New Federal Legislation Impacts Small Business

This year has already been a tumultuous one for tax changes affecting small business, and the year isn’t over yet. Some major tax laws have been enacted: the Hiring Incentives to Restore Employment (HIRE) Act and health care reform (Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act).

But there are still open tax questions for 2010 that Congress has yet to address. All of this boils down to the simple fact that tax planning for small business owners in 2010 and future years is more difficult than ever before.

Here’s what you need to know about changes for 2010 taxes so you can plan accordingly.

Hiring staff

Employers who hire new staff this year get a break on payroll taxes. No Social Security taxes are owed by employers on wages paid to certain new employees hired after February 3, 2010. The potential savings is $6,621.60 for every new employee (based on salary). To qualify an employer for this break, the new worker must not have been employed for more than 40 hours during the 60 days prior to starting the job. Employers must get the worker to sign an affidavit to this effect; the new IRS Form W-11 can be used for this purpose.

The suspension of part of the Federal Insurance Contributions Act (FICA) only applies for the employer share of Social Security taxes. Employers still owe the Medicare portion of FICA and must continue to withhold all of FICA (the Social

Security and Medicare portions) from employee paychecks. Looking ahead, employers are encouraged by the tax law to keep these previously unemployed new employees on the payroll. If a company retains new hires for 52 consecutive weeks, it can claim a tax credit of up to $1,000 per eligible employee; there’s no limit on the total credit. Employers won’t reap the benefit until they file their 2011 returns.

Buying equipment

Businesses that buy computers, furniture, machinery, equipment, and off-the-shelf

software can opt to deduct the cost in 2010 up to $250,000 rather than depreciating it over a number of years. This break, which is only beneficial if a business is profitable in 2010, expires at the end of 2010 unless Congress extends it. After 2010, the dollar limit on this deduction, called “expensing” or the Sec. 179 deduction, is set to revert to a limit of $25,000 (the actual amount may be adjusted for inflation). It is also important to note that the bonus depreciation, which allowed 50 percent of the cost of certain business items to be deducted in the first year, regardless of profitability, expired at the end of 2009.

Paying for health care

Small businesses with less than the equivalent of 25 full-time workers, who earn, on

average, below $50,000, may qualify for a tax credit for health insurance premiums paid on behalf of their staff. Employers must pay at least 50 percent of the cost of employees’ health coverage to receive the credit, and the maximum is 35 percent of these premium payments. (various limits may reduce the credit). The credit phases out gradually for companies with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

The IRS has created a three-step process for determining eligibility for the credit. This credit applies beginning on the 2010 return. The IRS has also sent out postcards to about four million small businesses alerting them to the existence of the credit.

Looking ahead, this credit can continue to be claimed annually for a total of four years (2010, 2011, 2012, and 2013). However, starting in 2014, the credit morphs into a new type of credit that will only apply to coverage obtained by a yetto- be-established, government-supervised exchange. The new credit, which will be up to 50 percent of the employer’s cost, can be claimed for a maximum of two years.

Expired provisions

Dozens of tax breaks expired at the end of 2009. It is expected that Congress will extend them, at least through 2010, but there is no guarantee. Some of the key business

breaks waiting for extension include:

• Research credit for increasing research activities (this applies to basic R&D such as medical or scientific research).
• 15-year amortization for leasehold, restaurant, and retail improvements.
• Deduction for environmentremediation costs.

Tax rate uncertainty

The Bush tax cuts are poised to expire at the end of 2010. This means that, without Congressional action, the top tax rate will raise from 35 percent this year to 39.6 percent next year. Also, the capital gains tax rate will jump from 15 percent this year to 20 percent next year, and dividends, currently taxed at the capital gains rate, will be subject to ordinary income rates up to 39.6 percent. Consider the impact that these rate hikes could have on your business tax planning, especially as the year comes to a close.

For businesses using the cash method of accounting (most service-type businesses), decide:

• Whether to accelerate income into 2010 by finishing up work and collecting on receivables as soon as possible.
• Whether to defer deductible expenses to 2011 when the value of a write-off will be greater for business owners in higher tax brackets.

Because of continued uncertainty and the possibility of additional tax changes before the year is over, work closely with your tax advisor so you don’t miss opportunities to save on taxes this year and in years to come.