The end of the year is a good time to consider making a tax entity change. If you’re thinking of switching, talk to your Padgett Representative first to find out if changing makes sense for your business, given the potential tax consequences. Some changes have few or no tax implications, but others can be costly. It is very important to consider the tax consequences of making the change.

Incorporating a sole proprietorship or partnership should be tax free if done correctly, but failure to adhere to the rules can trigger tax. Get good advice before making a move and then follow the advice carefully.

Another year end decision includes equipment deductions.

It generally makes sense to write off eligible equipment using the Section 179 expense option in the year of purchase. You’ll get the tax deduction faster than if you took depreciation over time. However, expensing may not make sense if you’re in a low tax bracket in the year of purchase but expect to be in a higher bracket in future years, or if your new sole proprietorship is not making enough to trigger self-employment tax.

While the depreciation deductions may be spread out over time, if you’re in a higher tax bracket or paying self-employment tax, the deductions will be worth more. You’ll have to crunch the numbers and consider the time-value of money to be sure. Keep in mind that you don’t have to write off the entire asset. If a machine cost $5,000, you can claim the Section 179 expense option on $2,000 and take regular depreciation over time on the remainder.

Following along the theme of my last blog, here are some more tax deductions, credits, and incentives for your 2009 tax returns.You may also find it helpful to download our tax organizer for 2009.

New Vehicle Purchase Incentive. New car buyers can deduct state or local sales or excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. The deduction is limited to the tax on up to $49,500 of the purchase price of each qualifying new vehicle purchased after Feb. 16, 2009, and before Jan. 1, 2010, and is subject to income phaseouts based on filing status. Individuals who itemize and those who take the standard deduction can benefit. In states without a sales tax, other taxes or fees can qualify if they are assessed on the purchase of the vehicle and are based on the vehicle’s sales price or as a per unit fee.

Cash for Clunkers A $3,500 or $4,500 voucher or payment made for such a voucher under the CARS “cash for clunkers” program is not taxable to the consumer buying or leasing a new car.

Tax Credits Increased for Low and Moderate Income Workers. The Earned Income Tax Credit (EITC) is now available for those with three or more qualifying children and married couples. The EITC helps taxpayers whose incomes are below certain income thresholds. The EITC, which, unlike most tax breaks, is refundable, meaning that individuals can get it even if they owe no tax and even if no tax is withheld from their paychecks.

Standard Deduction Increases for Most Tax-payers. Nearly two out of three taxpayers choose to take the standard deduction rather than itemizing deductions such as mortgage interest and charitable contributions. Eligible taxpayers can further increase their standard deduction by state or local real estate taxes paid in 2009, a net disaster loss reported, and state or local sales or excise taxes on the purchase of a qualifying new motor vehicle.

Making Work Pay Credit. Many taxpayers will qualify for the maximum credit of $800 for joint return filers ($400 for others). The credit equals 6.2 percent of earned income up to the maximum amount. For most, the credit is based on the taxable wages reported on Forms W-2. Self-employed individuals figure the credit using net profit or loss. Additional calculations apply to some taxpayers, including those with net business losses or foreign earned income. Not everyone is eligible, such as those whose income is above certain thresholds, those without valid Social Security numbers, and nonresident aliens. A reduced credit applies to those who received a $250 economic recovery payment made in 2009, and who claim the government retiree credit.

Although all eligible taxpayers must file Schedule M to claim the credit, most got the benefit of this credit through larger paychecks, reflecting reduced federal income tax with-holding during 2009. However, since the adjustments to the withholding tables may have caused millions of taxpayers to be under withheld, IRS will waive the penalty for an under payment of personal income tax caused by adjustments made to the income tax withholding tables after enactment of the Making Work Pay Credit.

Government Retiree Credit. This credit is designed to provide a benefit equivalent to the economic recovery payment to those government retirees who did not qualify for these payments. Retired federal, state or local government employees who receive pensions in 2009, based on work not covered by Social Security, are eligible to claim this credit. The credit is $250. The credit can’t be claimed by anyone who received the $250 economic recovery payment during 2009.

In today’s economy, small-business owners sometimes look to the oldest form of commerce the exchange of goods and services, or bartering. The Internal Revenue Service wants to remind small-business owners that bartering transactions generally have associated tax reporting, accounting and record-keeping responsibilities.

Bartering is the trading of one product or service for another. Usually there is no swap of cash. Barter may take place on an informal direct one-on-one basis between businesses and individuals, suppliers, customers, distributors, partners, contract labor, and employees, or it can take place on a third party basis through a modern Internet barter exchange.

Bartering is an exchange of one taxpayer’s property or services for another taxpayer’s property or services. The fair market value of property or services received through barter is taxable income. Be sure to use a reasonable fair market value for the property or services received in a barter transaction to include in your income. The transaction is not a wash if you report the fair market value of the property received that is greater than your cost or basis in the property given up.

For example: if bowling equipment given up has a cost or other basis of $500 to you
there is a $500 gross profit on the transaction if the fair market value of the fishing
equipment received in the barter exchange is $1,000. Simply put, you should identify the transaction in your records and report the income and any related business deductions and cost of goods sold on your tax return.

When my wife owned her own business as a wholesale distributor. She also was a full time mom. She had a huge van to accommodate kids and business. The title of the car was in her name so she had to keep a mileage log for reimbursement purposes. After a while the business grew enough where she needed a larger full time van in the business name. But to her disappointment, she still needed to keep track of the business usage.

If your company is paying for a car, make sure you title it in the company’s name. If the company writes the check yet you put the title in your own name, the IRS is almost surely going to deny the business a depreciation deduction.

This doesn’t apply to sole proprietors; you and your business aren’t separate entities. Your company may also lose deductions for insurance, gas, maintenance, etc. Of course, even if the car is in the company’s name, you still have to keep records of the business usage. But if you don’t take the first step, you’ll have an uphill battle. By the way, the same will likely be true for other business assets.