage may be coupled with small business tax measures, including a permanent increase in the expensing limit (which is scheduled after 2009 to revert to its old $25,000 limitation).
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