When it comes to issues that perplex and confuse small business owners, few items rank higher than taxes. To get a better understanding of what entrepreneurs need to know this tax season—and what changes lie ahead—Susan Caminiti spoke with Chris Walters, senior manager of tax and budget issues at the National Federation of Independent Business (NFIB), the leading small business association representing small and independent firms across the country. Some excerpts from the interview:
SC: What are the top tax issues that small business owners need to pay special attention to this year?
CW: This year there’s a change in the small business expensing provision. For 2011, a business could expense up to $500,000 in equipment and improvements to property. So for instance, if you had the roof or doors of your business changed, that expense was allowed as a deduction in addition to money spent on equipment. For the 2012 tax year, the business expense limit will drop from $500,000 to $125,000 and there is no longer a deduction provision for improvements to property; the deduction is strictly for business and office equipment. However, one thing to keep in mind is that for 2011 you can take 100% of your expenses for business and office equipment as a deduction for that year rather than depreciating it over several years.
SC: Does that still hold true for 2012 as well?
CW: Yes, but remember, for this year, it applies only to purchases for business and office equipment, not for improvements made to property.
CW: The increase to $500,000 for 2011 was actually part of the Small Business Jobs Act of 2010; prior to that tax relief legislation, the limit was set at $25,000. So while the expense limit is lower this year than the amount allowed in 2011, it is still higher than what it had been.
SC: Why is this important for small business owners to keep in mind?
CW: If you’re going to make substantial purchases for your business, this is the year to do it. Next year [tax year 2013] it goes back to $25,000. There are leaders in Congress who want to keep the levels higher because they understand that these deductions are good for small businesses. They allow them to expand their capabilities in a tax-friendly way. That’s not only good for the small businesses, but also for the communities in which they do business.
SC: What else should small business owners pay attention to this year?
CW: If you own a business that accepts credit and debit cards (and have at least $20,000 in processed payments and at least 200 transactions a year) you will begin to receive 1099-K forms this year. For this year, the IRS says you don’t have to do anything with the forms. But by next year, businesses may have to compare their numbers with those reported by payment processing companies.
SC: What’s the reasoning behind this?
CW: Congress created the 1099-K requirement to keep better track of electronic payments. However, the NFIB views this as a new burden for small businesses. For instance, if you run a restaurant and a customer uses a credit card to pay for a $25 meal, he’s not just paying $25. There’s state sales tax and probably a tip on there. So the number reported by the payment processing company isn’t going to be the same as what the restaurant reports. Now, of course, there are plenty of small businesses that don’t accept credit cards so this will not affect them. But as that changes, small businesses need to consult with their tax professionals to make sure they’re not required to do something with the 1099-Ks.
SC: There’s been talk about changes to the laws involving independent contractors. What’s happening there that can affect small businesses?
CW: Small businesses enjoy—and depend on—the flexibility that independent contractors give them. As businesses get started, the ability to bring someone on for a few months, or on a project basis, is what allows them the financial freedom and speed with which to grow. However, as a business owner you have to be careful how you classify an independent contractor.
CW: Employers are required to withhold taxes and pay Social Security, Medicare, and unemployment tax on wages paid to an employee. They don’t have to do that with an independent contractor. If you misclassify an individual as an independent contractor when in fact he or she is an employee, you could be liable for fines, back taxes, and interest payments. We’re not suggesting that businesses not be able to hire independent contractors. Small companies absolutely need that flexibility. We want the section of the tax code that defines independent contractors to be clearer.
SC: Are there any other steps that small businesses need to take now that will benefit them in the current tax year?
CW: Stay in touch with your tax accountant. The rules can be complicated. That’s why our studies show that 90 percent of small businesses use an outside tax preparer and 61 percent consulted a tax professional before making a major business decision. Tax rates are going up next year and business incentives are different every year so you need to have someone on your side that knows these issues thoroughly. As a small business owner, you’re too busy running your company to stay on top of every change.
Of course, since the details of each business situation are unique, you should always seek the services of a qualified financial planner and tax advisor.