As the owner or manager of an HVACR contracting firm, if you have not already done so, you may want to miss the deadlines for filing your annual income tax returns. The reason? The passage of the Tax Relief and Health Care Act of 2006, late in December, extended, simplified, and even created tax deductions and write-offs that are not on the 2006 tax returns.
All told, the extension of expiring and expired tax breaks, along with a number of completely new tax provisions, are expected to save taxpayers a whopping $38 billion over the next five years. Few would say that there is anything earth shattering in the new legislation, but there are many areas that HVACR contractors and their businesses may have overlooked, ignored, or not understood in the past. Plus, the fact that the new tax law was passed so late in the year has thrown both the Internal Revenue Service (IRS) and tax professionals into a frizzy.
Every contractor or business owner, regardless of whether the annual tax returns have already been filed, whether they took advantage of the automatic extension of time for filing those tax returns, or whether they - or their tax advisers - are in the process of preparing those income tax returns, should review these tax breaks.
TAX BREAKSAmong those most likely to be of interest to the owners and operators of HVACR businesses are such tax breaks as:
•Work Opportunity and Welfare-To-Work tax credits.Although contractors have faced problems finding skilled workers, our tax laws have long contained provisions that, in essence, picked up part of the wages paid to new workers hired from certain groups designated by our lawmakers. The Work Opportunity (WO) and Welfare-to-Work (WTW) tax credits were originally created to provide incentives for employers to hire economically disadvantaged individuals. The new law retroactively renews both the WO and the WTW credits for 2006, combining them, with enhancements, into one credit for 2007.
The credits continue to target nine specific groups of economically challenged individuals. The combined credit in 2007 will simplify the necessary computations and, therefore, enhance its use, especially among smaller contractors and businesses. The amount of the tax credit will, however, remain the same.
For most of the targeted groups, the credit is equal to 40 percent of qualified first-year wages (25 percent if employment is more than 120 hours but less than 400 hours). Qualified first-year wages cannot exceed $6,000. That means a tax credit, a direct reduction in the HVACR operation’s tax bill, of as much as $2,400 per qualified individual in the first year of employment.
•Health savings accounts.Many business owners have, in recent years, discovered the cost-effectiveness of so-called health savings accounts (or HSAs). Similar to an individual retirement account (IRA), but earmarked for health-related expenses, the HSA has caught on among HVACR contractors as an excellent, tax-favored fringe benefit for themselves, as well as employees.
Contributions to HSAs are tax deductible, whether made by the individual or a business. HSAs enable anyone with high-deductible health insurance to make pre-tax contributions equal to the lesser of the annual deductible or $2,700 for self-coverage ($5,460 for families) in 2006 to cover health care 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 now more attractive than ever. Unlike many of the extended provisions, the HSA enhancements are now permanent, with most taking effect for tax years beginning after 2006.
Employees, even employees of their own HVACR business, with a health flexible spending account (FSA) or a health reimbursement account (HRA), are now 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 the balance on the date of transfer or on Sept. 21, 2006. The transfer must be before Jan. 1, 2012.
What’s more, contractors and other business owners with tax-favored IRAs are allowed a one-time, once-in-a-lifetime, rollover of funds from their IRAs into an HSA. The change is designed to give those with IRAs quicker access to their funds for medical expenses, but it is also expected to spur interest in HSAs. The election to make the rollover is irrevocable and the new rules apply to tax years beginning after Dec. 31, 2006.
So-called medical savings accounts (or Archer MSAs) also allow favorable tax treatment of money saved for medical expenses by certain taxpayers covered by high-deductible plans. Another provision in the tax law allows new contributions to this type of plan through Dec. 31, 2007.
MORE POSSIBILITIES•New homes business credit.While few HVACR businesses qualify as builders of personal residences, a unique new tax credit has been created they should be aware of. Eligible contractors may claim a tax credit for qualified new, energy-efficient homes that they construct and that an individual acquires from the contractor in 2006 and 2007. The credit is generally $2,000 for a new, energy-efficient home and $1,000 for a new, energy-efficient manufactured home. Under the new law, the credit applies to homes purchased before Jan. 1, 2009.
•Frivolous taxes.In addition to the last-minute changes in the tax laws and regulations, the IRS has had its arsenal of weapons for fighting the “tax gap,” the difference between taxes owed and the amount of taxes actually paid, strengthened, and increased. Under congressional pressure to close that tax gap, the IRS will benefit from a number of provisions in the new tax law.
The IRS is, for instance, currently allowed to use the proceeds from its undercover operations to pay additional expenses incurred in those investigations. The provision the IRS uses to self-fund its “tax cheat” and tax fraud prevention efforts was due to expire at the end of 2006. It now extends through 2007.
The IRS has also been given the authority to share information with several other agencies, including state and municipal tax collectors, at least until the end of 2007.
Attempts testing the patience of the IRS are now more expensive. 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. And, finding a tax professional willing to venture too far into the grey areas of our tax laws has become more difficult as penalties for frivolous tax returns now extend to the professionals who prepare them.
ON A PERSONAL NOTEThe new tax legislation is not all business. In fact, only a few of the new law’s many provisions actually benefit the average HVACR business or are related to business. 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;
• A deduction of state and local sales taxes;
• An above-the-line deduction for certain expenses of elementary and secondary schoolteachers;
• Extension of energy-efficient new homes credit;
• Extension of the credit for residential energy-efficient property; and
• Alternative minimum tax credit relief for individuals.
Because the extenders bill passed after the deadline for printing 2006 tax year materials, the IRS has announced that it will not be revising the al-ready printed tax forms. Instead, the IRS is conducting a media blitz, to alert taxpayers that the extenders are back and should not be overlooked in preparing 2006 tax returns - or planning for 2007.
The IRS’s program to publicize the tax law changes, explaining how to claim the retroactively resuscitated tax breaks, uses a variety of media, including the IRS Web site (www.irs.gov). What’s more, there is also a new publication, Pub. 553 (“Highlights of 2006 Tax Changes”), available from the IRS. Despite these efforts, however, most tax experts have predicted significant confusion on the part of both tax professionals and taxpayers.
Fortunately, our tax laws currently permit automatic extensions of time in which to file income tax returns - but not the taxes due. Thus, unlike the IRS, every HVACR contractor and business owner, along with their tax advisors, should have adequate time to digest the contents of the latest changes to our income tax laws. If the tax returns have been filed, our tax laws permit everyone to correct errors and omissions on that already-filed tax return.
Once a tax return is filed, the claim by an individual who filed Form 1040, 1040A, or 1040EZ, is made on Form 1040X. A corporation that filed Form 1120 uses Form 1120X to include previously overlooked or neglected deductions and tax credits and to claim a refund. Generally, a HVACR contractor or business owner must file a claim for refund within three years from the time the return was filed.