| Income taxes are a substantial burden for
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| | 5, 7 and 15 year property. In
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| business owners and real estate
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| | addition, real estate owners can
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| investors. There are few actions which
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| | "catch-up" depreciation under reported in
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| can reduce your 2006 taxes after December
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| | prior years without filing amended tax
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| 31, 2006. This article summarizes four
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| | returns.
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| options for reducing your 2006 federal
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| | Fixed asset audits can be a cost
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| income taxes during 2007.
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| | effective means to increase operating
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| These include reducing revenue,
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| | expenses by removing phantom assets,
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| increasing real estate depreciation,
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| | removing operating expenses mistakenly
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| increasing expenses by conducting a fixed
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| | coded as capital expenditures and
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| asset audit and increasing expenses by
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| | correcting the depreciable life for
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| converting capital expenditures into
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| | incorrectly coded items. Phantom
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| operating expenses.
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| | assets can include assets which have been
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| The basic process for calculating income
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| | lost, stolen or disposed of without
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| taxes is simple:
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| | removing them from the accounting
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| Revenue - expenses = net income, or
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| | records. The undepreciated basis of
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| taxable income,
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| | these assets can be converted to an
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| Taxable income x tax rate = income taxes
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| | operating expense after the error is
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| Two options for reducing income taxes are
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| | discovered. In some cases, substantial
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| to reduce revenues or increase expenses.
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| | operating expenses are incorrectly added
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| It is not possible to change the tax rate
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| | to the fixed asset listing as capital
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| except through congressional action.
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| | expenditures. This could include items
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| It may be possible to reduce revenue for
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| | such as substantial roof repair or
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| taxpayers on an accrual accounting
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| | parking lot repair. The undepreciated
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| system. Taxpayers may be able to
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| | basis of these items can be converted to
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| increase expenses by increasing real
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| | an operating expense and written off when
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| estate depreciation, personal property
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| | the error is discovered. The fixed asset
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| depreciation or operating expenses.
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| | listing is massive for many companies,
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| Accrual accounting recognizes revenue
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| | sometimes exceeding 1,000 pages. With so
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| when it is earned. Cash basis
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| | many assets, it is difficult to ensure
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| accounting recognizes revenue when
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| | all are accurate. For items added with
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| payment is received. Accrual basis
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| | an incorrect and excessive depreciable
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| taxpayers can review revenue which has
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| | life, it is possible to revise the asset
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| been booked but not yet received. In
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| | life and "catch-up" depreciation under
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| some cases, it may be appropriate to
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| | reported in prior years without filing an
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| increase the allowance for bad debt.
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| | amended tax return. Instead, a form 3115
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| There is little cash basis taxpayers can
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| | is filed with the tax return.
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| do to reduce revenue (after the end of
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| | The difference between capital
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| the year).
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| | expenditures and operating expenses is
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| Most real estate owners can sharply
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| | often subjective. Are substantial roof
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| increase depreciation by obtaining a cost
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| | repairs a capital expense or an operating
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| segregation study. Real estate
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| | expense? Reviewing disbursements which
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| depreciation schedules are typically
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| | were listed as capital expenditures in
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| established by simply separating land and
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| | 2006 may uncover items which can be
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| long-life property. Long-life property
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| | converted to operating expenses.
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| is depreciated over 27.5 years for rental
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| | Federal income taxes are a substantial
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| residential property and 39 years for
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| | expense for successful businesses. Tax
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| commercial property. However, a
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| | planning is less glamorous than
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| subtantial portion of the depreciation
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| | purchasing a new company or developing a
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| schedule should be established as
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| | new division. However, a modest effort
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| short-life property. It is usually
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| | focused on reducing federal income taxes
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| possible to allocate 20% to 40% of the
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| | can sharply increase net income.
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| cost basis to short-life categories.
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| | Patrick O'Connor, MAI is president of
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| Cost segregation can usually increase
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| | O'Connor & Associates, a 180-person
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| depreciation by 50% to 100% during the
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| | real estate services firm in business
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| first five to seven years of ownership by
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| | since 1974.
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| allocating a portion of the cost basis to
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