Tax law changes that get overlooked the year they first take effect often end up costing a small business not only money but strategic opportunities as well. To avoid this fate and keep your cash flow robust, it’s a good idea to brush up on the already approved tax law changes for 2011 going forward. So here’s a rundown of the new tax provisions and how they could affect you in the coming year.
Section 179 Expensing and Bonus Depreciation: For 2011, the increased Section 179 expensing rules continue at the same generous levels as those set in 2010. So for business property purchased this year, owners can expense up to $500,000 per item with an annual Section 179 investment limit of $2 million. As is typically the case, the item must have been purchased or placed into service during this calendar year in order to be eligible for a 2011 tax write-off. In addition, for qualifying investments purchased or put into service between Sept. 8, 2010 and the end of 2011, businesses can now write off 100% of the item or equipment’s depreciation in the first year. There is no income limit on this write-off, but to qualify the equipment purchased must be new and the taxpayer must be the user of the asset.
TAKEAWAY for 2011: This extension of last year’s Section 179 expensing levels, coupled with the increased bonus depreciation allowance, provides small business owners with the ability to potentially write off million-dollar investments and shelter their business from onerous tax charges come tax time next spring. If your business has been waiting for the right time to undertake a large capital improvement project or purchase, these 2011 tax circumstances offer a particularly ripe climate for making a bold move, especially since the bonus first-year depreciation level is set to return to 50% in 2012. For more details on just how much your business can write off or deduct this tax year using Section 179 expensing and bonus depreciation, use this online calculator.
Startup Expenses: The increased deductible amount of $10,000 in annual startup expenses continues at the same level in 2011, as does the cap of $60,000, after which the total deductible amount decreases on a dollar-for-dollar basis.
TAKEAWAY for 2011: Budding entrepreneurs can now deduct twice as much in startup expenses as they did just two years ago, making the tax environment a bit more forgiving for new endeavors. While this larger deductible obviously isn’t a reason to launch a new business, it’s a worthwhile benefit to consider when calculating a potential startup’s financial picture.
Mileage, Business Travel, and Transit Commuter Deductions: The standard business mileage deduction increases from 50 cents in 2010 to 51 cents per mile in 2011. Use of a vehicle for a deductible move and for Health Reimbursement Accounts rises from 16.5 cents to 19 cents a mile. Also, business-related parking costs and tolls remain deductible expenses, as do taxi, shuttle bus, and rental car expenses related to your business. And note that last year, the monthly contribution limit for sheltering income used to pay for public transit passes gained parity with parking. For 2011, the same $230 a month contribution caps instituted last year still apply. As was the case before, employers receive a tax deduction for participating in the program.
TAKEAWAY for 2011: Before 2010, the tax-free contribution rate for public transit passes was barely more than $100, so many American workers who commute to work via bus, train, or subway may not have bothered with taking advantage of this tax break. But now that the monthly contribution is nearly twice what it was in 2009 (and much closer to covering the entire cost of a monthly bus pass or commuter train ticket in many parts of the country), it’s worth reacquainting your public transit-using employees with this tax benefit, one that could save both them and your business up to $1,000 per enrolled employee in 2011. For a primer on how it works and how employees can enroll, check out this Transit Commuter Benefit brochure.
Payroll Taxes: Starting this year, the partial credit that employers received for payroll taxes has expired. Also keep in mind that while the Social Security tax rate paid by employees drops from 6.2% to 4.2% of taxable income (up to $106,800), employers are still required to pay the full 6.2% rate on employee wages. Self-employed individuals, who normally pay the full 12.4%, enjoy the same 2.0-percentage point decrease, meaning they must only pay 10.4% in Social Security taxes on income in 2011.
TAKEAWAY for 2011: It’s important to remember that this 2.0% decrease in Social Security taxes effectively translates into a 2.0% pay raise—thanks to the federal government—for your employees. (For an employee making the maximum taxable amount for Social Security, this equates to an annual raise of $2,136. For those making close to the median American household income, which hovers around $50,000 a year, this means an extra $1,000.) While employees whose superior performance merits a raise should get their due, small business owners watching every penny might be wise to factor in this payroll tax windfall when handing out raises this year. But also realize that the employee portion of the Social Security tax is set to revert back to its previous rate in 2012 and, thus, may require entrepreneurs to give even higher-than-expected raises next year to prevent their employees from experiencing a small pay cut.
Health Care Tax Credit: Provisions of the Affordable Care Act (often referred to as ObamaCare) that passed in early 2010 continue in 2011, so qualifying small businesses are once again eligible for a tax credit for up to 35 percent of their premium payments made during the year. To qualify, a business must pay at least 50% of the health care premiums for its employees, have fewer than 25 full-time equivalent employees, and pay an average annual salary of less than $50,000.
TAKEAWAY for 2011: According to a recent Forbes article, early indications are that this 35% tax credit is finally making health care premiums affordable enough that thousands of small businesses are now signing up their employees into care plans. If you’ve held off running the numbers for your own business, it might pay to do so this year. 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, check out the IRS’s online worksheet.
Health Savings Account (HSA) Deductions: For the 2010 tax year, employer contribution limits for an employee’s Health Savings Account (HSA) increased incrementally and those levels—$3,050 for individuals and $6,150 for families—will remain the same for 2011. To qualify, the employer’s high deductible health plan (HDHP) has 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.
TAKEAWAY for 2011: If your business already offers an HDHP option for your employees, you’ll likely see little change this year. Nevertheless, because of the newly implemented health care tax credit (see previous item), you may want to shop around for alternative plans to see if you can save your business more money while also lowering your employee’s potential annual out-of-pocket expenses.
For more details and important tax-related dates in 2011, like the deadlines for estimated quarterly payments, click on the IRS’s online tax calendar for small business.