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Tips to Reduce Your 2006 Income Taxes in 2007!

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




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