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Tax Laws Giveth and Taketh Away

State business levies rose, but there are federal changes that could help your firmBIZ SPOTLIGHT – Tax Planning

For New Jersey business there were big changes in tax laws in the second half of 2006.

These include an increase and expansion of the state’s sales tax and a surcharge imposed on annual corporate taxes.

To fix the hole in the state’s budget deficit, the sales tax jumped from 6 percent to 7 percent and broadened to cover additional products and services, including storage space, tanning salons and information services.

That last category could include items such as mailing lists and credit reports that businesses order on new customers, says Ken Hydock, partner in charge of tax services at accounting firm Sobel & Co. in Livingston.

The requirements to collect and send in the tax could pose administrative burdens on businesses, according to accountants. And companies won’t necessarily be able to recoup the costs through higher prices, says Edward Mendlowitz, a shareholder in accounting firm WithumSmith Brown in New Brunswick.

For example, he says a bar selling beer typically includes the sales tax in the flat price of a drink. In that case, and in others where businesses charge flat prices, the higher sales tax eats directly into profits.

“Basically, they’re making less money now. They’re making 1 percent less on total sales,” Mendlowitz says. His firm is advising clients to look at their fees and consider raising them.

“That doesn’t mean that they’re going to do it,” he says. “But these are the kinds of things that need to be looked at.”

The surcharge on the state’s tax on company net income, adds four percent to a firm’s tax bills. A company that would have owed $10,000 in 2006 will now owe $10,400. Like the higher sales tax, the surtax is designed to reverse the state’s budget deficit. It is supposed to phase out in 2009.

While these state changes could cost companies, changes at the federal level could yield savings. Among other tweaks, the federal government has broadened the definition of activities eligible for research and development tax credits. The credit also is larger than it used to be, accountants say.

“It’s worth taking a real hard look at your operations with somebody that really understands how the credit works,” says Ted Carnevale, managing director of accounting firm Gramkow Carnevale Seifert & Co. in Oradell. “It could be a very material tax-savings tool.”

One of Carnevale’s clients, a manufacturer, was able to use the R&D credit to deduct costs associated with developing software for use with a new grinding machine it was making.

The federal government also has loosened rules governing depreciation of the costs for building renovation.

Traditionally, businesses have had to spread out renovation costs over 39 years. For the last two years, says Carnevale, businesses have been able to write off eligible costs more quickly, regardless of whether they own or lease the space being renovated.

In a new twist for 2006, businesses will be able to look back and speed up depreciation of costs incurred several years ago, not just those from 2006. No matter when they occurred, the exact costs eligible for quicker depreciation hinge on the result of a so-called cost-segregation study.

In 2006 and 2007, meanwhile, renovations made with the goal of saving energy are eligible for tax credits. The credits were enacted in a 2005 federal energy bill.

Buildings that cut energy use by 50 percent are eligible for a deduction of $1.80 per square foot. Owners must calculate energy savings using software approved by the Internal Revenue Service.

Buildings that save less than 50 percent on energy but more than 16.7 percent are eligible for tax deductions of up to 60 cents per square foot, according to the IRS.

Federal credits also are available for companies buying hybrid vehicles that run on a combination of gas and electricity. The credits vary by vehicle and time of purchase. They range from $250 for a hybrid GMC Sierra pickup truck to $3,150 for the Toyota Prius, a four-door passenger car, according to the U.S. Department of Energy.

The general tax picture for New Jersey companies, however, is relatively uninviting, says Carnevale, particularly since the state bumped up taxes to close the budget deficit. “We’re becoming less and less attractive a place to do business.”

The potential reform of property taxes offers some hope, although it remains an open question whether reform will happen, Carnevale says.

In addition to saving businesses money, lower property taxes might also help more people afford homes in the state, he adds. “If we have a state that has more affordable housing—and obviously, real estate taxes are a big component of housing costs—there’s going to be a better opportunity to attract people to the state.”

Regardless of regular changes to tax law, however, accountants have some advice they offer pretty much every year:

Companies should seek to minimize their tax bills by accelerating expenses and deferring income. That means spending money in 2006 that can be deducted as an expense and, where possible, putting off earning money until 2007, for example, by delaying invoices.

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