Market Watch
The Small Business Jobs and Credit Act is about to be signed into law. New high-level, expensive government posts have been created. There’s money for Small Business Administration loans and state governments, and a few new tax provisions — including the good, the bad and the downright sneaky.
Cell phones are no longer listed property. Excuse my rejoicing, but this has been a nuisance for years. As long as cell phones were considered listed property, you were required to keep logs of personal versus business use. Corporations were hit hard on audits when staff used their company phones to call family and friends.
Were you keeping logs, or paying your company back for your personal use? Neither was anyone else. Frankly, no one really wanted to enforce those rules. After all, IRS staff were using their cell phones personally, too.
More time for bonus depreciation
Bonus depreciation was extended to Dec. 31, 2010. It was set to expire on Dec. 31 last year, but it got a reprieve. New business assets you bought since Jan. 1 of 2010 are apt to qualify for a 50% special depreciation deduction. The assets must have a recovery period of 7 years or less.
Because bonus depreciation is back, you may deduct up to $8,000 on the purchase of your new car. That, along with regular depreciation, allows you up to $11,060 worth of depreciation for the first year, according the experts at CCH, a Wolters Kluwer business.
Cell phones are no longer listed property. Excuse my rejoicing, but this has been a nuisance for years. As long as cell phones were considered listed property, you were required to keep logs of personal versus business use. Corporations were hit hard on audits when staff used their company phones to call family and friends.
Were you keeping logs, or paying your company back for your personal use? Neither was anyone else. Frankly, no one really wanted to enforce those rules. After all, IRS staff were using their cell phones personally, too.
More time for bonus depreciation
Bonus depreciation was extended to Dec. 31, 2010. It was set to expire on Dec. 31 last year, but it got a reprieve. New business assets you bought since Jan. 1 of 2010 are apt to qualify for a 50% special depreciation deduction. The assets must have a recovery period of 7 years or less.
Because bonus depreciation is back, you may deduct up to $8,000 on the purchase of your new car. That, along with regular depreciation, allows you up to $11,060 worth of depreciation for the first year, according the experts at CCH, a Wolters Kluwer business.
Small-business health insurance
This has always been baffling. Small-business owners may reduce their taxable income for the cost of self-employed health insurance. But they have not been permitted to reduce their self-employment taxes by the cost of the health insurance.
For 2010 only, the health-insurance deduction will reduce your self-employment taxes, too. Why only for one year? Can you imagine the form changes IRS will have to make to change Schedule C for 2010 and then remember to change it back for 2011? This should have been permanent — like the cell phones.
This has always been baffling. Small-business owners may reduce their taxable income for the cost of self-employed health insurance. But they have not been permitted to reduce their self-employment taxes by the cost of the health insurance.
For 2010 only, the health-insurance deduction will reduce your self-employment taxes, too. Why only for one year? Can you imagine the form changes IRS will have to make to change Schedule C for 2010 and then remember to change it back for 2011? This should have been permanent — like the cell phones.
Penalty relief — big time
The tax code hits businesses with penalties of 75% for not reporting “tax shelter” activities. Some of those penalties have been much higher than any possible benefit the business owner or investor ever got from the investment. In fact, many of the small business hit by these penalties didn’t even know they were engaging in tax-shelter activities.
According to CCH, since June 2009 the IRS has exercised forbearance in collecting some of those penalties. For now, if you were hit by those penalties after Dec. 31, 2006, the revisions to IRC section 6707A may have dramatically reduced the ceilings on your penalties. Sit down with your tax pro to see just how you’ve been affected. This may be a good opportunity to file some amended returns.
The tax code hits businesses with penalties of 75% for not reporting “tax shelter” activities. Some of those penalties have been much higher than any possible benefit the business owner or investor ever got from the investment. In fact, many of the small business hit by these penalties didn’t even know they were engaging in tax-shelter activities.
According to CCH, since June 2009 the IRS has exercised forbearance in collecting some of those penalties. For now, if you were hit by those penalties after Dec. 31, 2006, the revisions to IRC section 6707A may have dramatically reduced the ceilings on your penalties. Sit down with your tax pro to see just how you’ve been affected. This may be a good opportunity to file some amended returns.
Good for really small businesses
If you’re the owner of a really small business, you perhaps tend to operate it using your own savings, personal loans, credit cards, and so forth, as a primary source of capitalization. That means you start out with a limited budget and pray that your clever marketing moves will generate enough money to cover operations, quickly. Sometimes that works.
The deduction for start-up costs has increased from $5,000 to $10,000 during 2010 and 2011. And, before, you lost this benefit if your start-up costs were $50,000. That has increased to $60,000. This will be a big help to the ma-and-pa-type start-ups. Remember, though, the business must have opened its doors during 2010 if you want to take advantage of writing off those start-up costs. So be sure to start selling something before Dec. 31.
Good for bigger small businesses, real-estate investors
Everyone’s favorite political football, Section 179 depreciation, just jumped from $250,000 to $500,000 for 2010 and 2011. The amount of assets your business may purchase before you are too big to qualify for this benefit also rose, from $800,000 to $2 million. In 2012, the Section 179 deduction will return to $25,000, with an asset purchase limit of $200,000. Unless, of course, it changes again.
Naturally, this increase does not apply to the behemoth personal vehicles. Those are still limited to a deduction of $25,000 in the year of purchase.
Certain real estate is now eligible for Section 179 benefits, according to Spidell Publishing Inc.: qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property.
Remember, to keep this Section 179 benefit, the asset you purchased must continue to be used for business for its entire tax life. If you stop using a 5-year asset, or sell it after 3 years, you must pay back the Section 179 benefit. Most people don’t realize that this applies to things like your computers, video cams, and other small, but expensive electronics that tend to be replaced every year or two.
If you’re the owner of a really small business, you perhaps tend to operate it using your own savings, personal loans, credit cards, and so forth, as a primary source of capitalization. That means you start out with a limited budget and pray that your clever marketing moves will generate enough money to cover operations, quickly. Sometimes that works.
The deduction for start-up costs has increased from $5,000 to $10,000 during 2010 and 2011. And, before, you lost this benefit if your start-up costs were $50,000. That has increased to $60,000. This will be a big help to the ma-and-pa-type start-ups. Remember, though, the business must have opened its doors during 2010 if you want to take advantage of writing off those start-up costs. So be sure to start selling something before Dec. 31.
Good for bigger small businesses, real-estate investors
Everyone’s favorite political football, Section 179 depreciation, just jumped from $250,000 to $500,000 for 2010 and 2011. The amount of assets your business may purchase before you are too big to qualify for this benefit also rose, from $800,000 to $2 million. In 2012, the Section 179 deduction will return to $25,000, with an asset purchase limit of $200,000. Unless, of course, it changes again.
Naturally, this increase does not apply to the behemoth personal vehicles. Those are still limited to a deduction of $25,000 in the year of purchase.
Certain real estate is now eligible for Section 179 benefits, according to Spidell Publishing Inc.: qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property.
Remember, to keep this Section 179 benefit, the asset you purchased must continue to be used for business for its entire tax life. If you stop using a 5-year asset, or sell it after 3 years, you must pay back the Section 179 benefit. Most people don’t realize that this applies to things like your computers, video cams, and other small, but expensive electronics that tend to be replaced every year or two.
Sneaky provision
Qualified Small-Business Stock (QSBS) has special provisions to encourage investors to risk their money in new, start-up corporations. If the company fails, there are generous provisions to write off part of the losses quickly. There are incentives allowing certain capital-gains exclusions when the stocks are sold.
QSBS investors have been getting a boost lately. Historically, we were able to exclude 50% of certain profits, if the stock had been held for five years or more. Then, it got pushed up to 75% of profits, for QSBS purchased after Feb. 17, 2009, and before Jan. 1, 2011 — with a special alternative minimum tax rate. The latest law increases the exclusion from tax to 100% for QSBS purchased after March 15, 2010, and before Jan. 1, 2012.
That sounds generous. Except for the little clause in the new law that says paragraph 7 of Code Section 57 does not apply. Congress took away the special alternative-minimum tax treatment. In other words, you exclude 100% of the gains from your regular income tax and pay 28% in AMT, or higher once the low capital-gains rates expire next year.
Qualified Small-Business Stock (QSBS) has special provisions to encourage investors to risk their money in new, start-up corporations. If the company fails, there are generous provisions to write off part of the losses quickly. There are incentives allowing certain capital-gains exclusions when the stocks are sold.
QSBS investors have been getting a boost lately. Historically, we were able to exclude 50% of certain profits, if the stock had been held for five years or more. Then, it got pushed up to 75% of profits, for QSBS purchased after Feb. 17, 2009, and before Jan. 1, 2011 — with a special alternative minimum tax rate. The latest law increases the exclusion from tax to 100% for QSBS purchased after March 15, 2010, and before Jan. 1, 2012.
That sounds generous. Except for the little clause in the new law that says paragraph 7 of Code Section 57 does not apply. Congress took away the special alternative-minimum tax treatment. In other words, you exclude 100% of the gains from your regular income tax and pay 28% in AMT, or higher once the low capital-gains rates expire next year.
Waste of taxpayer resources
An interesting little feature of this bill “prohibits the use of funds under this Act to pay the salary of an individual officially disciplined for viewing, downloading, or exchanging pornography on a federal government computer while performing official federal duties.”
How much salary reduction do you expect to see from this? Or will the cost to enforce this be higher than the savings?
An interesting little feature of this bill “prohibits the use of funds under this Act to pay the salary of an individual officially disciplined for viewing, downloading, or exchanging pornography on a federal government computer while performing official federal duties.”
How much salary reduction do you expect to see from this? Or will the cost to enforce this be higher than the savings?
And more…
There are several other provisions that will enhance or confuse your business experience. Wait about two weeks for your tax professional to get up-to-date on all the details. Then make an appointment to do some planning. Definitely get a business tax tune-up before October ends so you can take advantage of tax benefits on money you’ve already spent, and see if that frees up money for some expansion or marketing. Or just to pay off some bills.
There are several other provisions that will enhance or confuse your business experience. Wait about two weeks for your tax professional to get up-to-date on all the details. Then make an appointment to do some planning. Definitely get a business tax tune-up before October ends so you can take advantage of tax benefits on money you’ve already spent, and see if that frees up money for some expansion or marketing. Or just to pay off some bills.
