Small Business Taxes..the Whole Enchilada for Year-End Planning

 Guest Post by Carol Olson, CPA  - DRDA, LLC

Small Business Jobs Act of 2010

The Small Business Jobs Act of 2010 includes a number of important tax provisions for businesses large and small. While a few of the provisions take effect in 2011, the majority of the provisions are effective retroactively for the 2010 tax year.  Following are some of the major provisions:

Bonus Depreciation. Bonus depreciation has been extended for 2010.  You can deduct 50% of the cost of qualifying new business assets as well as depreciate the remaining basis of the asset.  Bonus depreciation of up to $8,000 may be taken on passenger automobiles.

Section 179.  The Section 179 deduction has been increased to $500,000 for property placed in service in 2010 and 2011.  The $500,000 deduction is limited if a business acquires more than $2,000,000 of qualifying property.  The Section 179 limit for large SUVs ($25,000) remains unchanged.   Normally, Section 179 expensing only applies to tangible personal property used in a trade or business.  For 2010 and 2011, a taxpayer may elect to treat up to $250,000 of qualified real property as Section 179 property.  Qualified real property includes qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.

Self-Employed Health Insurance Deduction.  For tax year 2010, health insurance costs for a self-employed taxpayer and his family are deductible in computing 2010 self-employment tax.

Deduction for Startup Expenses Increased.  For 2010 only, the amount of start-up expenditures deductible in the current year increased to $10,000.  Any remaining start-up expenses can be deducted ratably over 180 months.

100% Exclusion of Gain for Small Business Stock.  For qualified small business stock acquired after September 27, 2010, and before January 1, 2011, the excludible gain is increased to 100% if the stock is held for more than 5 years.

 

Rental Property Owners Required to Issue 1099s.   In 2012, rental property owners will be required to issue Forms 1099 to service providers paid $600 or more.  Beginning January 1, 2011, rental property owners should begin keeping adequate records of payments made to service providers such as plumbers, painters or accountants, in order to issue correct 1099s for 2011 payments.  There has been opposition to this new filing requirement.

Other Provisions

Small Employer Health Insurance Credit.  For 2010 through 2013, the health care act provides small employers with a tax credit for providing health insurance for their employees.  The credit is limited to businesses with no more than 25 full-time employees with annual full-time equivalent wages averaging no more than $50,000.

Standard Mileage Rate.  The standard mileage rate for 2010 business miles is 50 cents per mile.

E-file Mandate.  Tax preparers must electronically file tax returns beginning January 1, 2011, for 2010 individual and trust tax returns.  E-file was already required for corporations with assets > $10 million.

Estate Tax Exclusion.  The estate tax was repealed for 2010 but will reappear in 2011 unless Congress acts before then.

Gift Tax Exclusion.  The gift tax exclusion is $13,000 for 2010.

Payments to Corporations for Good and Services.  After December 31, 2011, payments of $600 or more made to corporations for goods or services must be reported on Form 1099.  (Prior to this change, most payments to corporations were exempt from reporting requirements.)  The law also extends reporting requirements for businesses to file a Form 1099 for any goods purchased from an outside vendor valued at over $600. This information-reporting provision will increase the paperwork burden on all businesses.  However, Congress is currently considering legislation that would repeal this reporting requirement.

American Opportunity Tax Credit.  For 2010,this education credit remains in effect for up to $2,500 (100% on the first $2,000, plus 25% of the next $2,000) for qualified tuition and related expenses including books.  The credit is available for the first four years of the student's post-secondary education. The credit is phased out at modified AGI levels between $160,000 and $180,000 for joint filers and between $80,000 and $90,000 for other taxpayers. Forty percent of the American Opportunity Tax Credit is refundable, which means that you can receive up to $1,000 even if you owe no taxes.

Non business Energy Property Credit.  The non business energy property credit remains for 2010 only.  Property qualifying for the credit includes windows (including skylights), exterior doors, insulation, metal roof, advanced main air circulating fans, natural gas, propane, or oil furnace or hot water boilers, and other energy efficient building property that meets certain energy standards. The credit is 30% of the cost of the improvement(s) up to a maximum credit per year of $1,500.

State and Local Sales Tax Deduction, Additional Standard Deduction for Real Property Taxes, Above-the-Line Deduction for Educators.  These deductions were not included with the Small Business Jobs Act of 2010 which passed September 27, 2010.  However, Congress may consider extending these deductions before year-end.

 Retirement Savings Rules for 2010

401(k) Contributions.  The § 401(k) elective deferral limit is $16,500 for 2010 and 2011. If you will be 50 years old by December 31, 2010, you may contribute an additional $5,500 to your §401(k) account, for a total maximum contribution of $22,000 ($16,500 in regular contributions plus $5,500 in catch-up contributions). IRA Contribution Limit.  The IRA contribution limit remains at $5,000 for 2010 ($6,000 if you're over 50). Roth IRA Conversion Rule.  Funds in a traditional IRA or other retirement plan may be rolled over into a Roth IRA (earnings and distributions are tax-free). Such a rollover is treated as a taxable event, and you will pay tax on the amount converted.   In the past, a taxpayer's AGI for conversions (whether married or filing jointly) was limited to $100,000.  This limit has been repealed, and taxpayers are now able to make the conversions without regard to their AGI. (However, the AGI income limits still apply to current contributions to Roth IRAs.) If you are eligible to convert to a Roth IRA in 2010, you will have the option of spreading the income ratably over two taxable years (2011 and 2012).  This deferral and two-year spread for distribution income applies to 2010 distributions only.