With reports of so-called abusive tax shelters constantly in the news, many taxpayers and practitioners are increasingly wary of even the most fundamental of tax planning alternatives. However, solid tax planning is an essential component to build personal wealth and business profits, and not all tax planning is about outrageous or questionable tax shelters. Based on your business and personal activities, planning can save you money.

The following legitimate, intentional and potentially tax-reducing strategies are intended as a sampler-not an all-inclusive list of tax-planning ideas. Consider them for your business.

1. Take advantage of the newly enacted deduction for income attributable to domestic production activities.
The final version in 2010 will eventually permit tax deductions for up to 9 percent of taxable income derived from qualified domestic production activities, beginning with 3 percent in 2005. These include manufacturing, production, growth or extraction activities. Deductions also will also be limited by domestic wages paid.

2. Consider the EIE if you manufacture and export U.S. products.
The Extraterritorial Income Exclusion may be for you. Extraterritorial income is partially excludable from taxable gross income, and comprises "foreign trading gross receipts" arising from sales of certain qualifying foreign trade property outside the United States. This includes the sale or rental of qualifying foreign trade property outside the United States; the performance of certain services related to the sale or rental; and certain other limited services. Although this tax benefit was repealed in 2004, it is still available over the next three years as it is phased out. Eligible taxpayers can still amend returns to claim refunds by taking the exclusion for prior open tax years.

3. If the EIE helped, consider a Domestic International Sales Corporation.
A DISC is another tool available to many exporters, enabling taxpayers to reduce their taxable income from export sales and activities. Even though the tax deferral benefits of the DISC may be subject to an annual interest cost payable to the IRS, the benefits should be of more interest now that other options are on the way out of the tax law.

4. Look for research & development tax credits.
You may be eligible for R&D tax credits-more broadly available than many taxpayers realize. Frequently businesses assume their activities do not constitute R&D, and/or overlook costs that can be included in qualifying expenditures. You do not have to be in a high-tech business to have qualifying R&D expenditures and do not have to hire high-tech outside expertise.

5. Use the cash method of accounting.
To encourage the development and growth of U.S. small businesses, in part by simplifying tax compliance costs, the IRS recently increased the size of companies that can operate on cash basis accounting. Cash accounting can simplify reporting, and save taxes because you typically do not recognize revenue until the amount is collected. Expenses are typically deductible when paid, and qualifying businesses are usually those with less than $10 million in annual gross receipts that do not earn a majority of their income in certain businesses, including mining, manufacturing, wholesale or retail trade, or certain information activities.

6. Defer taxes with like-kind exchanges.
Collecting taxes when cash is available to pay is considered good tax policy; therefore, tax rules permit like-kind exchanges. These occur when a taxpayer exchanges property for similar new or used property. Like-kind exchanges are particularly popular with real estate properties. In a qualifying like-kind exchange, tax on the gain can be deferred through adjustments to the taxpayer's basis (carrying cost) of the newly acquired property. Taxpayers typically will pay tax on gain only to the extent that cash or cash equivalents are received in the swap.

7. Increase depreciation deductions using cost segregation.
Tax rules governing depreciation of real estate do not require that all real estate components and attachments be depreciated over the lengthy lives required for real property. Cost segregation identifies asset costs that are often buried in building costs, reclassifying them to a category with a shorter depreciable life in order to maximize the depreciation deduction in the early years. Most real property can yield extra near-term depreciation deductions based on the results of a cost segregation study. Cost segregation studies for properties placed in service after Sept. 11, 2001, and before Dec. 31, 2004, may yield extra depreciation benefits due to post-Sept. 11 tax depreciation economic stimulus incentives.

8. Make sure your income is not taxed twice.
Unlike most nations, the United States taxes income at the corporate level and again to individuals when dividends are paid. Recent tax changes reduced, but did not eliminate, this extra cost, and as a result, many U.S. small businesses are structured as tax-transparencies such as partnerships and S corporations so that the income is taxed only once to the owners of the business.

9. In solid tax planning, timing is almost everything-the earlier the better.
Most of the solid tax strategies discussed here are based on simply and legally deferring income and/or accelerating deductions. Many other opportunities also exist.

For example, have you maximized your personal retirement plan contributions and benefits? Taxes can be deferred for years, or even eliminated entirely, on income contributed to or earned within qualified retirement plans or IRAs. Dollars contributed to a plan today are far more valuable than dollars contributed 10 years from now.

As another example, do you have current estate and/or business succession plan? There are substantial non-tax reasons to plan your estate and business succession, but equally valid tax reasons. And, the earlier these are done, the more easily and effectively they can be executed.

10. It's not over till it's over.
In many cases, taxpayers can claim some of the benefits through amended returns. For example, taxpayers may, in certain circumstances, amend returns to claim additional depreciation deductions from cost segregation; additional research and development tax credits that were not claimed on the original return; or additional extraterritorial income exclusion benefits that may have been ignored or simply overlooked.

11. Good constructive ideas do not have to always be of the home run variety.
In fact, the combination of two or three of these ideas may yield as much benefit over time as the more publicized tax shelters, and at much lower risk.

12. Remember that execution is key.
A poorly executed acceptable tax strategy is no better than a well-executed abusive one. In either case, the IRS has the upper hand.

Use tax planning to your advantage

Properly used, tax planning enhances personal wealth and business profits. Like any other tool, it is most effective when used safely. These sample strategies, if properly executed, will avoid publicized abusive tax shelter risks because they reflect accepted, intended benefits under our tax law. e