Current Tax Ideas

Every year just before year-end most of us receive newsletters that set forth various year-end tax planning ideas. Unless there is a new tax bill, most of the information sounds exactly the same year after year. This month’s column is early in the year and hopefully presents new tax ideas and highlights recent tax law changes which may specifically apply to the franchise owner. Let’s look at these ideas:

Retirement Planning and Deferred Compensation. There are a number of new and revised approaches concerning retirement planning and deferred compensation that may save you taxes:

IRA Owners. One of the main impediments in the past in converting from a traditional IRA to a Roth IRA was the limitation based upon adjusted gross income (“AGI”). The recent tax bill removed this AGI limitation for conversions beginning in 2010. To take full advantage of this opportunity, you should take certain planning steps soon.

Retirement and Deferred Compensation Plans:

Observe the new provisions of the tax law that allow for “Juiced-up 401(K)s” which can mean higher contribution levels for key employees.

Something not in the tax bill is an idea of a spin-off of assets or drop-down of stores into new LLCs. This may allow for participation by employees in those specific assets; and thus, spread the income and resulting tax liability efficiently and provide an effective way of compensating key individuals.

Depreciation and Amortization Benefits. The new law extends the ability of the franchise owner (in the restaurant space) to amortize qualified restaurant property leasehold improvements over a 15 year period. This is a great new benefit to restaurant owners as the previous deduction was an amortization over 39 years.

Production Credit. Do not forget about the production tax credit which provides certain benefits for wages paid which are deemed to be paid for production activities. It is surprising how many areas of the franchise world may qualify for this production tax credit.

Research and Development Credit. A research and development credit may be available for franchise businesses that are developing new concepts with intellectual property.

General Provisions of the New Tax Legislation. As to individuals (which would include the treatment of certain income aspects from flow-through entities), please look at a number of breaks for capital gains and Alternative Minimum Tax (AMT) relief. This includes a refundable AMT credit, certain additional deductions from your AMT income and the extension of the lower capital gains and dividend rates. These tax laws will continue to provide favorable treatment for disposition of business assets and stock that qualify for long-term capital gains.

Expansion of Health Savings Accounts. A surprising series of provisions of the new tax bills deal with health savings accounts.

The new tax law allows certain taxpayers a direct transfer of flexible spending accounts to a health savings account.
Flexible spending accounts, which most companies have, now allow a grace period of up to 2 ½ months for participants to request reimbursement after the close of the year.
The amount that can be set into these accounts has been increased to $5,650.

The bottom line is that most companies should be looking at adopting or modifying these types of plans because they provide great tax benefits and lower the cost of health care to their employees.

Capital Asset Expensing. The extension of the Section 179 small business expensing election was good news, and will continue to allow you to accelerate the tax benefits for capital expenditures.

Employer Tax Credits.

The IRS also retroactively extended the welfare to work and work opportunity credits (which many franchise businesses owners take advantage of).

Additionally, the franchise owner needs to consider the New Market’s tax credit (that is intended to stimulate development in economically distressed areas) which may be applicable for business in communities where the franchise is operated.

Tax Court Case. A recent Tax Court case involving start-up expenses may provide a benefit to the franchise business. As you probably know, business start-up expenses are amortized over 60 months. The Court, in a very pro-taxpayer ruling, held that expenses paid for the production of income from a horse boarding and training facility were currently deductible under § 212 even though the expenses may have been incurred in the pre-offering phase of the horse farm becoming an active trade or business. While this was not a franchise business case, it does provide guidance that may allow for additional current deductions for expenses incurred when opening new stores or getting started in a franchise business.

Old Ideas. I would be remiss if I did not address some of the old standbys for tax planning which you need to take advantage of:

Cost segregation. This is the process of segregating your fixed assets into various classes, creating the ability to accelerate depreciation and amortization.

Service Expense Deduction. Paying and deducting service expenses that will be incurred in the first 2-½ months of a succeeding tax year.

Income Shifting. Shifting of income between certain entities with different tax year ends to defer income recognition.

State Tax. Plan for state tax issues to make sure that where possible, income is allocated to states with lower income tax rates. We have found that state tax planning can result in significant savings.

Disposition of Assets. Look at disposing of assets versus writing off those assets as worthless. The IRS’ position as it relates to the retail and franchise businesses is that even though a store may be closed, you cannot write off those assets until they are disposed of; therefore, we recommend a disposition of those assets as soon as possible after a store is closed in order to create a taxable event.

Keep all of these items in mind as you move through 2007; and remember, every day is a tax planning opportunity.