Recently Enacted Tax Breaks for Small Businesses

April 5, 2012

Keeping track of tax changes these days is quite a task. Congress is constantly tweaking the tax laws in an effort to stimulate the economy and deal with the budget deficit. The following is a compilation of recent changes to keep you up date.

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 – A one-year law change allowed 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. For years before and after 2010, the deduction is used only as an above-the-line deduction from gross income on the self-employed individual’s income tax return and does not affect the SE tax.

Medicare B as an SE Health Insurance Deduction – The IRS very quietly reversed its position related to the deductibility of Medicare B premiums as an SE health insurance deduction. The 2009 Form 1040 instructions indicated that it was not deductible, while the 2010 instructions reversed that position to indicate that it is. The 2011 instructions also permit voluntarily paid Medicare premiums to be treated as SE health insurance premiums.

Payment Card and Third-Party Payment Transactions – Beginning in 2012 (for 2011 returns), payment settlement entities (e.g., a bank) will have to make an annual information report in settlement of reportable payment transactions (e.g., a credit or debit card transaction) and transactions settled through third-party payment networks (e.g., PayPal) that settle online transactions. The report is made to the merchant and the IRS stating the gross amount paid to the merchant during the previous calendar year. Form 1099-K will be used for this reporting.
The IRS had intended to require business owners to reconcile credit and debit card income with the gross income reported on business returns beginning with 2012 returns filed in 2013. However, in February of 2012, the IRS announced that they were dropping that requirement.
Even though the reconciliation requirement is being dropped, business owners should be aware that the IRS is still receiving 1099-Ks reporting the business’s credit and debit card income. On a cautionary note, the IRS is expected to develop models of various business types so they can extrapolate the credit and debit card income and arrive at the estimated gross income for various types of businesses. This will help them select their audit targets.

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.

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 $139,000 and $560,000, respectively.

Certain Real Property Can Be Expensed – Generally, real property is not eligible for Sec 179 expensing. However, for property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 deduction of expensed property 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. Congress extended the 50% rate for qualifying property purchased through September 8, 2010 and doubled 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 – Beginning in 2011, Congress authorized 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 dropped from 15.3% to 13.3% for 2011. The reduction was subsequently extended to apply to all of 2012.

Research Credit – The research tax credit expired at the end of 2009. As part of the 2010 Tax Relief Act, Congress reinstated the credit for 2010 and extended it through 2011.

Small Employer Health Insurance Credit – The Patient Protection and Affordable Care Act provides a tax credit for an eligible small employer (ESE) for nonelective contributions to purchase health insurance for its employees. For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000, will be eligible for a tax credit of up to 35% of the cost of nonelective contributions to purchase health insurance for their employees. The maximum credit is available to employers with no more than 10 full-time equivalent employees with annual full-time equivalent wages from the employer of less than $25,000. In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.

Credit for Hiring Veterans – The VOW to Hire Heroes Act of 2011 added two new categories to the existing qualified veteran targeted group for the Work Opportunity Credit (WOTC). Employers may claim the WOTC for veterans certified as qualified veterans and who begin work before January 1, 2013. The credit can be as high as $9,600 per qualified veteran, but the amount of the credit will depend on a number of factors, including the length of the veteran’s unemployment before hire, the number of hours the veteran works, and the veteran’s first-year wages. Non-profit organizations are also eligible to claim this credit. All employers must obtain certification from their respective state workforce agency that an individual is a member of the targeted group before the employer may claim the credit.

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, the extension of certain business energy credits, and the limitation of the penalty for failure to disclose certain reportable transactions (including listed transactions) on a return.

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