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Battle city hall, with tax deductions

January 1st, 2012 / By: / Management

Thanks, in large part, to the economy’s impact on cash-strapped state and local governments, many marine canvas and upholstery businesses are swamped with red tape, rules, regulations, fees and taxes, all sharply cutting into their bottom line. Fortunately, battling city hall, the county or statehouse over zoning issues, unfairly levied fines, property tax assessments and, yes, tax bills, can, in many instances, be funded with tax write-offs and deductions.

Any tax that is, in reality, an assessment for local benefits, such as streets, sidewalks and similar improvements, is not deductible, except where it is levied for the purpose of maintenance and repair or meeting interest charges on local benefits. According to the tax rules, it is up to the taxpayer to show an allocation of amounts assessed for different purposes.

Fortunately for those complying rather than fighting, a unique rehabilitation credit is available equal to 20 percent of qualified rehabilitation expenditures (QRE) for certified historic structures and 10 percent for QRE other than historic structures.

Property and assets

The U.S. Tax Court has denied tax deductions for any decrease in property values that result from zoning law changes. Adding insult to injury, the cost of challenging zoning laws must be capitalized, rather than deducted as an immediate expense.

Many of those irksome—and increasingly more expensive—licenses, permits and other business necessities fall within the category of “intangible assets.” Because neither a value, nor a predicted “life,” can be placed on most intangible assets, they are rarely tax deductible. Fortunately, Section 197, a unique write-off for intangible assets “acquired” by a business, allows the cost of those intangible assets to be deducted or amortized over a 15-year period.

Legal expenses are generally immediately tax deductible, even if primarily for the purpose of preserving existing business reputation and goodwill. However, while the deductibility tests are substantially the same as those for other business expenses, they clearly preclude a current deduction for any legal expense incurred in the acquisition of capital assets, including zoning changes, leases and other intangible assets.

Despite all of the attention focused on income taxes, it is the bill for the tax on the property owned, or leased by, many marine fabrication businesses that is the biggest expense and the most difficult to manage. Battling city hall or, in this case, the property tax assessor, offers the potential for major savings. Even better, once reduced, the savings generally last year after year.

State taxes

Every marine fabricator faces an interesting challenge: what happens if you do business in more than one state? The state that the operation calls home generally wants to tax every dollar of income. Every other state where you do business wants to tax income earned in that state. Does that mean you pay taxes twice on the same income?.

Fortunately, only rarely does anyone wind up paying tax on the same income twice. In fact, a marine fabricator that does 45 percent of its business in state A and 55 percent in its home state of B, doesn’t necessarily have 45 percent of the operation’s income taxed in A and 55 percent in B. Depending on the rules in each state, the fabricator may wind up paying slightly more or less. In fact, depending on the rules in each state, the operation could wind up paying state tax on less than 100 percent of its income.

States looking for new revenue without having to raise taxes are increasingly—and more aggressively—asserting nexus. Nexus is defined as having sufficient presence within the jurisdiction of a taxing authority. Business owners might want to look into the amount and type of business they do in taxing jurisdictions other than in their primary location. Marine fabrication business owners choosing their battles may find it pays to fight that nexus label, the minimum amount of contact between a taxpayer that might lead to a tax bill from another taxing jurisdiction.

The increasing financial burden for every marine fabricator trying to comply with the growing number of new rules and regulations and the ever more expensive fines, penalties and even new or higher taxes, is significant. Although there is no longer a tax deduction for lobbying expenses directed toward influencing federal or state legislation, this prohibition does not apply to in-house expenses that do not exceed $2,000 for a tax year. Lobbying expenses pertaining to local legislation are, of course, deductible.

While few government programs on any level—local, state or federal—come with provisions to help offset their cost, our tax laws remain one avenue of potential savings—at least for those marine fabrication business owners who seek professional help when battling city hall.

Mark E. Battersby, based in Ardmore, Pa., writes on business, financial and tax-related topics.

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