Three ways to lower your business tax liability

Smart businesspeople know this is the time of year to explore long-range tax-reduction strategies that may take months to put in place.
Here are three promising areas you may want to look into: assets, production and energy. All offer opportunities to lower your tax bill and put that money to use building your bottom line. And all have been affected by recent tax law changes.
The Section 179 deduction
The Section 179 expensing deduction has been a perennial favorite among business owners for some time. And for good reason: For 2006, it allows you to deduct up to $108,000 of investments in depreciable assets in the year you place them in service. But the deduction phases out dollar for dollar for 2006 investments exceeding $430,000.
In some instances – such as for qualified zone property, qualified renewal property, qualified Liberty Zone property and Gulf Opportunity Zone property – the expense election is even higher. Expense elections for heavy SUVs are limited to $25,000.
The big news regarding the Section 179 deduction is the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), which President Bush signed into law last May. Before TIPRA, the deduction was due to decline to a relatively small $25,000 limit with a $200,000 phase-out after 2007. TIPRA extends the $100,000 limit and $400,000 phase-out, and their annual inflation indexing, through Dec. 31, 2009.
This gives you three more years to determine which assets you may need to buy and to make the most of these significant, necessary purchases before the 2009 deadline. Generally, you shouldn’t buy a major asset only for tax-saving purposes. But if you figure you’ll need one or more items anyway, why not get them while the getting is good?
The manufacturers’ deduction
The manufacturers’ deduction, also referred to as the domestic production activities deduction (or Section 199 deduction), came about as part of the American Jobs Creation Act of 2004. It was initially intended to help create and retain domestic manufacturing jobs. But many other types of production-related activities qualify for the tax break as well.
For 2006, the deduction applied to 3 percent of your qualified production activities income (QPAI), taxable income or, if applicable, alternative minimum tax income – whichever is less. This percentage will rise to 6 percent for 2007 through 2009 before topping out at 9 percent in 2010 and thereafter.
The deduction is also limited to 50 percent of wages you report on employees’ W-2 forms. And this is where TIPRA comes into play.
For pass-through entities (such as partnerships and S corporations), partners, shareholders or others who receive QPAI were previously considered to have been allocated their total share of the entity’s deductible wages for the purpose of the 50-percent limit. But, under TIPRA, deductions are now limited to 50 percent of the wages used to calculate their QPAI.
Energy: The EECB deduction
The energy-efficient commercial building (EECB) deduction sprang to life as part of the Energy Policy Act of 2005. It allows both owners and leaseholders of commercial buildings to deduct the cost of energy-efficient property they install in those structures.
For buildings that achieve a 50-percent energy savings threshold of the total annual energy and power costs with respect to combined usage of the building’s heating, cooling, ventilation, hot water and interior lighting systems, the deductible amount may be up to $1.80 per square foot of floor area. Structures that meet at least a 16-2/3-percent threshold may be eligible for a smaller deduction – up to 60 cents per square foot of floor area.
To claim the deduction, you need to obtain a certification that your building will achieve the required energy savings. In Notice 2006-52, the IRS sets forth guidelines regarding the content of that certification and the qualifications that the certifier must meet.
Moreover, the Department of Energy will be keeping a public list of software that must be used to calculate energy savings for EECB deduction certification purposes. It also provides a process that software developers should use if they wish the Department of Energy to include their software on that list.
The IRS has not specified an overall per-building cap on the EECB deduction. Requirements other than those mentioned here may apply.
Staying current
One thing you can count on: There will be more tax law changes. Staying current will give you the best shot at keeping your company’s tax bill as low as possible and profit margin high. And always consult with your tax adviser about your particular circumstances.
Danielle Poyant McCue is a tax principal with Tofias PC, which has offices in Providence, Newport, Cambridge and New Bedford. She can be reached at dmccue@tofias.com.