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Tips to Reduce Your 2006 Income Taxes in 2007!

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



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