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New Tax Credits Available for Small Businesses in 2010
Tax Credits: A summary of tax deductions available for small businesses in 2010.
By DeAnna Stephens Baker
Date Posted: 10/1/2010
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ The end of 2010 is quickly approaching, which means that tax season is not far behind. As you gear up for this not so exciting process, do you know everything you need to take advantage of recent changes? Even for those who have responsibly stayed up-to-date on previous revisions, this year has seen some significant changes in tax codes that can affect small businesses, and even more look to be on their way. The following is a summary of some new tax deductions and changes that could affect small businesses in the forest products industry.
Health Care Credit
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ The Patient Protection and Affordable Care Act provides a credit designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. The maximum credit for eligible small businesses is 35% of premiums paid in 2010.ï¿½The maximum credit increases to 50% of premiums paid in 2014. Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low and moderate income workers. It is generally available to employers that have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 per employee per year. Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers. The maximum credit, however, is intended for smaller employersï¿½ï¿½ï¿½those with 10 or fewer FTEsï¿½ï¿½ï¿½paying annual average wages of $25,000 or less.
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ Businesses will use Form 8941 to calculate the small business health care tax credit when they file income tax returns next year. After using the form to calculate the credit, the amount of the credit is then included as part of the general business credit on a companyï¿½s income tax return.
Research & Development Credit
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ Some costs of product research and development can be deducted as current business expenses under the research and development (R&D) credit. Businesses may claim the R&D credit against tax for certain qualified R&D expenditures, and combine the credit as one of the components of the general business credit. Under the R&D credit, the term ï¿½productï¿½ includes a formula, invention, patent, pilot model, process and technique. Whether expenditures qualify for the R&D tax credit depends on the activity that the expenditures are spent on, not the nature of the product or the technological advancement being made. For the purpose of the credit, R&D expenditures ï¿½generally include all expenditures incident to the development or improvement of a product,ï¿½ said the IRS. This includes costs of obtaining a patent, such as attorneyï¿½s fees related to the patent.
HIRE Act Credit
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ Under the Hiring Incentives to Restore Employment (HIRE) Act, companies can receive tax benefits just for hiring new workers who were previously unemployed or only working part-time. Businesses that hired unemployed workers after February 3, could qualify for 6.2% payroll tax incentive. This, in effect, exempts the company from its share of Social Security taxes on wages paid to the employees after March 18. The credit may be claimed for employees who were unemployed or employed for 40 hours or less during the 60-day period leading up to the beginning of employment. Also, they cannot be hired to replace another employee unless the other employee separated from employment voluntarily or was terminated for cause. Additionally, a business may claim an additional general business tax credit up to $1,000 per worker for each worker retained for at least one year on its 2011 taxes.
Cancellation of Business Debt
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ Some businesses can elect to delay recognition income from the cancellation of business debt from the reacquisition of certain types of business debt repurchased in 2010 through a change implemented under the American Recovery and Reinvestment Act (ARRA). For 2010, income recognition can be deferred until the fourth year after the reacquisition. After that the income is included ratably over the following five years.
ï¿½Businesses which make this election cannot exclude, for the tax year of the election or any subsequent tax year, the income from the cancellation of such indebtedness based on a title 11 bankruptcy case, insolvency, qualified farm indebtedness, or qualified real property business indebtedness. The company must include an election statement with the tax return in the year the debt is reacquired. The statement must clearly identify the debt instrument and the amount of income deferred.
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ The Section 179 Expense Deduction has been extended through 2010. Under this provision, a business may 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. Small businesses may deduct up to $250,000 of the cost of machinery, equipment, vehicles, computers, furniture and other qualifying property purchased and put into use during 2010. In 2011, this amount will decrease to $25,000. To elect to take this deduction a company must fill out Part 1 of IRS Form 4562 and attach it to its tax return.
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ Section 179 deductions cannot be used for buildings and their structural components, or investment and rental property. Earlier in the year it looked like some of these deductions may not be extended in 2011. But the tide may be turning because President Obama has signaled a desire to increase the amount that small businesses can write off.
Obamaï¿½s Tax Plansï¿½
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ Amid concerns about a sagging economic recovery, President Obama recently highlighted tax breaks for small businesses that he was calling Congress to pass. In response, the Senate recently passed the Small Business Jobs and Credit Act (HR 5297) that has a number of tax provisions aimed at helping small businesses. It differs somewhat from a version passed by the House of Representatives earlier this year. It looks like this bill will get approved and signed by the President. See Table 1 to read a complete list of pending tax changes in the recent small business legislation. Some of these changes may alter the policies and limitations for the current tax year as described in this article.
Act Now or Possibly Pay More Later
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ With a few months left in the calendar year, now is the time to take action advantage of tax changes. You may already be doing things that qualify for tax breaks. However, you may need to change a few details about how you do things
Editorï¿½s Notice: The information contained in this article is of a general nature and should not be used a substitute for discussing these issues with a qualified accountant or tax preparer. Each company may have unique situations that can impact the application of certain tax breaks and exclusions.
Obama Small Business Tax Relief Proposals
The following tax provisions are in the Small Business Jobs and Credit Act (HR 5297) that the Senate just approved and is expected to pass the House and be signed into law this fall by President Obama. These new tax provisions are aimed at giving a boost to small businesses.
1. Extension and Expansion of Small Businessesï¿½ Ability to Immediately Expense Capital Investments: Temporarily increase for 2010 and 2011 the amount of investments in new plants or equipment that 4.5 million small businesses would be eligible to immediately write off to $500,000 ï¿½ its highest limit ever ï¿½ while raising the level of investments at which the write-off phases out to $2 million.
2. Extension of 50% Bonus Depreciation: Extending through 2010 the ï¿½bonus depreciationï¿½ for two million businesses, large and small, providing them with incentives to invest in plants and equipment by accelerating the rate at which they can deduct capital expenditures.
3. A New Deduction of Health Insurance Costs for Self-Employed: Allow two million self-employed to deduct the cost of health insurance in 2010 for themselves and their family members in calculating their self-employment taxes.
4. Tax Relief and Simplification for Cell Phone Deductions: Change tax rules so that the use of cell phones can be deducted without burdensome extra documentation.ï¿½
5. Increase in the Deduction for Entrepreneursï¿½ Start-Up Expenses: Temporarily increase in 2010 and 2011 the amount of start-up expenditures entrepreneurs can deduct from their taxes from $5,000 to $10,000 (with a phase-out threshold of $60,000 in expenditures), offering an immediate incentive for someone with a new business idea to invest in starting up a new small business.
6. Five-Year Carryback of General Business Credits: Allow certain small businesses to ï¿½carry backï¿½ their general business credits to offset five years of taxes ï¿½ providing them with an instant tax break ï¿½ while also allowing these credits to offset the Alternative Minimum Tax.
7. Limitations on Penalties for Errors in Tax Reporting Affecting Small Business: Change the penalty for failing to report certain tax transactions from a fixed dollar amount.
8. Qualified Small Business Stock Exclusion: Increases the exclusion from gross income of gain from the sale or exchange of qualified small business stock from 50% to 100%, and the minimum tax preference does not apply. This provision applies to eligible stock acquired after the date of enactment and before Jan. 1, 2011.
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ There are a number of other changes that may be of interest to you. Consider discussing these tax law revisions with your accountant.