Taxes

Economic Recovery Package: What�s In It for You?

SBOCTeam — Fri, 20 Feb 2009 22:35:00 GMT

by BigIdeas4Biz

The $787 billion American Recovery and Reinvestment Act of 2009, which was signed into law on February 17, 2009, is designed to spur the economy. It makes numerous tax changes for individuals and businesses. Since sole proprietors, independent contractors, LLC members, and other owners pay tax on their share of business income on their personal returns, business-related changes become highly personal!

Most of the changes run for only a short time-two years, one year, or less. Many of the changes have income caps, so check these limits carefully to see whether you qualify. Here is an overview of some key changes that could affect you.

Buying equipment
Upgrade your computers, office furniture, machinery or equipment and get tax breaks:

Deduct the cost up to $250,000 for equipment purchased placed in service by December 31, 2009 (called first-year expensing or the Section 179 deduction).
This applies to both new and pre-owned items. The deduction applies whether you finance the purchase in whole or in part. Caution: Opting to use this write-off only makes sense if you're profitable for the year. If you don't use first-year expensing, you simply depreciate the purchase price.
Claim 50% bonus depreciation for the cost of new property placed in service by December 31, 2009. This break can be combined with first-year expensing, as well as a regular depreciation allowance, to enable most or all of the cost of qualified purchases to be deducted this year.

If you purchase a new (not pre-owned) personal car or light truck after February 17, 2009, and before January 1, 2011 (even though you use it partially for business), you can deduct state and local sales and excise taxes, regardless of whether you itemize your other personal deductions. This break doesn't apply to leased vehicles. The deduction is limited to taxes on a sticker price up to $49,500. The deduction phases out for singles with adjusted gross income between $125,000 and $135,000 ($250,000 to $260,000 for joint filers).

Getting credits
A tax credit reduces your tax bill dollar for dollar; a tax deduction saves you an amount based on your tax bracket. For example, a $1,000 credit saves you $1,000 in taxes, while a $1,000 deduction only saves you $250 in taxes if you're in the 25% tax break. Some new tax credits of note:

American opportunity credit. Now may be a great time to complete your education. If you (your spouse or dependent) is in the first four years of college, claim a tax credit in 2009 and 2010 equal to 100% of the first $2,000 of tuition and other qualified expenses, plus 25% of the next $2,000, for a top credit of $2,500. The credit phases out for singles with adjusted gross income between $80,000 and $90,000 ($160,000 to $180,000 for joint filers).
Work opportunity credit. If you hire certain disadvantaged workers, you get a tax credit (usually 40% of first-year wages up to $6,000, for a top credit of $2,400 per eligible new employee). The new law expands the group of targeted workers that can qualify for 2009 and 2010 to include certain unemployed veterans and unemployed youth who lack education and certain basic skills
Business energy credits. Going to alternative energy can save you in utility costs as well as provide you with important tax breaks. There are several tax credits to encourage investments in renewable energy production and for other alternative energy investments for your business. Note: There are also credits for making energy improvements to your home.

Getting a tax refund
If 2008 was a difficult year for your business and you show a loss, you may be able to turn that into an immediate tax refund. Net operating losses (NOLs) for small businesses can be carried back and used to offset income in prior years. Usually, the carryback period is limited to two years. For NOLs in 2008, you can choose a three-, four-, or five-year carryback (the option only applies to businesses with gross revenue of $15 million or less).

If you have an NOL and want to use this carryback, you can obtain your tax refund by filing amended returns on IRS Form 1040X, Amended U.S. Individual Income Tax Return, for those years or by filing for a quick refund (individuals use IRS Form 1045, Application for Tentative Refund, which the IRS usually acts upon within 90 days of the filing of the form).

Paying estimated taxes
Usually, to escape underpayment penalties, estimated taxes must be at least 90% of the tax shown on your current year's return or 100% of the tax on your prior year's return. The current year return threshold rises to 110% if your adjusted gross income (AGI) in the prior year was more than $150,000 (or $75,000 if married filing separately).

For 2009, the first payment of which is due April 15, 2009, there will be no estimated tax penalties if tax payments for 2009 total at least 90% of your 2008 taxes. To rely on this reduced estimated tax payment requirement, your AGI in 2008 must have been $500,000 or less, and half of your income must be derived from a small business (defined here as 500 or fewer employees).

When figuring estimated taxes for 2009, take into account the new Making Work Pay credit if you're self-employed. The credit, which is the crown jewel of the new law, is $400 for singles or $800 for joint filers. The credit phases out for singles with AGI between $75,000 and $95,000 and for joint filers with AGI between $150,000 and $150,000. The credit is paid to employees by means of adjusting their payroll withholding; for self-employed people, reduce your estimated tax payments accordingly.

Preparing for payroll changes
If you have employees (including yourself), expect revised withholding tables for 2009 in late spring to reflect the Making Work Pay credit. These new tables will help you adjust employee take home pay to reflect the credit, which is retroactive to January 1, 2009.

Businesses with more than 20 employees and that offer COBRA health coverage will also have to adapt to new federal subsidy for involuntarily terminated workers after September 1, 2008, through the end of 2009. The federal government will pay 65% of COBRA premiums for these former employees and the payments will be made by means of a reduction in an employer's payroll taxes (with some credit to employers if the subsidy exceeds payroll taxes).

Changing to the Type of Entity That's Right for You

SBOCTeam — Tue, 19 Feb 2008 01:47:00 GMT

Barbara Weltman

Not all business owners carefully think through the legal and tax ramifications of how they are set up when they begin. An individual starting a business on his or her own may, for example, take the easiest road and operate as a sole proprietor. Or another person may have rushed to incorporate but now thinks that decision was hasty. If you think you may have gotten started on the wrong foot--entity speaking and are seeking to make a change, take heart and remember:

Choose the best type of entity to suit your needs.
Go ahead and change your entity type, but recognize that there may be a tax and other costs for doing so.

Which entity is best for you?

There are five basic entity types: a sole proprietorship, partnership, limited liability company (LLC), S corporation and C (regular) corporation. Each entity has advantages and disadvantages that make it more suitable to certain types of ventures.

Personal liability protection. Companies that are concerned about liability exposure for owners should be set up to give the owners personal liability protection. LLCs and both types of corporations do this, so that if the business is sued, only business assets can be used to satisfy the claims of creditors.

For sole proprietorships and partnerships, owners' personal assets home, car, bank account, etc. are exposed to claims against the business. For certain types of businesses, this may not matter too much. A freelance writer, for example, has minimal liability exposure. Also, owners can be protected from many liabilities by carrying adequate insurance.

General rule: Any business with the potential for claims against it, which includes most businesses with employees as well as those with customers who visit the business premises, should probably opt for an entity type that protects owners' personal assets.

Income tax treatment. Sole proprietorships, partnerships, LLCs, and S corporations are entities that don't pay taxes (there are some exceptions where S corporations are concerned). Instead, owners pay tax on their share of net profits from the business. This is commonly referred as "pass through" tax treatment because the obligation for taxes on earnings is passed through to owners.

C corporations, however, are separate taxpayers-the corporations pay tax on their profits. Their owners pay tax only on distributions to them in the form of salary, dividends, and taxable fringe benefits. C corporations carry the potential of "double taxation" when earnings are taxed first to the corporation and then again to shareholders when they are distributed to them as dividends.

Employment tax treatment. Owners of unincorporated businesses proprietors, partners, and LLC members-pay self employment tax (the employer and employee share of Social Security and Medicare taxes) on their share of net earnings from the business.

In contrast, shareholders in corporations only pay FICA (Social Security and Medicare taxes) on compensation paid to them by their corporations. In other words, owners of unincorporated businesses can pay substantially greater employment taxes than their shareholder counterparts.

Other considerations. There are several other factors to take into account in making an entity choice, including:

Access to tax free fringe benefits for owners only C corporations can offer the broadest range of benefit options.
Audit risk sole proprietorships on average face a greater chance of being audited than other entity types.
State tax issues the rules at the state level vary greatly.

Making a switch in entity selection
Changing from certain entity types to others may be easy and involve minimal cost. For example, if you're a sole proprietor and want to become an LLC or a corporation, the only cost is the state filing fees (and related fees that may be incurred for professional services or online self incorporator services, and publication in legal notices, if required). There are no tax costs to make this change.

However, switching from corporate status to any other entity choice is not that simple. The corporation must be terminated in accordance with the law of the state in which it was set up. Also, there may be tax costs. For example, if a C corporation holding appreciated assets wants to become an LLC, it must first be liquidated this results in tax at both the entity and owner levels.

Combining entity choices
The tax law lets certain entities elect how they'll be taxed, despite the legal way in which they are organized. For example, an LLC is usually taxed like a sole proprietorship if there is one owner or as a partnership if there are two or more owners. However, the LLC can opt to be taxed like a corporation and can even elect to be taxed as an S corporation.

Why would an LLC want to elect S corporation status? There may be state tax advantages. For instance, in California, an LLC pays a higher gross receipts tax than an S corporation on similar income.There may also be an employment tax advantage. Some tax professionals maintain that electing S corporation status limits an owner's employment tax costs to FICA on wages, rather than on all net earnings from the business. Note: The IRS has yet to rule on the concept of an LLC electing S status to limit employment tax exposure.

Bottom line
The choice of entity type is yours to make. If you didn't get it right the first time, consider making a change. But do this carefully and with the advice of an attorney, accountant, or other trusted advisor.

Barbara Weltman is one of the nation's leading authorities on small business. She is a contributing writer for Inc.com, PINK magazine and New York Enterprise Report, and is a sought after media commentator who has been featured in The New York Times, The Wall Street Journal, The Washington Post, Reuters, Forbes.com, Marketwatch.com, WABC-TV, Fox News, CNNRadio and CNBC.

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.