Today, with the 2007 tax year ended for most builders and contractors, all that can be done before the deadline for filing the rural building operation’s tax returns is to make the most of the existing tax rules — all the while keeping an eye on the operation’s potential tax bill for 2008.
You can make the most of already completed transactions and do it in a manner that will not adversely affect or reduce next year’s tax deductions. It might also mean changing your mind about past returns.
Tax deadlines imposed by the IRS are flexible. While moves made to structure transactions for the most favorable impact on the annual tax bill are limited, postponing the filing of the tax returns reporting those transactions or changing your mind on already reported transactions is permitted.
Of course, Uncle Sam wants his money sooner rather than later. That means pre-paying an estimated bill, usually in quarterly installments. It also means fully paying the expected tax bill on or before the deadline, either March 15 or April 15 for most businesses and individuals using a calendar year.
Extensions can work for you
Even with the strict pre-payment rules, extensions are often granted for specific groups of taxpayers, usually those suffering from a natural disaster or unusual circumstances. Under special circumstances, the payment of tax can be extended for a reasonable period, not longer than six months.
Using Form 4868, a builder or contractor can obtain an automatic, six-month extension of time in which to file tax returns. Naturally, a proper estimate of tax liability is required.
Incorporated building businesses may obtain the automatic six-month extension of time to file income tax returns by submitting Form 7004, “Application for Automatic 6-Month Extension of Time to File Certain Business, Income Tax, Information, and other Returns.” Form 7004 is also used to obtain a six-month extension for filing some excise, income, information and other returns.
The automatic six-month extension to file also applies to the returns of pass-through entities such as partnerships, S corporations and limited liability companies (LLCs). Remember, however, the Form 7004 does not extend the time for payment of tax.
After filing, if a builder determines the operation’s tax bill is incorrect, changes can be made on an amended tax return. You can change your mind about many of the income, credits or deductions on an already-filed tax return.
Although the IRS reports surprisingly few taxpayers amend their tax returns to report additional income, every builder has up to three years to change their mind about previously reported income or deductions. The limit is only two years from the time the tax was fully paid. Should the refund claim involve the deductibility of bad debts or worthless securities, the period is seven years.
ndividuals, sole proprietors, etc., use Form 1040X. A corporation that filed Form 1120 uses Form 1120X to file an amended return.
It’s OK to amend
With the IRS assuring everyone that changing one’s mind about previously reported deductions or income will not increase the likelihood of an audit, why not change or amend those returns? You might, for example, discover that either the first-year write-off or accelerated depreciation method produced a deduction that would be more valuable in a later year.
Whether a building business is operating as a corporation, an individual or a partnership, it is permitted to deduct (from gross income) all of the ordinary and necessary expenses of the business that are paid or incurred in the tax year. Deductible expenses usually fall within two broad categories: an immediate expense deduction or a capital expense, an expenditure that adds to the value of or useful life of property, usually deducted by means of depreciation, amortization or depletion.
However, a big tax deduction now might not be the proper strategy. A building operation with little or no taxable income should opt for smaller write-offs, saving the bulk of the deductions for future, more profitable years. After a banner year, on the other hand, making the most of all available tax deductions could put the builder or business in a lower tax bracket.
Simply ignoring the tax deduction for depreciation does not work. That write-off might not be of much use on this year’s tax return but it cannot be saved for the next year. The rules clearly say “allowed or allowable” whether computing the amount of gain or loss or the book value of an asset.
At the other end of the equation, the depreciation deduction can be reduced by taking advantage of a unique — and newly increased — first-year deduction for newly acquired property. That “Section 179” first year write-off permits a portion of qualified equipment and business asset expenditures to be written-off immediaely, rather than depreciated over a number of years.
From 2003 through 2010, a building business can make, revoke or change a depreciation deduction, even Section 179 first-year expensing election without IRS consent on an amended return.
Last summer’s tax law changes extended and expanded Section 179, enhanced first-year expensing provisions. It provided an immediate increase in the 2007 expensing limit from $112,000 to $125,000, with phase-out levels from $450,000 to $500,000.
That $125,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $500,000. Both the $125,000 and $500,000 amounts have been indexed for inflation in 2008 and thereafter.
The best time to think about tax strategies is during the tax year. For long-term tax savings, however, the tax bracket should be consistent year-after-year. If income is up this year but expected to be down next year, postponing asset sales or other unusual transactions might produce a noticeably smaller tax bill.
Postponing income or profitable transactions until next year when they might not be quite as likely to put the building business – or its owner – into a higher tax bracket, is often a legitimate tax-saving strategy. Although the IRS may occasionally disagree, the courts strongly back every taxpayer’s right to choose the course of action that will result in the lowest legal tax liability.
Thanks to an extended period in which taxes can be filed and an even longer period in which to change or amend already-filed tax returns, the so-called “tax season” is a year-round event. After all, now is the best time to guarantee that all deductions have been claimed and simultaneously incorporate overlooked or ignored tax strategies into your 2008 tax plans.