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 rebate10 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 deduction11 for business travel was set at 55 cents per mile.

 


2010

 


1. Small Business Stock Investment: With an eye toward investors, the tax rates12 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 change13 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 programs14 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 here15.

 


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

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