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December 9 , 2007 - I am a local contractor and I have had a great year. What can I do before year end to minimize my tax bill?

When performing year end planning for your construction company it is important to consider all angles of your financial obligations. This means you need to take into account not only your tax bill, but also your company's requirements for bonding and borrowing obligations in 2008. It is important to schedule year-end meetings with accountants, sureties, bankers, and other financial partners. These meetings are crucial for both 2007 tax planning and 2008 financial support requirements.

Below is a checklist of actions to help you save taxes if you act before year end:

  • Maximize your section 179 deduction for purchasing equipment, furniture, vehicles, etc. The maximum deduction you can elect for qualified section 179 property placed in service in 2007 has increased to $125,000. Your section 179 deduction is limited to taxable income, thus you cannot create a loss with a section 179 deduction.
  • Increase bonus amounts paid to employees and owners. Paying bonuses will increase your payroll expenses thus decreasing your taxable income. If you are using the accrual method of accounting bonus amounts paid within two and a half months of year end can be deducted on your 2007 tax return.
  • Maximize employer contributions to employee retirement plans. The limit on the amount the employer can deduct depends on the type of retirement plan. For example, an employer can contribute up to 25% of an employee's compensation to a profit sharing plan.
  • Although it may not affect your tax situation for 2007 asses your current method of accounting. The basic accounting methods are accrual, accrual less retainage, cash, completed contract and percentage of completion, with the last two generally applied to long-term contracts. Accrual methods tend to benefit contractors who receive payment quickly. But for most contractors, the cash method is usually more favorable and more familiar. To qualify for cash accounting, gross receipts must total less than $5 million for C Corporations, and $10 million for S Corporations. The company must also be engaged in an eligible business activity, essentially providing a service. A change in accounting method may or may not be automatically granted by the IRS.

The above are a sample of tax planning ideas. It is best to consult your financial advisors before making any decisions to ensure the best possible course of action is taken. For construction related fields remember to keep in mind bonding and borrowing needs for 2008 in addition to tax concerns.

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