Small Business Tax Saving Strategies for the 2011 Filing Season

ADVICE FOR SMALL BUSINESSES FROM CPAs
Whether it’s the economic uncertainty that many of you continue to face as small business owners, or new tax laws that affect your business, there has probably rarely been a time when meeting your tax responsibilities has been more challenging.

We’re all aware that tax laws present opportunities for reducing taxes, lowering expenses and encouraging investment. However, understanding these laws, and correctly applying them when preparing your tax return, can be overwhelming, especially when new demands on your business and the growing competition seem to consume more and more of your time and resources.

Key tax-law provisions ranging from the Section 179 expense deduction and bonus depreciation to the health insurance deduction and business tax credits may affect your business.

Tax planning and the timing of tax decisions are critical, and that tax issues may change throughout the year. Should you have any questions or concerns as you prepare your 2010 tax return or evaluate your business’s financial situation throughout the year, a CPA tax professional can help by reviewing your overall position and providing you with the expert tax-planning counsel you need today and in the years ahead.

By taking the necessary responsive steps when the need arises, rather than delaying action until the end of your tax year, you can better protect the financial interests of your business.

SELECT 2010 TAX PROVISIONS

SECTION 179 EXPENSE DEDUCTION
The Section 179 expense deduction is an expensing provision that applies to tangible business property placed in service during the tax year. By claiming the deduction, you deduct the full cost of newly-purchased equipment and, in the process, you receive a larger tax benefit, improve cash flow and have additional capital to invest.

In 2010, you can write off the entire cost of the tangible personal property you use in your business. The maximum write-off is $500,000 in the first year, regardless of whether you made the purchase with cash or credit. Also, the $500,000 limit applies on a per-taxpayer basis and is expected to remain in effect through 2011.

Property eligible for the deduction ranges from computer software to office equipment. For 2010, you can use up to $250,000 of the total available deduction for qualified restaurant property, leasehold and retail improvement property. This rule expires at the end of 2011 so if you plan on making physical improvements to your facilities, you will want to plan ahead to be able to take advantage of this benefit.
The deduction is reduced by every dollar over $2 million. Therefore, if a company spends $2.5 million or more on eligible property, your Section 179 expense deduction will be zero. Normal depreciation rules will apply.

The Section 179 expense deduction cannot be greater than your business’s taxable income and it does not apply to property inherited or property initially purchased for personal use, even if you later change it to business use.

Benefits: Provides immediate tax relief on newly purchased equipment, benefits cash flow and promotes investment by small businesses.

BONUS DEPRECIATION
There is a special first-year bonus depreciation allowance for eligible property acquired after December 31, 2007.

Under this rule, you can deduct 50 or 100 % of the property's cost in the year it is placed in service, with any remaining cost subject to regular depreciation rules.

The allowance generally applies to tangible personal property, including certain leasehold
improvements, office equipment and computer software that you first purchased, or in other words, is not used property. The property also needs to have a recovery period of 20 years or less, and been placed in service from 2008 through 2012.

The first-year bonus depreciation allowance is determined by when you place the property in service.

If it was placed in service from January 1, 2010 through September 8, 2010, the allowance is 50%; from September 9, 2010 through December 31, 2011 it’s 100 percent; and, from January 1, 2012 through December 31, 2012 it’s 50 percent.

By providing immediate tax relief, improving cash flow and providing additional capital for reinvestment in the business, this rule delivers a number of benefits to small business owners.

Benefits: Provides immediate tax relief, improves cash flow and provides additional capital that small business owners can use to reinvest in the business.

S CORPORATION BUILT-IN GAINS
The built-in gains tax applies to S corporations that have converted from a C corporation. The tax applies to certain property held by the S corporation at the time of the conversion. If the property is sold during the 10-year period after the conversion, The S corporation must pay a tax on the gain (net recognized built-in gain) equal to 35 percent, which is the highest corporate tax rate.

For tax years beginning in 2010, no tax is imposed on your net built-in gain if the seventh tax year in the 10-year recognition period precedes the year the built-in gain is recognized. So, a built-in gain on a property sold in 2010 is not subject to the built-in gains tax if 2010 is the eighth tax year of the recognition period.

For tax years beginning in 2011, no tax is imposed on an S corporation’s net built-in gain if the fifth year in the 10-year recognition period precedes the year the built-in gain is recognized.

This rule lowers the tax burden on S corporations and may provide additional capital for business investment.

Benefits: Lowers the tax burden on S corporations and may provide additional capital for business investment.

EMPLOYER-PROVIDED CELL PHONES
The IRS categorizes specific assets as “listed property” that is subject to both special record-keeping and depreciation rules. Listed property includes transportation vehicles such as automobiles, motorcycles and boats. It also covers computers and peripherals as well as other assets that businesses provide employees that can be used in non business, personal ways.

The special rules for listed property are intended to distinguish between business and personal use, which can create taxable income to an employee or business owner when an employer-provided benefit is used for personal purposes. Listed property must be used more than 50% for business to qualify for depreciation, and deductions will be severely limited.

For tax years after 2009, cell phones are no longer included as listed property and therefore employees do not need to adhere to listed property’s heightened documentation rules for personal and business use.

However, this does't mean that no documentation is required. An employer’s policy needs to clearly reflect that the cell phone or similar equipment is necessary for business purposes and is needed for the employee to perform his/her duties.

Benefit: Removes the need for employees to report taxable income from an employer-provided cell phone if the phone is used primarily for business purposes.

SMALL BUSINESS HEALTH INSURANCE CREDIT
For 2010 there is a new credit for small business owners who contribute to their employees’ health insurance coverage. However, there are a number of criteria that all factor into the extent to which the credit can be applied. The criteria pertains to the number of employees, average wages, premium amounts paid and average premiums by the state for certain coverage.

To qualify for the credit, which can reach 35 percent of the employer’s contribution, the employer needs to have the equivalent of 25 or fewer full-time employees and average annual full-time wages of less than $50,000. Small businesses with 10 or fewer full-time employees and average annual full-time wages of less than $25,000 you can receive the full credit.

The credit, which also applies to 2011, 2012 and 2013 tax years can be claimed for each tax year in which the employer qualifies, and it can offset your Alternative Minimum Tax (AMT). The credit also encourages you to help pay for your employees’ health coverage, and in the process reduce your tax liability.

Benefit: Encourage small business owners to help pay for their employees' health coverage, and in the process reduces their own tax liability.

START-UP AND ORGANIZATIONAL EXPENSES
Small business owners typically incur a wide range of costs in the launch of their business. The tax law allows you to deduct some of those costs in the year that you started the business and others you must amortize, or deduct, over the course of succeeding years.

These start-up costs include expenses incurred when investigating whether to start or buy a business and which business to start or buy. Costs can range from market analysis and feasibility studies to advertising and consultant fees.

For 2010, a taxpayer is deemed to have made the election to deduct the first $10,000 in start-up expenses paid or incurred during the year and to amortize the balance over 180 months, beginning in the month that you launched your business.

However, the deduction phases out dollar-for-dollar if your costs are greater than $60,000, with no immediate deduction available when your start-up costs are greater than $70,000. In that case, you must amortize all costs over 180 months.

Also, certain organizational costs (up to $5,000, subject to a dollar-for-dollar phase out if costs are greater than $50,000) incurred in the set up of a C or S corporation or a partnership can be deducted under the same rules for business start-up costs. Organizational costs include legal and accounting fees relating to the creation of the entity.

This rule helps small business owners by promoting entrepreneurship and making additional capital available to business owners that can be used for other purposes.

Benefits: Promotes entrepreneurship and makes additional capital available to business owners that can be used for other purposes.

DEDUCTION FOR HEALTH INSURANCE WHEN COMPUTING SELF-EMPLOYED TAX
In general the self-employed (sole proprietor, partner or LLC member) must pay self-employment tax on business earnings. The tax is based on net earnings from self-employment and is equal to 15.3 percent, which is the social security tax rate of 12.4 percent plus the Medicare insurance tax rate of 2.9 percent. Typically, in determining net earnings from self-employment, several deductions are disallowed, including those for health insurance (even though health deductions are available in computing income tax).

However, for 2010, self-employed persons may deduct health insurance costs incurred in 2010 for themselves, spouse, dependents and, effective starting March 30, 2010, any child of the taxpayer who, as of the end of the tax year, has not attained age 27. Self-employed persons will pay less in taxes because the deduction will lower taxable income.

Benefit: Self-employed persons will pay less in taxes because they deduction will lower taxable income.

1099 REPORTING REQUIREMENT: FUTURE PLANNING
All persons engaged in a trade or business and making payments in any tax year aggregating $600 or more, must provide payees with a Form 1099-MISC for the year, and send a copy to the IRS. However, payments to corporations are excepted from these reporting obligations (other than payment of legal fees or medical or health-care services that are otherwise reportable).

For payments made after December 31, 2011, the exception for payments to corporations is eliminated. Thus, all payments aggregating $600 or more made to corporations are subject to the information-reporting requirements.

Also, for payments made after December 31, 2010, individuals receiving rental income from real estate are considered to be engaged in a trade or business of renting property. Therefore, unless they fall into an authorized exception, they must file the appropriate information returns for reportable payments of $600 or more that they make in the course of that business. Congress is considering legislation to remove this requirement.

WORKER RETENTION CREDIT
For tax years ending after March 18, 2010, an employer may take an additional general business tax credit for each formerly unemployed worker retained for at least one year. The credit is equal to the lesser of $1,000 or 6.2 percent of the wages you paid the retained worker during a specified 52-week period.

To qualify for the credit, the worker must begin employment after February 3, 2010 and before January 1, 2011, and not been employed more than 40 hours during the 60-day period ending on the date the individual begins employment.

The worker must not be employed as a replacement for another employee, unless the former employee left employment voluntarily or for cause, and the worker cannot be engaged in agricultural labor.

Other requirements pertain to the length of employment and amount of wages paid.

OTHER BUSINESS TAX CREDITGS
The new tax-reform legislation also affected a number of important business tax credits by extending them through December 31, 2011. Those credits are:

• Alcohol Used as Fuel
• Alternative Fuel Vehicle Refueling Property
• Biodiesel and Renewable Diesel Fuel
• Differential Wage Payment
• Indian Employment
• Mine Rescue Team Training
• New Energy Efficient Home
• New Markets Tax
• Railroad Track Maintenance
• Refined Coal Production Facilities (for the production of electricity from renewable sources)
• Research

OBTAIN PROFESSIONAL ADVICE
A CPA tax professional understands the business of taxes and finances and can provide trusted advice and services for your small business during the tax season and throughout the calendar year.

Contact Us. We hope this information is helpful. If you would like more details about this or any other aspect of the new law, please do not hesitate to call your M+N contact person directly or through each office’s main telephone number: