Understanding new federal and state tax laws that affect your April 2011 tax filing -- and how to comply with them -- is just another cost of doing business for companies big and small, self-employed individuals, and independent contractors. So, to get your business's tax returns together for the 2010 tax year -- and to make important tax-related business decisions for the rest of 2011 -- what tax law changes should you pay particular attention to?
This article looks at key business-related federal tax law changes that affect your 2010 return and, in some cases, your 2011 through 2013 returns. And remember to check for new state tax laws that could affect your business too. A good place to start is the official website for your state's tax agency. (For everything you need to get your business's tax return together this year, check out Nolo's Business Tax & Deductions section. If you're looking for tips on important 2011 tax law changes that affect your personal tax return, you'll find them in Nolo's article 2011 Tax Law Changes: Key Changes for 2010 Individual Returns.)
Health Care Tax Credit for Small Businesses
The Small Business Health Care Tax Credit is available to some small employers who pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate-income and lower-income workers.
Small businesses can claim the health care tax credit for 2010 through 2013 and for any two years after that. For tax years 2010 to 2013, the maximum credit is 35% of premiums paid by eligible small businesses and 25% of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 50% of premiums paid by eligible small business employers and 35% of premiums paid by eligible tax-exempt organizations.
The maximum credit goes to smaller employers -- those with 10 or fewer full-time equivalent (FTE) employees -- paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year. Because the eligibility rules are based in part on the number of FTEs only (not the total number of employees), employers that use part-time workers may qualify even if they employ more than 25 individuals.
Eligible small businesses will first use Form 8941 to figure the credit and then include the amount of the credit as part of the general business credit on its income tax return.
The IRS has developed a website page devoted to the Small Business Health Care Tax Credit with answers to frequently asked questions and explanations of the credit through various tax scenarios. Check it out at www.irs.gov/newsroom/article/0,,id=223666,00.html.
Reduce Your Self-Employment Tax With a Health Insurance Deduction
Now that the Small Business Jobs Act of 2010 has passed, self-employed businesspeople who pay their own health insurance costs can reduce their net earnings from self-employment by these costs to lower their self-employment taxes. Previously, the self-employed health insurance deduction was allowed only for income tax purposes. For tax year 2010, self-employed taxpayers can reduce their net earnings from self-employment that are subject to self-employment taxes on Schedule SE by the amount of self-employed health insurance deduction claimed on line 29 of Form 1040.
Taxpayers can claim the self-employed health insurance deduction if the insurance plan is established under their business and if any of the following are true:
- They were self-employed and had a net profit for the year.
- They used one of the optional methods to figure net earnings from self-employment on Schedule SE.
- They received wages from an S corporation in which the taxpayer was a more-than-2% shareholder.
Don't overlook this deduction, as it can save you a significant amount of money if you're self-employed. During tax year 2008, the self-employed health insurance deduction was claimed on 3.6 million tax returns, reducing taxpayers' adjusted gross incomes by $21 billion.
Higher Expensing and Depreciation Limits Can Benefit Small Businesses
For tax years beginning in 2010 and 2011, small businesses can expense up to $500,000 of the first $2 million of certain business property placed in service during the year.
In general, businesses can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property, after the relevant section in the Internal Revenue Code.
If the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2 million, the amount that a small business can expense will be less than $500,000.
For tax years beginning in 2012, the maximum amount that can be expensed is $125,000; before enactment of the 2010 tax relief legislation, it was set at $25,000.
Learn more about section 179 on the IRS website at www.irs.gov/businesses/small/article/0,,id=213666,00.html.
50% or 100% Bonus Depreciation for Qualified Property
Generally, businesses can take a special depreciation allowance to recover part of the cost of qualified property placed in service during the tax year. The allowance applies only for the first year you place the property in service. This is referred to as a bonus depreciation.
Businesses that acquire and place qualified property into service after Sept. 8, 2010 can now claim a depreciation allowance of 100% of the cost of the property. The property must be placed in service before Jan. 1, 2012 (Jan. 14, 2013 in the case of certain longer-lived and transportation property). Businesses that acquire qualified property during 2010 on or before Sept. 8, 2010 can claim a depreciation allowance of 50% of the cost of the property. The property must be placed in service before Jan. 1, 2013 (Jan. 1, 2014 in the case of certain longer production period property and for certain aircraft).
The allowance is an additional deduction you can take after any section 179 deduction and before you figure regular depreciation for the year you place the property in service.
Learn more about bonus depreciation on the IRS website at www.irs.gov/businesses/small/article/0,,id=213666,00.html.
Business Vehicle Depreciation Deduction Increased
The total depreciation deduction (including the section 179 expense deduction and the 50% or 100% bonus depreciation) that you can take for a passenger automobile (that is, not a truck or a van) you use in your business and first placed in service in 2010 is increased to $11,060. The maximum deduction you can take for a truck or van you use in your business and first placed in service in 2010 is increased to $11,160. If you do not take any bonus depreciation for the passenger automobile, truck, or van you use in your business and first placed in service in 2010, the maximum deduction you can take for a passenger automobile is $3,060 and for a truck or van is $3,160.
Some content reproduced from the Internal Revenue Service.