New Breaks for Small Businesses

• Posted on September 27, 2010

The 2010 Small Business Jobs Act, enacted September 27, 2010, and the Tax Reform Act of 2010, signed into law December 17, 2010, include an assortment of incentives and tax breaks for small businesses.  The following is a brief overview of some of the key provisions included in these new laws. 

• Cell Phones No Longer Listed Property - This means that cell phones can be deducted or depreciated like other business property, without the complicated recordkeeping required for listed property.  This is effective for tax years beginning after Dec 31, 2009.
  
  
• Business Owners’ Health Insurance Deduction Reduces Self-Employment Tax - The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax. Previously the deduction could only be used as an above-the-line deduction from gross income on the self-employed individual’s income tax return.
  
  
• Boosted Deduction for Start-Up Expenditures – For 2010, businesses can deduct up to $10,000 (was previously $5,000) in trade or business start-up expenditures. However, the $10,000 limit is reduced by the amount by which start-up expenditures exceed $60,000 (was previously $50,000). The $5,000/$50,000 amounts return for tax years beginning in 2011.
  
  
• Increased Small Business Section 179 Expensing – Small business taxpayers can elect to write off the cost of certain capital expenses in the year of acquisition in lieu of recovering these costs over a period of years through depreciation.

For tax years beginning in 2010 and 2011, a taxpayer is allowed to expense (under Section 179) up to $500,000 (up from $250,000 under prior law) of the cost of qualifying business property, which includes machinery, equipment and certain software placed in service during the year.  For 2010 and 2011, the annual expensing limit is reduced by the cost of qualifying property that is placed into service during the year exceeding the $2 million (was $800,000) investment limit. The maximum Sec. 179 deduction and investment cap amounts for 2012 are $125,000 and $500,000, respectively, and both amounts will be indexed for inflation.

• Certain Real Property Can Be Expensed – The new law also makes certain real property eligible for Sec 179 expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 deduction of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
  
  
• Bonus First-Year Depreciation Extended and Expanded - Businesses normally can only deduct the cost of capital expenditures over time through depreciation—most commonly at the rate of about 14% or 20% of the cost of machinery or equipment for the first year. For 2008 and 2009, businesses were permitted to write off 50% of the cost of new machinery and equipment placed in service during those years.  In the new law, Congress extends the 50% rate for qualifying property purchased through September 8, 2010, and doubles the first-year bonus rate to 100% for qualifying property placed in service after September 8, 2010 and before January 1, 2012 (before Jan. 1, 2013 for certain property). The bonus rate for 2012 (through 2013 for certain property) will again be 50%.
  
  
• Lower SE Tax Rate - The Making Work Pay credit, which provided a credit in years 2009 and 2010 of up to $400 ($800 for married couples filing jointly), subject to income limitations, was available for both employees and self-employed taxpayers. The credit expired after 2010 and has been replaced for one year only (2011) with a 2 percentage point reduction in the employee’s portion of the payroll tax (OASDI) and a corresponding reduction in the SE Tax for self-employed individuals.  Thus the overall SE tax rate will drop from 15.3% to 13.3% for 2011.
  
  
• Research Credit - The research tax credit expired at the end of 2009.  As part of the 2010 Tax Relief Act Congress has reinstated the credit for 2010 and extended it through 2011.
  
  
• General Business Credits for 2010 Can Be Carried Back 5 Years – Under the new law, for the first tax year beginning in 2010 (2010 for calendar year taxpayers), eligible small businesses (ESB) (generally one with $50 million or less in average annual gross receipts for the prior three years) can carry back unused general business credits for five years. ESBs include sole proprietorships, partnerships and non-publicly traded corporations.
  
  
• General Business Credits of Eligible Small Businesses in 2010 Aren't Subject to AMT - Under the Alternative Minimum Tax (AMT) rules, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The new law allows eligible small businesses, as defined above, to use all types of general business credits to offset their AMT in tax years beginning in 2010.
  
  
• Other Provisions With Limited Application – Calculations of the built-in gains tax on C-Corporations converted to S-Corporations, special rules for long term contract accounting, extension of certain business energy credits, and limitation on the penalty for failure to disclose certain reportable transactions (including listed transactions) on a return.

If you have questions related to any of these new tax benefits or wish to schedule a tax planning appointment to see how your business might benefit, please give this office a call.

Big Break for Adoptive Parents

• Posted on June 7, 2010

As part of the Health Care Legislation passed earlier this year, the credit for expenses of adopting a child was increased and made refundable.  Prior to this change, the credit was non-refundable and could only be used to reduce the adoptive parent’s tax to zero, with any unused portion of the credit carried over for up to five years and used against future years’ tax.
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How Will the Health Care Bill Affect Your Taxes?

• Posted on June 7, 2010

On March 23, 2010, President Obama signed into law the new health care legislation.  The legislation will affect virtually every individual in one way or another and will significantly impact tax returns in the future.  The following overview of the tax-related provisions of the legislation is based upon the House of Representatives’ version and the one signed by President Obama on March 24, 2010.  The provisions take effect over a number of years (2018).
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Small Employer Simple Cafeteria Plans

• Posted on June 7, 2010

For years beginning after Dec. 31, 2010, small employers (average of 100 or fewer employees on business days during either of the two preceding years) may provide employees with a “simple cafeteria plan.” (Code Sec. 125(j))
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Advanced Lean-Burn Technology Vehicle Credits

• Posted on September 27, 2010

2010 is the final year for the advanced lean-burn technology motor vehicle tax credit. Advanced lean-burn technology vehicles are passenger cars or light trucks with an internal combustion engine designed to operate primarily using more air than is necessary for complete combustion of the fuel.

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Inherited Basis in 2010

• Posted on June 1, 2010

Legislation enacted nearly 10 years ago repeals the estate tax for individuals dying in 2010, and then brings it back for those dying after 2010.  Although many had thought Congress would revoke the repeal for 2010, and keep the tax at 2009’s level, that has not happened yet.
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2010 Brings Increased Deduction for Domestic Production Activities

• Posted on March 1, 2010

The domestic production deduction was created to encourage manufacturing and production within the U.S., and it provides a substantial business deduction equal to 9% (up from 6% in 2009) of the lesser of: (1) the taxpayer’s net income from qualified production activities or (2) the taxable income (modified adjusted gross income for individual taxpayers) without regard to this deduction for the tax year.
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2010 Inflation Adjustments

• Posted on September 27, 2010

Every year, many of the various tax limitations, deductions, allowances, etc., are inflation adjusted. The following are the more commonly-encountered values that apply to 2010, along with the prior year's amounts.
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Home Energy Credits

• Posted on September 27, 2010

Tax Credit for Residential Energy Improvements – Energy property improvements to a principal residence located in the United States and placed in service during before the end of 2010 qualify for the residential energy improvement credit.  2010 is your last chance to “go green” and get Uncle Sam to cover part of the cost in the form of a tax credit.
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Roth Conversion Limitations Eliminated

• Posted on September 27, 2010

Beginning in 2010, legislation: (1) Eliminates the $100,000 modified AGI limit on conversions of traditional IRAs to Roth IRAs, and (2) Permits married taxpayers filing a separate return to convert amounts in a traditional IRA into a Roth IRA. Under prior law, married taxpayers who filed separate returns were restricted from making conversions.
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Plug-In Electric Vehicle Credit

• Posted on September 27, 2010

For vehicles bought after February 17, 2009 and before January 1, 2012, the Recovery Act creates a new 10% nonrefundable personal credit for low-speed vehicles, motorcycles, and three-wheeled vehicles that meet the criteria of a qualified plug-in electric drive motor vehicle.  The maximum credit for these vehicles is $2,500.  If the vehicle is also used in business, the business portion of the credit is treated as a general business credit.  Four-wheel vehicles purchased after January 1, 2009 also qualify for this credit based on a law passed in 2008.  There are additional qualifications, so please call for further details.