Masonry Magazine December 1998 Page. 27
Keeping every year's taxable income in the same bracket can have a significant impact on the tax bill year-after-year. Naturally, in those years when losses appear inevitable, tax planning can involve claiming as many deductions as legitimately possible in order to maximize that inevitable tax loss.
However, on a regular basis, shifting income and deductions, if done within the rules, will produce the smallest possible tax bill-year-after-year.
To most of us, year-end tax planning commonly involves seeking tax deductions to reduce this year's taxable income. Perhaps structuring transactions in a manner that will have the most favorable impact on the tax bill. Naturally, this must all be accomplished prior to the end of the tax year when every transaction is closed.
One common planing strategy involves using anticipated profits to expand; reducing the tax bill with growth costs. Another quite similar strategy involves working toward the goal of business profits that are consistently taxed at the same level each year.
Tax planning allows every contractor to legitimately reduce their tax bill by speeding up the collection of income or to take gains when the mason contractors operation's expenses are up. Or, the mason contractor may prefer to pay legitimate expenses when income is up in order to keep income in a lower tax bracket. For those contractors experiencing temporary financial problems, tax planning may involve bulking up deductions in one year to actually increase the loss.
Capital Assets
Asset acquisitions are an invaluable tax planning device not because the entire depreciation deduction is available regardless of how little of the total purchase price the mason contractor must actually part with; instead it is important because of Section 179 of our income tax law.
Section 179 allows every mason contractor a write-off of up to $18,500 of the cost of new equipment purchases that are put into service in a given year. Thus, instead of depreciation, up to $18,500 may be classed as a "Section 179" expense and claimed as an immediate tax deduction.
Although relatively simple, tax planning involves more than the acquisition of new equipment, whether it can be afforded and how it will be paid for. Tax planning also means looking at the downside of every transaction.
In the case of Section 179, the $18,500 expensing amount will be reduced, dollar-for-dollar, if equipment acquisitions exceed $200,000 in that tax year. Section 179 is a valuable tax reduction strategy subject to a ceiling that may limit its usefulness.
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A look at the ordinary, day-to-day expenses of a masonry contracting operation provides a even more profitable tax planning tool. However, just how effective those routine expenses and income sources are to the mason contractor depends, to a great extent, on the accounting method used by that masonry operation.
There are two common overall methods of accounting for a masonry operation's income: (1) the cash basis and (2) the accrual basis.
The
Continued on page 32
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MASONRY-NOVEMBER/DECEMBER, 1998 27