Taxes

Tax Law Changes for 2009 and 2010

SBOCTeam — Mon, 04 Jan 2010 15:33:00 GMT

These 15 important modifications could significantly lower your tax burden

By Reed Richardson

Spurred on by the federal government's economic recovery efforts, there have been numerous changes to the federal tax law for 2009 and 2010. Here's what your small business needs to know now to take advantage of this year's expiring rules and what it needs to keep in mind for next year.

2009

1. Section 179 Expensing: For 2009, one of the most important changes involves the extension, for another year, of the expanded Section 179 deduction[1], which covers depreciable assets like manufacturing equipment or office computers and furniture. This year, the deduction remains at the $250,000 level. The Section 179 total annual threshold on all depreciable assets also remains at $800,000 annually.

IMPACT: By now, an entrepreneur should have a good idea if their business will turn a profit in 2009. If the numbers look to be in the black, taking advantage of the increased Section 179 deductions by making a major capital investment during the last few weeks of 2009 could be a smart way to upgrade your company while lessening your tax bill next spring.

2. Bonus First-Year Depreciation: Much like the Section 179 deduction, the bonus first-year deduction for the 2009 tax year continues to be at the same lucrative rate-50%-as it was in 2008. And just as with the Section 179 deduction, for any property or equipment purchases to qualify, they must be placed into service by your small business before January 1, 2010.

IMPACT: Combined with the Section 179 deduction, this more robust bonus first-year depreciation deduction means savvy small businesses could make significant substantial re-investments in their companies this year and still keep their tax burden low. To see what significant tax savings your own small business could enjoy by combining the Section 179, bonus first-year, and normal depreciation deductions this year, check out the online deduction calculator[2] at the Section 179.org website.

3. Payroll Tax Credit: As part of the American Recovery and Reinvestment Act, Congress passed a 6.2% tax credit on earned income for 2009. This credit, capped at $400 for single filers and $800 for joint filers, begins to phase out at an annual income of $75,000 and ends entirely at $95,000 for individuals. For couples, the credit starts phasing out at $150,000 in yearly income and drops to zero by $190,000. Also, keep in mind that for self-employed people, annual net earnings subject to Social Security taxes were raised[3] to $106,800 in 2009.

IMPACT: Most small business employees already began receiving this credit this past spring in the form of less withholding from their paychecks. But self-employed entrepreneurs who pay quarterly estimated income taxes may not have adjusted their payments at that time and could therefore be due a refund once they file their 2009 tax returns next year. If you file your own taxes, be sure to account for this change and for the increased threshold in Social Security taxes.

4. New Vehicle Sales Tax Holiday: The state sales taxes paid on any new vehicles purchased between February 16, 2009 and January 1, 2010 are fully tax deductible[4] on the first $49,500 in cost; a potential savings of several thousand dollars depending on which state you live in. What's more, this deduction can be taken even if the filer doesn't claim sales taxes as part of their itemized deductions.

IMPACT: If you've been holding off on the purchase of a new car for yourself or a new delivery truck for your small business, the 2009 sales tax deduction-as well as the often substantial, end-of-year sales discounts at most car dealerships-might make the last few week of this year a lucrative time to finally pull the trigger.

5. Estimated Taxes: The 2009 federal stimulus package also included a provision[5] that lets small business owners (and employees) pad their cash reserves slightly by paying less of their individual estimated taxes during the year. According to the new guidelines, individuals who draw more than 50% of their income from a business with an average of fewer than 500 employees and who earn less than $500,000 in annual income must only pay 90% of their estimated tax during their quarterly payments.

IMPACT: If you missed out on this change until now, you can still take advantage of it when it comes time for your final quarterly estimated tax payment for 2009, which is due by January 15, 2010. Keep in mind, however, that this doesn't change your overall tax burden and might mean you have to pay more income taxes once you file your final return in the spring.

6. Net Operating Loss Carryback: As was the case with the 2008 tax year, in 2009 eligible small businesses (companies that averaged less than $5 million in gross revenue for the past three years) can carryback[6] a net operating loss from this year over the previous three, four, or five tax years instead of the usual two years.

IMPACT: By taking the losses from an unprofitable 2009 and retroactively spreading them over a longer, more profitable period in the past through revised tax filings, small business owners could realize an unexpected refund come springtime. To get a sense of just how much your company might save by carrying back losses over five years, check out this online NOL calculator[7].

7. Targeted Hiring Benefits: Also included in the federal stimulus package were two new work opportunity tax credits[8] for employers. These credits, which top out at $2,400 per hired worker, are awarded to businesses that hire certain unemployed veterans and those under 25 who've been out of school for six months or more.

IMPACT: If your small business is looking to fill a position in the near future with someone who fits either of these categories, officially bringing them aboard in the last few days of the 2009 calendar year could end up earning your business a nice credit, one that might even cover a couple of the new employee's paychecks.

8. Differential Wage Payment Credits: If your small business made differential wage payments to an active duty member of the military in 2009 to make up the difference between their normal employee salary and their military salary, your company can take a 20% credit[9] on the first $20,000 of those extra wages paid to them.

IMPACT: Small businesses that had an employee called away to active duty military service for all or part of 2009 and covered the gap in pay between their civilian and military salaries could be entitled to up to $4,000 in credits for every applicable employee.

9. COBRA Premium Assistance Credit: If your small business had to lay off staff during 2009 and those unemployed workers are now paying in to the COBRA program to continue their health care coverage, your company could be in line to receive a rebate[10] from the federal government for the 65% of the premium cost not being paid by the individual. The maximum time limit over which this reimbursement can occur, however, is nine months.

IMPACT: A company that is still bearing the brunt of the health care costs for a number of eligible laid off workers could reclaim thousands of dollars by claiming this tax credit.

10. Tax-Free Parking and Commuting: Starting in 2009, companies can now pay up to $230 in parking or commuting costs for employees tax-free every month.

IMPACT: For a struggling small business that is unable to offer a salary increase to its employees right now, enrolling workers in this tax-free program could be a creative way to put as much as $1,500 back into their pocket annually (depending on the employee's tax bracket).

11. Standard Mileage Rate: For 2009, the standard mileage deduction[11] for business travel was set at 55 cents per mile.

2010

1. Small Business Stock Investment: With an eye toward investors, the tax rates[12] on future capital gains of some small business stock purchases this year and next have been relaxed. As a result, investors that purchase stock in qualified small companies (C corporations with gross assets less than $50 million) and hold that stock for at least five years can exclude up to 75% of their eventual gains from taxes. This represents a 25 percentage-point increase over the 2008 capital gains exclusion rate of 50%.

IMPACT: For incorporated small businesses looking to attract external sources of capital, this tax change could be an additional enticement to potential investors. Keep this tax law change in mind if you're thinking about the best way to raise money-stock issue vs. equity stake vs. debt borrowing-in 2010.

2. S-Corporation Gains Taxes: Staring in 2009 and continuing through 2010, a change[13] in tax law will allow small businesses organized as S-corporations to enjoy a shortened recognition period on built-in gains taxes. Normally 10 years, newly elected S-corporations now will only be exposed to the top corporate tax rate on realized gains during their first seven years of existence.

IMPACT: For small companies currently organized as C-corporations, the IRS has effectively re-opened a loophole to make re-forming as an S-corporation more enticing. For struggling small businesses looking for a simpler organizational structure and more straightforward profit realization, now might be a good time to make the switch without having to pay as steep a financial penalty later.

3. Energy Efficiency Tax Credits: If you run your small business out of your home, there are two residential tax credit programs[14] that can be used to, respectively, offset the cost of weatherizing your home and install alternative energy systems.

The first of these is a 30% credit for purchases made to install energy-efficient windows, exterior doors, water heaters, air conditioners, and furnaces, up to a maximum of $1,500. The credit is available in both 2009 and 2010, but the $1,500 cap is cumulative across both years.

The second credit involves homeowners that purchase and install qualified solar, geothermal, and wind-based energy systems. This credit is also 30% of the purchase price, but unlike in the past-when the tax credit maxed out at $2,000-this program no longer has a fixed dollar cap.

IMPACT: Small home-based businesses might consider taking advantage of these tax credits to both update the value of their homes and cut the overhead costs for their business. It should be noted, though, that the total cost of installing a solar water-heating system or replacing all of the windows on a typical two-story, three-bedroom house would far outstrip the tax credits available. As a result, a home-based small business owner would probably face a choice between doing a modest weatherization project that runs a few thousand dollars and a more ambitious energy-efficiency campaign with a price tag that begins around $10,000 and goes up swiftly from there.

4. Roth IRA conversions: Starting this year and moving into 2010, the IRS made significant changes regarding the rules of a financial transaction called Roth IRA conversions. The changes do away with many of the Roth IRA's previous contribution limits and, if taken advantage of now, could provide a great way for a small business owner to shelter more of their savings from taxes once they retire. For a more in-depth look at these changes, refer to our earlier article on the topic here[15].

1. www.irs.gov/formspubs/article/0,,id=177054,00.html
2. www.section179.org/section_179_calculator.html
3. www.irs.gov/formspubs/article/0,,id=177958,00.html
4. www.irs.gov/irs/article/0,,id=214016,00.html
5. www.irs.gov/formspubs/article/0,,id=208103,00.html
6. www.irs.gov/formspubs/article/0,,id=207330,00.html
7. www.2009stimulusforbusiness.com/net-operating-loss-calculator.html
8. www.irs.gov/formspubs/article/0,,id=177948,00.html
9. www.irs.ustreas.gov/pub/irs-access/f8932_accessible.pdf
10. www.irs.gov/formspubs/article/0,,id=207305,00.html
11. www.irs.gov/formspubs/article/0,,id=178004,00.html
12. www.irs.gov/formspubs/article/0,,id=210602,00.html
13. www.irs.gov/formspubs/article/0,,id=181061,00.html
14. www.irs.gov/newsroom/article/0,,id=206871,00.html
15. smallbusinessonlinecommunity.bankofamerica.com/blogs/EmployeeBenefitsAndRetirementPlanning/2009/09/08/the-10-spot

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).