At the end of a volatile year, a flurry of changes to the tax code passed, many of which could have a significant impact on the financial fortunes of small businesses and start-ups. Here’s a rundown of what changed, what didn’t, and what you need to know before filing your taxes for 2010.
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 $500,000 for 2010, up from $122,000 just four years earlier. Likewise, the annual Section 179 investment limit, or phase-out threshold, jumped to $2 million, nearly four times what it was in 2007. Assets that qualify for Section 179 expensing run the gamut from heavy machinery and production equipment to smaller, durable items like office computers, copiers, and printers. (For more on what’s expensable, check out IRS Publication 946.) As usual, a business must have placed the item into service during the 2010 calendar year. With these generous expensing rules, many small businesses would be wise to forego depreciating any new capital investments from last year and instead write off the entire amount in 2010.
Bonus First-Year Depreciation: For the 2010 tax year, the bonus first-year depreciation provision, which allows a business to write off up to half of a newly purchased asset’s cost, was once again extended. So, for example, if a small business spent $750,000 on a new assembly line last year, it would be able to write off $500,000 using Section 179 expensing (mentioned in previous item) and then claim an additional $125,000 in bonus, first-year depreciated value, which would leave just $125,000 in taxable value to depreciate over the coming years. To figure out your own potential tax savings, try using this online Section 179 and bonus depreciation calculator.
Startup Expenses: For 2010, Congress raised the deductible amount of startup expenses to $10,000. However, keep in mind that for startup expenditures that exceeded $60,000 last year, the new law reduces the total deductible amount on a dollar-for-dollar basis. So, an entrepreneur claiming $62,000 in startup expenditures would only be eligible for an $8,000 deduction and someone with $70,000 in start-up expenses would see their deduction shrink to zero.
Net Operating Loss (NOL) Carryback: Continuing again for 2010 is the provision that allows eligible small businesses to spread out general business credits over the previous five years. This change—the normal carryback limit is one year—allows struggling start-ups and small businesses to even out their receipts over a greater amount of time. For instance, a business that lost $200,000 in 2010 is able to amend its returns back through 2005—years where the company may have made profits—and generate some much needed capital in the form of tax refunds.
Take note, though, that the bevy of last-minute tax law changes from Congress could create a backlog at the IRS and, hence, NOL refunds could take an extended amount of time to process. (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 sole proprietorships, partnerships, or C-corporations that aren’t publicly traded. Gross annual receipts also have to be under $50 million for the previous three years.
Mileage, Transportation, and Business Travel Deductions: For 2010, the standard business mileage deduction was 50 cents per mile. Use of a vehicle for a deductible move and charity purposes stands at 16.5 and 14 cents, respectively. As was the case previously, business-related parking costs and tolls are still deductible, as are taxi, shuttle bus, and rental car expenses related to your business. And keep in mind that if the actual business travel expenses for your car will total more than the standard deduction, you can choose to itemize those expenses instead to get the larger deduction.
In 2010, employers were once again allowed to pay up to $230 per month, tax-free, to their employees to cover the cost of parking. The rate on tax-free public transit passes for employees gained parity with parking in 2010 and was nearly doubled to $230 a month as well.
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% and has remained at that rate ever since.
Health Care Tax Credit: As part of the comprehensive health care reform law enacted last spring, qualifying small businesses are eligible for a tax credit of up to 35 percent of their premium payments made in 2010. For more on the eligibility rules and to view some sample business scenarios along with their corresponding tax credit eligibility, click on this IRS fact sheet. To calculate your individual small business’s potential tax credits, go online and print out the IRS’s simple, three-step worksheet.
Health Savings Account (HSA) Deductions: In 2010, employer contributions into an employee’s Health Savings Account (HSA) could be made tax-free up to $3,050 for individuals and $6,150 for families. (Slightly higher tax-free contribution limits—$4,050 and $7,150, respectively—were applicable for employees that reached age 55 at any time during the year.) To qualify, the employer’s high deductible health plan had to have an annual deductible of at least $1,200 for individuals or $2,400 for families and limit annual out-of-pocket expenses to no more than $5,950 for individuals and $11,900 for families.
Self-Employment Taxes: The maximum amount of net income subject to Social Security taxes for the self-employed remained at $106,800 for 2010. All net income above $400 is subject to Medicare taxes as well. Also, in an important change for the 2010 tax year only, self-employed business owners that meet certain guidelines can deduct the cost of health insurance premiums paid for themselves and their family when computing self-employment taxes (as opposed to income taxes only).
Expired Tax Benefits: For 2010, the partial exclusion from taxes on the first $2,400 in unemployment benefits was eliminated. So, if you were laid off and collected unemployment before starting a business last year, you’ll have to pay taxes on the entire amount of unemployment collected.
Finally, don’t forget that the tax filing (and extension) deadlines for your business depend upon the structure of your business you own. Corporations (both C- and S-type) that file any version of Form 1120 must do so by March 15, 2011, while partnerships and sole proprietorships file on the individual tax schedule, which must be postmarked no later than April 18 of this year. And remember, even if you’re filing for an extension, you must still pay your estimated tax due by the original filing deadline or your business will be charged a late penalty. (For more details and important dates, check out the IRS’s online tax calendar for small business.)