Every year brings significant changes to the tax laws for small businesses. Each year, Congress allows some tax provisions to expire, extends others, and enacts new rules as well. This article covers the most significant tax changes for small businesses for 2012, including changes made under the American Taxpayer Relief Act (the so-called fiscal cliff tax deal) approved on January 1, 2013.
Section 179 Limits
IRC Section 179 permits businesses to deduct in a single year the cost of equipment and other personal property used at least 51% of the time for business. There is a limit on the amount that can be deducted each year. In 2011, this limit was $500,000. The limit was supposed to go down to $139,000 for 2012. However, under the fiscal cliff tax deal, this amount remained at $500,000 for 2012 and 2013.
Decreased Bonus Depreciation
Bonus depreciation is a temporary measure that permits businesses to deduct the cost of new business property in a single year without limit. For 2011, businesses could deduct 100% of the cost of qualifying property. The bonus amount was reduced to 50% for 2012. Bonus depreciation was scheduled to expire at the end of 2012. Under the tax deal approved by Congress on January 1, 2013, 50% bonus depreciation remains in effect for 2012 and was extended through the end of 2013.
Depreciation Limits on Business Vehicles
The total depreciation deduction (including the Section 179 deduction and bonus depreciation) you can take for a passenger automobile you use in your business that was first placed in service in 2012 is $11,160. The maximum deduction you can take for a truck or a van you use in your business that was first placed in service in 2012 is $11,360.
Standard Mileage Rate
For 2012, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 55.5 cents per mile (the same rate as for the last six months of 2011). For 2013, the optional standard mileage rate was raised by one cent to 56.5 cents per mile.
Health Savings Accounts (HSAs)
For 2012, a qualifying high deductible health plan (HDHP) must have a deductible of at least $2,100 for self-only coverage or $4,200 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $5,050 for self-only coverage and $12,100 for family coverage. For 2012, you can contribute up to $3,100 for self-only coverage or $6,250 for family coverage. These amounts are increased by $1,000 for people over 55 years of age.
New Reporting Requirement: Form 1099-K
Beginning in January 2012, payment settlement entities (PSEs)--credit card companies and online payment providers such as PayPal--are required to report on Form 1099-K:
- all payments made in settlement of credit card transactions
- payments in settlement of third party network transactions (such as PayPal payments) if: (1) gross payments to a participating payee exceed $20,000, and (2) there are more than 200 transactions with the participating payee.
Social Security Tax Holiday Extended Through 2012
Ordinarily, the self-employed must pay a 12.4% Social Security tax up to the annual wage limit. However, the 2% payroll tax holiday enacted for 2011 has been extended through 2012. This means that for 2012 self-employed taxpayers, the Social Security tax is set at 10.4%. For 2013, the 2% payroll tax holiday is eliminated and the Social Security tax rate will go back to 12.4%.
Commuting and Parking Expenses
An employer may pay up to $240 per month for an employee's parking and the employee will not have to pay tax on the amount. However, the tax exclusion for employer-provided transit passes and van pooling expenses was supposed to be cut to $125 per month for 2012. The fiscal cliff tax deal extended the $240 tax-free limit for these benefits through the end of 2013.
Every year the dollar amounts for dozens of tax provisions are adjusted to keep pace with inflation. The new dollar amounts for 2012 include the following:
- The wage limit on which the self-employed must pay Social Security tax went up to $110,100 for 2012. There is no wage limit on the 2.9% Medicare tax.
- The annual contribution limit to 401(k) plans, 403(b) plans, and some 457 plans was increased $500 for 2012.
- Tax-bracket thresholds have been adjusted upward, resulting in a decrease in taxes. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15% bracket from the 25% bracket is $70,700, up from $69,000 in 2011. Such a couple will pay $255 less in income tax in 2012 over 2011. For 2013, there will be new tax rates in effect under the fiscal cliff tax deal approved on January 1, 2013.
- The maximum compensation used to determine contributions to qualified retirement plans is $250,000, up from $245,000 in 2011.
- The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.