Pinnacle Consultants L.L.P.

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Financial Review

Its Still Not Too Late To Do Some Year End Tax Planning

The 2006 tax filing season is upon us. However, you still have time to do some tax planning to lower that corporate tax bill. There were several changes to the tax code in 2006 that impact businesses; here are a few of the changes that may affect your business:

  • Standard Mileage Rates: Beginning January 1, 2006, the standard mileage rates for the use of a car will be: 44.5 cents a mile for all business miles driven, up from 40.5 cents a mile in 2005.

  • Depreciation and Section 179 Expense:  The maximum section 179 deduction you can elect for property you placed in service in 2006 is increased from $105,000 in 2005 to $108,000 for qualified section 179 property. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $430,000. So when your purchases reach $538,000 and above you no longer get the deduction.

  • Expense Limit for SUVs: Businesses should be aware of a change regarding the deduction for certain sport utility vehicles (SUVs) placed in service after October 22, 2004. Under the American Jobs Creation Act of 2004, businesses cannot take a first year deduction of more than $25,000 for an SUV. The business would depreciate the remaining cost. The new limit does not affect other types of property where the taxpayer decides to expense the cost instead of depreciating the property.

There are many things business owners can do to lower their tax bill in 2006. Here are a few ideas you may want to consider:

Contribute to a Retirement Benefit Plan Your contributions as an owner or employee are tax deductible from your current income, thus reducing your present taxes. A contribution to a tax advantaged retirement plan must come from earned income, meaning compensation for active work. An investor in a business, who isnít active, cannot deduct contributions to the retirement plan. Income generated by your investments accumulates tax free until withdrawn. Types of plans include: IRA, Simple IRA, SEP, 401(k), Simple 401(k), Defined Benefit Plan, Profit Sharing Plan. In some plans, such as a SEP plan, a participant can contribute up to 25% of their compensation, with a maximum contribution of  $44,000. That's a pretty good contribution to your nest egg!

Contribute to a Health Plan  Tax rules for health benefits vary, depending on whether or not a business is incorporated. For C-Corporations medical costs, including insurance premiums paid for by owners and employees are entirely tax deductible to the corporation and tax free to the recipients.

Purchase in 2006, Those Items Needed for the New Year  This will allow you to realize the tax savings from the purchase in 2006 versus 12 months from now. These deductions can really add up, especially if you take advantage of the IRS Section 179 mentioned above. Provided the listed property is used 50% or more of the time for business. This produces an immediate write-off of capital assets. Some typical assets that qualify for Section 179 include: manufacturing and R&D equipment, some vehicles, cell phones,  computers, off-the shelf software. For example, if you buy a $1,000 computer and use it for your business, you could deduct the full cost from your taxes. If you were in the 28% federal income tax bracket, this would save you $280 in income tax. In effect, youíd be getting a 28% discount on the computer.

Purchase an Electric Vehicle  You are allowed a limited tax credit for the purchase of an electric vehicle. The credit is generally 10% of the cost of each qualified electric vehicle you place in service during the year. However, for 2006 the maximum credit you can claim is $1000 per vehicle. If your vehicle is a depreciable business asset, you must reduce the cost of the vehicle by any section 179 deduction before figuring the credit.

Many business owners fail to take advantage of all the tax deductions available to their business. Here are a few of the more commonly overlooked tax deductions you should be aware of:

  • Business travel expense

  • Inventory shrinkage

  • Accounting fees for tax preparation services

  • Bank service charges

  • Business related books, magazines, seminars, association dues

  • 50% of self employment tax

  • Appreciation on property donated to charity

  • Trade or business tools with life of one year or less

As a business owner, itís in your best interest to plan for your 2006 tax filing. There are some changes in the tax law that could impact your business. Taking the time now to understand these tax law changes, taking advantage of some of the tax saving ideas above and ensuring that you do not overlook any tax deductions for your business can have a positive impact on your bottom line!  

Thank you for your continued interest in Pinnacle Consultants.  If you would rather not receive e:mails with news, updates and tips from the financial world, please click the following link paul@pinnacleconsultants.org


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Special Points of Interest

  • Your contributions to a retirement benefit plan as an owner or employee are tax deductible from your current income, thus reducing your present taxes.

  • IRS Section 179 allows a small business owner or c-corporation to deduct up to $108,000 of asset purchases each year as a current operating expense.

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Pinnacle Consultants L.L.P.

19332 N. 100th Way

Scottsdale, AZ 85255

P: 480 980-3977

F: 480 585-1920

Website:

www.pinnacleconsultants.org

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paul@pinnacleconsultants.org

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