Cara DeAnda

Accounting Method

Review your accounting methods to determine if there are other methods available to help you better manage the timing of your income taxes. Some methods to consider are cash vs. accrual method of accounting or completed contract vs. percentage completion accounting for long-term contracts.

Depending on the type of accounting method your company uses for long-term contracts, there are different ways to defer income. A contractor using the percentage-of-completion method of accounting may consider deferring additional costs on projects until after year-end to reduce the current year income recognition. A contractor using the completed contract method of accounting may consider slowing the progress or completion of a contract late in the year to defer revenue to future years. However, this contractor should consider the effect of this deferral on alternative minimum tax (AMT).

Bonus Depreciation & Section 179 Expense

The American Recovery and Reinvestment Act of 2009 extended the benefits of bonus depreciation and increased Section 179 expense allowance provided by the Economic Stimulus Act of 2008 to the 2009 calendar year.

Bonus depreciation is allowed on qualifying property in the amount of 50% of the adjusted basis of the property. In general, qualifying property includes most types of new property (excluding buildings) placed in service after December 31, 2007, and before January 1, 2010.

Internal Revenue Code Section 179 provides for expensing $250,000 of eligible business property acquired and placed in service during 2009. In general, business property needs to be tangible personal property or off-the-shelf computer software. Section 179, however, does not apply to property used in a rental real estate activity. This expense is phased out, dollar for dollar, by the amount of eligible property placed in service that exceeds $800,000. For 2010, the allowable expense is $125,000 and the phase-out begins at $500,000. For years beginning after 2010, the expense is reduced to $25,000 with the phase-out beginning at $200,000.

Qualified Production Activities Deduction

A deduction was created for qualified domestic production activities by the American Jobs Creation Act of 2004. In general, construction activities are classified as a qualifying production activity. For 2009, a business can deduct 6% of the lesser of income from qualified production activities or taxable income. However, the deduction is limited to 50% of related wages paid during the year.

Bonus Payments

Deductibility of bonus payments differs based on the entity’s structure. An accrual-basis corporation can deduct bonus payments accrued on its financial statements and paid within two and a half months of year-end. However, accrued bonus payments to a more than 50% owner of the corporation (2% for S corporation shareholders) are not deductible in the current year unless they are actually paid prior to year-end.

Additional Items

Consider the benefits of a cost segregation study, which can generate tax savings by identifying costs embedded in a building’s construction or acquisition cost that would qualify for a shorter depreciation period.

Review small tool purchases made during the year to determine if they should be expensed rather than capitalized and depreciated.

If your company is a C corporation, consider discussing whether you would benefit by electing to be an S corp for future years.