by Jason M. Ray
J.D., L.L.M. Taxation
The end of the year is approaching fast. Here are several ideas that may be of assistance as you consider year end tax planning.
- Employee Health Insurance Premium Credit- The Patient Protection and Affordable Care Act signed by President Obama on March 23, 2010 provides small businesses with a credit of up to 35% of the premiums paid for employers who pay at least 50% of employees’ health care premiums. The full extent of the credit is available to employers who pay full-time employees on average less than $25,000 per year. Under a complicated set of rules, the credit phases out, but even small businesses that pay full-time employees an average of less than $50,000 can take advantage of the credit.
- Depreciation- The recently enacted Small Business Jobs Act of 2010 includes a wide-ranging assortment of tax changes generally affecting business. Two of the most significant changes allow for faster cost recovery of business property. Here are the details.
- Enhanced small business expensing (Section 179 expensing)- In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Act law, taxpayers could expense up to $250,000 for qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.
- Real Property- The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property that can be expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
- Extension of 50% bonus first-year depreciation- Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).
- New Incentives for Hiring Unemployed and others- Employers who have hired individuals in 2010 should take these alternative benefits into consideration:
- Employers who hire unemployed individuals may be exempt from paying their share of the newly hired employee’s Social Security Tax.
- Each qualified employee who was retained by an employer for at least a year whose wages did not significantly decrease is eligible for a tax credit of up to $1,000.00.
- Passive Activity Loss Rules- If you own a business operating at a loss which is a closely held C-corporation, Personal Service Corporation, S-corporation or Partnership, the passive activity rules of I.R.C. § 469 may limit your ability to deduct that loss. That section applies to individuals, trusts, estates and personal service corporations. The rules do not apply to partnerships or s-corporation as such, but do apply to individuals in their shareholder or partner capacity.
What people don’t know is that they can perform certain acts which, if done before the end of the tax year, will ensure that the passive activity loss rules do not apply. If you own a business or anticipate passive activity losses this year and are struggling to figure out how to deduct them at the close of the year, give us a call and we can tell you how to minimize the harmful effect of these rules.
- Deduction for Domestic Production Activities- I.R.C. § 199 allows certain businesses to deduct the cost of producing tangible personal property in the U.S. The deduction allowed can be up to 50% of qualifying W-2 wages of all employees. If your business manufactures products in the US or provides construction, engineering or architectural services, you may want to consider hiring yourself or spouse in order to increase the amount of the deduction.
- Effect of the end of the Bush Tax cuts- The tax cuts enacted under “The Economic Growth and Tax Relief Reconciliation Act of 2001” and “The Jobs and Growth Tax Relief Reconciliation Act of 2003” are set to expire at the end of this year. While it is difficult to assess what will happen with tax rates after the end of this year, the following will occur if nothing changes:
- Dividends will be taxed on the ordinary rates of the person receiving the dividend. This means that the maximum rate will go from 15% to 39.6%;
- The rates do not apply to partnerships or s-corporation as such, but do apply to individuals in their shareholder or partner capacity. If your business is a partnership or s-corporation, your distributive share of the partnership or S-corporation’s ordinary income will be subject to the owner’s ordinary income tax rates as well;
- The maximum rate on long-term capital gain is scheduled to increase from 15% to 20%.
That means it may be wise to accelerate any income or gain in 2010, and to, if possible, delay deductions until 2011. For example, if your business is on the cash basis method of accounting, you may consider placing special emphasis on collections, or delaying payment for expenses until 2011. If your business owns capital assets which are to be sold at a gain, you may consider selling the capital asset this year to take advantage of the lower rates. If the sale of the capital asset will result in a loss, you may consider waiting until next year to sell the asset so that you can deduct the loss when it has a higher value.
If you have heard of these or other tax breaks, incentives and planning opportunities and wonder how they apply to you specifically, come talk to us. We can help you understand the tax ramifications of the actions you are considering and help you plan to achieve the greatest tax benefit possible.
Call Davis Miles today! 480-733-6800