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

Which version is right for your small business?

 

By Reed Richardson

 


For those small business owners who choose to do their own taxes this year, there are more software choices than ever to help them file. Indeed, tax prep software companies, like banks and credit card companies before them, are now increasingly targeting small businesses. And recognizing that many small business owners seamlessly blend their personal and professional lives, some software companies are now bundling their individual and small business tax return products together to save you time and money as well.

 


But sorting through the many different product tiers, price structures, and claims can be confusing, so here's a quick rundown of what three popular tax prep software companies are offering this year.

 


Lay of the land

Pricing for most tax prep software generally follows some tried and true conventions. For the most part, purchasing an online or downloadable product amounts to buying the ability to prepare and file a federal tax return. If you would like to electronically file that federal return-and shorten the turnaround on getting back an expected refund to as little as eight days-tax prep software companies now typically include one free efile as part of each version's standard price as well. However, if based on where your small business is located you are required to file a state tax return, you might be required to pay an additional flat fee of between $8 and $30 per state to file. And to electronically file those state tax returns you'll likely trigger yet another fee.

 


As pricing has become more competitive, tax prep software companies have tried to differentiate themselves by touting more qualitative benefits. One popular way involves offering maximum refund and/or accuracy guarantees. By now, though, almost all major tax prep software products come with one, if not both, of these guarantees, making them more like industry best practices than something that sets them apart from one another.

 

Likewise, when it comes to ease of use, nearly every tax prep software product now easily imports data from bookkeeping programs like QuickBooks and Microsoft Money, a handy feature that can significantly shorten time spent on tax preparation and avoid simple mistakes arising from data entry errors. Offering multiple platforms of customer support-phone, email, and live chat-and various kinds of after-you-file "audit support" have now become commonplace as well for most major tax prep software companies, although H&R Block, which allows its software customers to consult a dedicated tax preparer from one of the company's storefront locations for an additional price, can be an attractive choice for those looking for a more personal touch.

 


One final caveat: it's important to keep in mind that tax prep software has its limitations. Even TurboTax's top-tier Business version states quite plainly that it works best for a small business that "has revenue of less than $250,000 and fewer than five employees." More affordable but less well-known tax prep software companies tend to offer less comprehensive business platforms, if they offer one at all. As a result, entrepreneurs that experienced even modest growth this past year might find that their company has unexpectedly vaulted beyond the point where any level of do-it-yourself tax software makes sense.

 


Intuit's TurboTax

As the best-selling and most well-known tax prep software brand, Intuit's TurboTax products also come highly rated, with last year's versions having earned "Editor's Choice" awards from tech publications CNET and PC Magazine. This year, TurboTax rolls out five different software versions, two of which focus on small businesses. The first, TurboTax's Home & Business version, is, as it sounds, focused on those entrepreneurs who run a side business out of their home or are full-time sole proprietors or single-owner LLCs and would likely file their personal and business taxes together. The more robust Business version is TurboTax's top-of-the-line product and it includes a suite of corporate forms geared toward small businesses partnerships, multi-member LLCs, as well as S and C Corporations.

 


TurboTax's business software stands at the high end of the market, with costs ranging from $75 for a typical sole proprietorship up to $160 for a C Corporation that files at least one federal and state tax return electronically. Also of note, the latter scenario doesn't include the cost for the small business owner to file their personal federal and state taxes, which would necessitate buying an individual TurboTax suite like Premier, adding another $86 to the bill.

 


The higher cost of TurboTax software brings with it some greater flexibility, however. Along with free audit support for all products, with TurboTax Home & Business, for example, you can enjoy the freedom of preparing and filing your taxes completely online instead of having to use a downloadable or CD version. (TurboTax's Business edition is download or CD only, however.) In addition, all TurboTax business software packages let you file five different federal returns from just one software purchase, a big plus if you're an entrepreneur with multiple ventures.

 

 


TurboTax Home & Business version: http://turbotax.intuit.com/personal-taxes/online/home-and-business.jsp

 

TurboTax Business version: http://turbotax.intuit.com/small-business-taxes/business.jsp

 

 

H&R Block At Home

In an attempt to emphasize H&R Block's unique two-pronged approach to tax preparation, the company's previous "TaxCut" software products have been renamed "At Home" this year. (Its storefront operations were also rebranded, as H&R Block "Offices.") For the 2009 tax year, H&R Block offers four At Home software tiers, two of which, Premium and Premium & Business, would be of use to small business owners. Premium, which is offered in both online and downloadable versions, is limited to small rental property owners or the self-employed who don't file any business forms beyond a 1040 Schedule C, however. At Home Premium & Business, on the other hand, is only downloadable in a Windows version and encompasses all other small business structures from limited partnerships to multiple-owner LLCs to S and C Corporations. And to encourage established tax prep software users to switch H&R Block, the company claims its At Home platforms are now set up to quickly import previous tax year data from its rival TurboTax's programs.

 


Price shopping between TurboTax and At Home can be difficult, though. At $49.95, H&R Block's Premium version is more comparable in price and amenities to TurboTax's Premier version ($49.95) than it is to TurboTax's Home & Business suite ($74.95). The Premium & Business version, however, costs only five dollars more ($79.95) but offers small business owners the ability to efile up to five free federal business returns (even for C Corporations) as well as one federal and state 1040. The price difference becomes particularly stark for owners of C Corporations, who would pay only $120 when using At Home Premium & Business to file both their federal and state personal and business tax returns electronically, a price less than half of the $246 needed to accomplish the same tasks using comparable TurboTax products.

 


For self-employed entrepreneurs that would only file 1040s and Schedule Cs and who seek the security of having the critical eye of a tax professional on their side, H&R Block also offers its $99.95 "Best of Both" package. With this package, customers prepare their taxes using the company's software, but a dedicated H&R Block tax preparer is also available to answer questions during the process and review all tax forms before they're filed. State returns are extra, however, and run $29.95 each.

 


H&R Block Premium version: http://www.hrblock.com/taxes/products/32.html

 

H&R Block Premium & Business version: http://www.hrblock.com/taxes/products/38.html

 

H&R Block Best of Both program: http://www.hrblock.com/taxes/products/33n.html

 


TaxACT

Launched in 1998, TaxACT has grown to be the second most popular online tax prep software destination behind TurboTax. TaxACT, much like TurboTax and H&R Block's At Home, offers several tax prep software tiers ranging from a basic/free federal-only version for individuals to several business-specific federal and state software packages. TaxACT tends to fall at the more affordable end of the market price-wise, below even H&R Block, and offers a more á la carte product menu, letting small businesses separately purchase downloadable Business 1065, 1120, or 1120S software packages for $39.95 each, all of which include the filing of one federal business return either by mail or electronically. To file additional state 1065, 1120, and 1120S returns, however, you must pay an extra $14.95 per state and TaxACT charges another $7.95 apiece to efile each of those state tax returns. For companies with a wide geographical footprint, TaxACT also offers an All-States edition that lets you file in as many states as necessary for just $51.80.

 


For entrepreneurs looking to combine the preparation of their personal and business taxes, TaxACT does have a Home & Business package for $54.95 that bundles a Business 1065, 1120, or 1120S return (and free federal efiling) with free federal and state 1040 returns. But as with its other platforms, the filing of state business returns and efiling of state personal and business returns cost extra. As a result, the owner of a C Corporation that intends to efile both corporate and personal tax returns in at least one state would pay just over $85. This compares to the $120 price if one used H&R Block's At Home Premium & Business edition and the $246 price found by combining TurboTax's Premier and Business editions.

 


TaxACT Business Software Products: http://www.taxact.com/products/index_business.asp

 

TaxACT Home & Business Bundles: http://www.taxact.com/products/homebiz_overview.asp

SBC Team

Finding a Tax Professional

Posted by SBC Team Jan 4, 2010
What a small business should look for in a professional tax preparer

By Reed Richardson

 

Despite the seeming ubiquity of tax-prep software like TurboTax, using a paid professional remains the most popular form of tax preparation-roughly six in ten Americans are expected to use a local accounting firm or a nationwide franchise like H&R Block to prepare their individual tax returns this year. That number is even higher for businesses. For most, the choice to use a tax preparer is one based on convenience and peace of mind. Just as you wouldn't try to perform a root canal or bring a lawsuit by yourself, many entrepreneurs feel the same analogy applies to doing their taxes-let the pros handle it.

 


"If you have rental property or get a Schedule K-1 because of a business partnership or own a second home, it would probably pay to have a tax pro or C.P.A.," advises Tom Ochsenschlager, vice president of the American Institute of Certified Public Accountant's (AICPA) taxation division. Additionally, he suggests that anytime you experience what he calls a "major lifestyle change"-get married, move, have a child, get divorced, start a business-it is probably a good year to consider having a professional handle all your taxes. "They are going to suggest ways to structure your finances and minimize your taxes, such as setting up a 529 college savings plan for a new baby, that you're just not going to get to from a software program," he says.

 


Another reason to consider a tax preparer for 2009 specifically, involves the host of tax law changes that have occurred this past year. "The tax code becomes more complex every year-especially this year with so many new tax credits and other rules as the federal government attempts to provide some taxpayers with relief during the economic downturn," notes National Society of Accountants president Robert Cross. With all these constant changes and new provisions, Cross explains that it pays to have a professional tracking all the potential tax breaks for which you may qualify. "Even one extra deduction or tax credit can more than cover the fee paid to a professional tax preparer."

 


But what's the best way to find a reputable tax preparer? "Word of mouth," answers the AICPA's Ochsenschlager. "Talk to friends to see what their experiences have been like, or failing that, try contacting your state C.P.A. society to get some referrals." He adds that, if you are thinking about hiring an accountant, most C.P.A.s should agree to an initial interview free of charge so you can get a sense of whether or not their expertise matches your particular tax situation. " You'll get a real feel for what they know very quickly just by the questions they ask you," he says. "But, in the end, it comes down to comfort level. After all, if they prepare your taxes, they're going to find out a lot about you so you have to pick someone you're comfortable with." (To find a nearby C.P.A. or tax preparer, see the online search tools at the end of this article.)

 


So just how much can a small business owner expect in the way of costs if they choose to go with a tax professional? According to a biennial survey just completed by Cross's NSA this past December, the average fee charged by a C.P.A. to prepare a business tax return (1065, 1120, or 1120S) for the 2009 tax year will be between $142 and $148 an hour. According to the survey, most small business returns take four to five hours to complete, making the average total cost of preparing a 1065, 1120S, and 1120 tax return this year approximately $551, $665, and $692, respectively. These costs are relatively unchanged from what the same survey found in 2007.

 


And while tax professionals are typically the most expensive option for a small business owner, many feel it's the costs you don't see that make them worth it. Claiming a highly dubious deduction and risking an expensive audit, for example, is a trap that a C.P.A. is unlikely to fall into. "C.P.A.s have to go through 40 hours of continuing education every year," Ochenschlager points out, "and they also don't want be breaching the industry's ethical rules and earning a poor reputation with the IRS because that jeopardizes their livelihoods."

 


Tip: If you do end up using a storefront tax preparation service like Jackson-Hewitt or H&R Block rather than an accountant, you might consider requesting that your preparer be an "enrolled agent." They may cost a bit more, but they will have passed rigorous IRS exams and can represent you in the event you get audited later.

 

 

Try these online search tools o find an accountant or professional tax preparer: http://www.nsacct.org/professional.asp

 

http://www.cpadirectory.com/

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