Saved before the tax bell tolled
By Mark E. Battersby

You may be missing out on a number of newly extended and expanded tax breaks under the false impressions they had expired. And other tax breaks you may have overlooked in the past have been clarified, thanks to the last-minute passage of a new tax law.

The passage of the Tax Relief and Health Care Act of 2006, late in December, extended a number of expired or expiring tax breaks. The passage of the bill prevented a scheduled 5 percent cut in Medicare payments to doctors from taking effect.

Also 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.

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.

Even if you have already filed your annual tax returns, you (or your tax advisor) should review these tax breaks. Here are some you may find of interest:

• Qualified leasehold improvements. If you lease property — any business property, not merely your offices, labs, or clinics — you will find the new law extends the 15-year recovery/write-off period through 2007 for certain leasehold improvements made to an interior portion of a nonresidential building.

The property must be a 15-year leasehold improvement property. Unless it qualifies, 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 depreciated over a 39-year period.

• Energy-efficient buildings. The office and other buildings your practice utilizes have one thing in common: High energy bills. Our lawmakers came to the rescue by devising a unique write-off for the owners of commercial buildings.

Under the energy tax write-off, in effect until Jan. 1, 2008, qualifying taxpayers may deduct costs associated with energy-efficient commercial building property. A provision in the new law extends the deduction for expenditures by "commercial building owners" for one year to help their commercial buildings reduce annual energy and power consumption by 50 percent.

The deduction equals the cost of energy-efficient property installed, 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 after Dec. 31, 2005, and before 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.

• Donations. Incorporated chiropractic practices will benefit from the extended and enhanced rules for deducting donations of property, computer equipment, and technology to schools and public libraries.

The new law extends a provision that encourages professional practices and businesses to contribute computer equipment and software to elementary, secondary, and post-secondary schools by allowing an enhanced deduction for such contributions. For contributions made after 2005, the new law expands the deduction to allow equipment "assembled by" the donor to qualify for the deduction.

• Health Savings Accounts (HSAs). Many business owners have, in recent years, discovered the cost-effectiveness of health savings accounts (HSAs).

Contributions to HSAs are tax deductible, whether made by the individual, or a practice, or business.

HSAs enable anyone with high-deductible health insurance to make pretax contributions equal to the lesser of the annual deductible or $2,700 for self-coverage ($5,460 for families) in 2006 to cover healthcare costs.

Unlike an IRA, amounts paid or distributed out of an HSA used exclusively to pay qualified medical expenses are not includable in gross income.

As part of the new law, Title III, the Health Opportunity Patient Empowerment Act of 2006, HSAs are more attractive than ever and are expected to have a major impact on employer-sponsored healthcare decisions. Unlike many of the extended provisions, the HSA enhancements have been made permanent with most taking effect for tax years beginning after 2006.

Employees 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 either the balance on the date of transfer or on Sept. 21, 2006. The transfer must be made before Jan. 1, 2012.

• Frivolous taxes. In addition to last-minute changes in tax regulations, the new law strengthened and expanded the IRS's arsenal of weapons for fighting the growing "tax gap," the difference between taxes owed and the amount of taxes actually paid.

The provision the IRS can use to self-fund its tax cheat and tax fraud prevention efforts was due to expire at the end of 2006. It has now been extended through 2007. Plus, the IRS has been given the authority to share information with several other agencies, including state and municipal tax collectors, at least until the end of 2007.

It has also become more expensive to test the IRS's patience. The penalty for so-called "frivolous" tax-return submissions has increased from $500 to $5,000, and expanded to cover all taxpayers and all types of federal taxes. This increased penalty now applies to frivolous submissions for lien and levy collection due process, installment agreements, offers-in-compromise, and taxpayer assistance orders.

• Personal tax changes. The new tax legislation is not all business. In fact, only a few of the new law's more than 200 provisions benefit the average chiropractic practice or are related to business. Many provisions, of course, relate to Medicare.

However, 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; extension of the energy-efficient new homes credit; extension of credit for residential energy-efficient property; and alternative minimum tax credit relief for individuals.

The last-minute tax bill was passed after the IRS printed tax materials for 2006. Instead of revising the already printed tax forms, the agency planned a "media blitz" to publicize the tax-law changes.

Most tax experts predict significant confusion on the part of both tax professionals and taxpayers about the tax-law changes. Fortunately, the tax laws now permit automatic extensions of time in which to file income tax returns — but not the taxes due.

If you have already filed your tax returns, our tax laws permit everyone to correct errors and omissions.

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer, and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.

DISCLAIMER: The author is not engaged in rendering tax, legal, or accounting advice. Please consult your professional advisor about issues related to your practice.