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It’s Time to Prepare for Tax Season
Tax Credits: A summary of tax changes and deductions that will affect small businesses in 2011
By DeAnna Stephens Baker
Date Posted: 11/1/2011
November may mean the start of the holiday season. But for businesses it means that it is time to ensure that everything is in order for tax season. There is still time to take advantage of tax changes that are either new or expiring in 2011 and see some savings come April 2012.
Business managers that review their tax position now will have time to discuss which of the following tax breaks they may be eligible for with their accountants as well as be aware of some key changes.
Small Business Health Care Tax Credit
Businesses that employ up to 25 workers, pay annual average wage below $50,000, and pay at least half of the premiums for employee health insurance may qualify for this credit of up to 35% of its premium costs. The credit was included in the Affordable Care Act enacted last year and small businesses that filed their 2010 taxes before determining that they are eligible can still file an amended 2010 tax return. In addition, businesses that could not use the credit in 2010 can claim it in 2011 and future years. Small businesses can claim the credit for 2010 through 2013 and for two additional years beginning in 2014, when the rate will increase to 50%.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) gives varying amounts of tax credit to companies that hire workers from certain target groups. For example, under the WOTC an employer can receive credit of up to $2,400 for each new adult hire, $1,200 for each summer youth hire, $4,800 for each new disabled veteran hire, and $9,000 for each new long-term Temporary Assistance for Needy Families (TANF) recipient hired over a two-year period. The WOTC had been set to expire, but was extended through December 31, 2011 as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 which was signed into law in December. Any company that has hired employees during 2011 should see if it is eligible for the Work Opportunity Tax Credit (WOTC). A complete list of eligible target groups is available at www.doleta.gov.
HIRE Act Credit
Companies that hired previously unemployed workers between February 3, 2010, and January 1, 2011 may be eligible to claim an additional credit of up to $1,000 per worker when filing their 2011 taxes. 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. 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 their 2011 taxes. This credit can be claimed in addition to the WOTC credit.
Higher Depreciation/Expensing Limits
Like last year, small businesses can expense up to $500,000 of the first $2 million of certain business property placed in service during 2011. If bought in 2011, a business can choose to treat the cost of fixed assets and equipment, such as machinery, office furniture and equipment, as an expense and deduct it from this year’s taxes, instead of depreciating it over several years. The eligible property is frequently referred to as section 179 property, and includes property that is purchased for use in the active conduct of trade or business. For tax years beginning in 2012, the maximum amount is reduced to $125,000.
Also, businesses can take a special depreciation allowance to recover part of the cost of qualified property placed in service during the tax year. A temporary measure allows businesses that acquire and place qualified new property into service after September 8, 2010 and before January 1, 2012 to claim a depreciation allowance of 100% of the cost of the property. Qualified property that was acquired on or before September 10, 2010 and during 2010 can claim a depreciation allowance of 50% of the cost of the property if it is placed in service be the end of 2012. The allowance is an additional deduction that can be taken after any section 179 deduction and applies only for the first year the property is placed in service. For a list of the types of property that can be depreciated, see the instructions for Form 4562 available at www.irs.gov.
Research and Development Credit
The Research and Development (R&D) Credit was also extended under through December 31, 2011 under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act. This allows companies to deduct some costs of product research and development incurred through 2011 as current business expenses. 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 “product” 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 “generally include all expenditures incident to the development or improvement of a product,” said the IRS. This includes costs of obtaining a patent, such as attorney’s fees related to the patent.
President’s Jobs Bill
Still unknown is what portions of President Obama’s jobs bill will get passed. The $447 billion bill which recently failed to advance in the Senate included several tax credits geared toward small businesses. However, the President and Democratic leaders are still pushing to have Congress hold separate votes on different portions of the proposal. Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell immediately started looking for specific provisions that they could get enough support to pass. The bill has been sharply contested by Republicans because of extensive expenditures that are also included.
Small business tax cuts in the President’s proposal include:
• A payroll tax cut to businesses. The plan would extend payroll tax cuts by cutting in half payroll tax on the first $5 million in payroll. As a result, instead of paying 6.2% on their payroll expenses, businesses would pay only 3.1%.
• A complete payroll tax holiday for new jobs or wage increases. This is intended as a direct incentive to encourage firms to hire additional employees or raise wages for their current employees. The plan would refund payroll taxes paid on added workers or wage increases for current workers above the level of last year’s payroll.
• An extension of 100% business expensing through 2012. The President believes this would encourage companies to make investments that would strengthen them economically.