The end of the tax year provides an annual opportunity to manage tax situations to the most advantageous position possible. The traditional approach to year-end tax planning is deferring income and accelerating deductions, thereby minimizing current-year taxes. As everyone in the residential construction arena is aware, profits have taken a hard hit over the past 18 months. So the traditional approach or what was always done in the past may or may not be the best answer this year.

Whether its corporate-level tax in the case of the C corporation, or individual-level tax in the case of the S corporation, partnership or sole proprietorship, the United States tax system uses graduated rate brackets. Lower-income amounts are taxed at lower percentages and higher-income amounts are taxed at higher percentages. Managing these rate brackets from year to year can have a significant impact on how much tax ultimately is paid on income.

On an individual level, federal income tax rates vary from 15 to 35 percent. If it’s a down year and the marginal tax rate is 15 percent, while you generally will be in the 35 percent tax bracket you likely will be costing yourself money by accelerating deductions or deferring income. Assume you will be in the 15 percent tax bracket in the current year and the 35 percent tax bracket in the following year. If you accelerate $10,000 of deductions to the current year, it will save you $1,500 in tax now; however, the loss of that deduction in the following year will cost you $3,500 next year. The same principles will apply to C corporations that pay tax at the corporate level.

It is important to work with tax advisors to manage taxable income from year to year. The fact that a business may be in a down cycle could make this planning even more important than it has been in the past. Tax situations are not exactly the same from person to person, or business to business. Develop a tax strategy based on personal facts, not facts about other people or businesses.

Reduce Current Tax Liability

A business may elect under Code Section 179 to deduct as an expense, rather than depreciate, up to $125,000 per year of new equipment, furniture or fixtures in 2007. The deduction is phased out dollar-for-dollar as purchases exceed $500,000. These limits were increased under the Small Business and Work Opportunity Act of 2007.