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Last-Minute Tax Breaks That Can Save You Money

By Mark E. Battersby

Many tennis shop and facility owners may be overlooking a number of tax breaks under the false impressions that they had expired. Still other tax breaks, that may have been considered too complex in the past, have now been clarified thanks to the last-minute passage of a tax law.

The Tax Relief and Health Care Act of 2006, passed late in December, extended a number of expired or expiring tax breaks. Covered were provisions such as sales tax deductions for people in states without income taxes, the tax deduction for college tuition, a tax credit for hiring welfare recipients and others facing difficulties finding jobs, tax credits for alternative energy producers, and purchases of solar energy equipment by homeowners and businesses. All told, the extension of expiring and expired tax breaks, along with several new tax provisions, are expected to save taxpayers $38 billion over the next five years.

Regardless of whether you’ve already filed your annual tax returns, have taken advantage of the automatic extension of time to file those returns, or are in the process of preparing income tax returns, you and your tax adviser should review these tax breaks.

How You Can Save

Among the tax breaks likely to be of most interest to your business are:

• Improving Leased Property: Those owners or operators who lease property — any business property — will find that the new law extends the 15-year recovery/write-off period for certain leasehold improvements through 2007. Generally, qualified leasehold improvement property is any improvement to an interior portion of a non-residential building.
   Remember, however, unless a leasehold improvement qualifies as “15-year leasehold improvement property,” the cost of an addition or improvement made to property that is a structural component of the building must be depreciated. For example, the cost of installing permanent walls in a commercial building (structural components) would be separately depreciated over a 39-year period.
• Energy-Efficient Buildings: Today, the pro shop and other buildings utilized by tennis facilities have one thing in common: high energy bills. But there’s a unique write-off for the owners of commercial buildings. The new law extends that benefit until Jan. 1, 2008.
   Under the energy tax write-off, qualifying taxpayers may deduct costs associated with energy-efficient commercial building property. The new law extends for one year a deduction for expenditures by owners to help their commercial buildings reduce annual energy and power consumption by 50 percent compared to the American Society of Heating, Refrigerating and Air Conditioning Engineers standard.
   The deduction equals the cost of energy-efficient property installed during construction, with a maximum deduction of $1.80 per square foot of the building. In addition, a partial deduction of 60 cents per square foot is available to offset the cost of the building’s subsystems.
   In order to qualify for this write-off, the “property” acquired to help make the building more energy efficient must have been placed in service between Dec. 31, 2005, and Jan. 1, 2008. The next law extends the write-off for equipment or “property” acquired to make commercial buildings more energy-efficient to expenditures made before Jan. 1, 2009.
• Work Opportunity and Welfare-to-Work Credits: The Work Opportunity (WO) and Welfare-to-Work (WTW) tax credits were originally created to provide incentives for employers to hire economically disadvantaged individuals. The new law retroactively renews both the WO and the WTW credits for 2006, combining them, with enhancements, into one credit for 2007.
   The credits continue to target nine specific groups of economically challenged individuals. The combined credit in 2007 will simplify the necessary computations and, therefore, enhance its use, especially among smaller retail shops and businesses. For most of the targeted groups, the credit is equal to 40 percent of qualified first-year wages (25 percent if employment is more than 120 hours but less than 400 hours). Qualified first-year wages cannot exceed $6,000. That means a tax credit, a direct reduction in the tennis operation’s tax bill, of as much as $2,400 per qualified individual in the first year of employment.
• Health Savings Accounts: Many business owners have, in recent years, discovered the cost-effectiveness of health savings accounts, or HSAs. Similar to an Individual Retirement Account (IRA), but earmarked for health-related expenses, the HSA has caught on among small business owners as an excellent, tax-favored fringe benefit for themselves as well as employees.
   Contributions to HSAs are tax deductible, whether made by the individual or a business, HSAs enable anyone with high-deductible health insurance to make pre-tax contributions. Contributions equal to the lesser of the annual deductible or $2,700 for self-coverage ($5,460 for families) in 2006 to cover health care costs qualify. Unlike an IRA, any amount paid or distributed from an HSA, used exclusively to pay qualified medical expenses, are not included in gross income.
   As part of the new law, Title III, the Health Opportunity Patient Empowerment Act of 2006, HSAs are now more attractive then ever. Unlike many of the extended provisions, the HSA enhancements have been made permanent, with most taking effect for tax years beginning after 2006.
   Employees, even employees of their own tennis facility or business, with a health flexible spending account (FSA) or a health reimbursement account (HRA) will be allowed to make a one-time transfer of the balance of their FSA or HRA to an HSA. The maximum amount that may be transferred, tax-free, is the lesser of the balance on the date of transfer or on Sept. 21, 2006. The transfer must be made before Jan. 1, 2012.
   What’s more, those shop owners and facility operators with tax-favored IRAs are allowed a one-time, once-in-a-lifetime, rollover of funds from their IRAs into an HSA. The change is designed to give those with IRAs quicker access to their funds for medical expenses, but it is also expected to spur interest in HSAs. The election to make the rollover is irrevocable and the new rules apply to tax years beginning after Dec. 31, 2006.
   So-called Medical Savings Accounts (or Archer MSAs) also allow favorable tax treatment of money saved for medical expenses by certain taxpayers covered by high-deductible plans. Another provision in the tax law allows new contributions to this type of plan through Dec. 31, 2007.

On a Personal Note

The new tax legislation is not all business. In fact, only a few of its provisions benefit the average tennis facility and business or are related to business. By far, the majority of the extended or resurrected provisions in this bill apply to individuals. Those provisions cover such things as:

• An “above-the-line” deduction for higher education expenses.
• Deduction of state and local sales taxes.
• Above-the-line deduction for expenses of elementary and secondary schoolteachers.
• Extension of energy-efficient new homes credit.
• Extension of credit for residential energy-efficient property.
• Alternative minimum tax credit relief for individuals.

After The Fact

The extenders bill passed after the IRS printed the 2006 tax year materials. Although the IRS will not be revising the printed tax forms, it plans a “media blitz” to alert taxpayers that the extenders are back and should not be overlooked in preparing 2006 returns (visit www.irs.gov for more details) and to claim the retroactively resuscitated tax breaks. Publication 553 (Highlights of 2006 Tax Changes) is expected sometime in the first quarter of 2007.

Fortunately, tax laws now permit automatic extensions of time in which to file income tax returns — but not the taxes due. If the tax returns have been filed, you can also correct errors and omissions on that already-filed return — including previously overlooked or neglected deductions and tax credits and to claim a refund — by filing Form 1040X for individuals or Form 1120X for corporations that filed Form 1120. Generally, you can file a claim for refund within three years from the time the return was filed.

See all articles by Mark E. Battersby

About the Author

Mark E. Battersby is a tax advisor and author in Ardmore, Pa.

From the April 2007 issue
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