Here are some helpful tips to ensure that your small business doesn't leave money on the table this tax season

By Reed Richardson
The past year has seen a number of changes to the tax code that could significantly affect small businesses and start-ups. Here's a rundown of the major tax updates and additions for filing your 2008 taxes.

Section 179 Expensing: In an effort to reward businesses that invested in expansion and infrastructure last year, the federal government more than doubled the maximum allowable Section 179 expense deduction on business property to $250,000 in 2008, up from $122,000 in 2007. Likewise, the annual Section 179 investment limit, or phaseout threshold, jumped from $510,000 in 2007 to $800,000 for last year. These qualifying depreciable assets-which include everything from large-scale production machinery to more modest items like laptop computers-are detailed on IRS publication 946 (http://www.irs.gov/publications/p946/index.html) and must have been placed into service during the 2008 calendar year. The upshot of this generous rule change is that small businesses will be able to ditch the IRS's multi-year depreciation schedules on many qualified purchases from last year and simply write off the entire cost immediately. And when coupled with more generous bonus first-year depreciation rules (see below), these new Section 179 rules translate into an even greater tax windfall for small businesses.

Bonus First-Year Depreciation: For the 2008 tax year, businesses are also allowed to write off up to half of a newly purchased asset's cost in the first year of its use. So, for example, if a small business spent $300,000 on office equipment last year, it would be able to claim $150,000 in depreciated value on that equipment in 2008 as well. But to really maximize its tax savings, a small business owner would be smart to first take the full Section 179 deduction (mentioned above) on this office equipment-reducing the equipment's taxable value down to a mere $50,000-and then add on the first-year 50% bonus depreciation, which would leave just $25,000 in taxable value to depreciate over the coming years.

Vehicle Depreciation: The total deduction for each passenger car and truck or van placed into service by your business in 2008 is $2,960 and $3,160, respectively. This figure includes the Section 179 expense deduction. Both of these numbers represent a $100 decrease from 2007. Keep in mind that these deductions will be less if the vehicles are not used exclusively in service of your small business.

Net Operating Loss (NOL) Carryback: As part of the $787 billion recovery package recently passed by Congress and signed by President Obama, businesses with annual gross revenues of under $15 million can shift any 2008 losses back five years. This change-the normal carryback limit is two years-allows struggling start-ups and small businesses to even out their receipts over a greater amount of time. For instance, a business that lost $500,000 in 2008 might shift that balance back across the tax years of 2005, 2006, and 2007; years that it made profits of $50,000, $150,000, and $300,000, respectively. By amending its tax returns through NOL carryback to now show no profits for those three years, that small business could generate some much needed capital in the form of tax refunds for those three years. Some caveats, however: An overwhelmed IRS is likely to take months, if not longer, to process and send out these refunds (for an expedited refund, file IRS Form 1139: http://www.irs.gov/pub/irs-pdf/f1139.pdf). Also, note that NOL carrybacks are only available to small businesses formed as C-corporations.

 

Mileage, Transportation, and Business Travel Deductions: For the first half of 2008, the standard business mileage deduction increased to 50.5 cents per mile. To account for the high cost of gasoline during the first half of the year, the IRS-albeit belatedly-raised the rate to 58.5 cents per mile for the final six months of the year. As before, the cost of parking and tolls are still deductible.

In another change for 2008, businesses are allowed pay up to $220 per month, tax-free, for employee parking. The rate on tax-free public transit passes for employees also increased slightly in 2008, to $115 a month from $110 in 2007.

And finally, the IRS also relaxed its rules regarding business meals. Previously, you could generally expense only 50% of business-related meal expenses. However, starting in 2008, the IRS now allows deductions of up to 80% of meal costs when traveling away from home and as long as the meals take place during or right before or after business "hours of service."

 

Payroll Taxes: While the self-employment tax rate and Social Security tax rate for employers remained unchanged from 2007, the maximum amount susceptible to taxation for both of these was raised from $97,500 to $102,000. Also, the federal unemployment tax rate (FUTA), previously set to decrease to 6.0% after 2007, was instead kept at 6.2% for the 2008 calendar year.
Health Insurance Deductions: The eligibility limits and employer contribution amounts for company-sponsored high deductibility health plans (HDHPs) and health savings accounts (HSAs) increased slightly in 2008.

For qualifying HDHPs, the only tax change last year involved a $200 increase on the limit of annual out-of-pocket expenses for family coverage (from $11,000 in 2007 to $11,200 in 2008). The minimum annual deductibles for self-only and family HDHP coverage ($1,100 and $2,220, respectively) as well as the maximum out-of-pocket expenses for self-only coverage ($5,600) remained unchanged.

And for small businesses with HSAs, the maximum employer contribution amounts per employee all went up. For those employees with individual HSAs, the employer contribution limit was raised to $2,900 ($3,800 for individuals age 55 or older) and for those employees that have families enrolled as well, the annual employer limit was increased to $5,800 ($6,700 for those employees aged 55 or older).

Expired Tax Benefits: In 2008, some common tax programs were no longer allowed, including tax credits for increasing research and development and the deduction for environmental cleanup costs. For a full list of expired tax benefits, check out the IRS web page: http://www.irs.gov/publications/p553/ch02.html#d0e2384

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