Tax Law Changes Made Simple

With the start of the new year there is a slew of new tax rules that can help you reduce your tax bill for 2011, although some other changes create administrative burdens. Many of the rules were created or extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was signed into law on December 17. As an entrepreneur, here is what you need to know: 

Payroll tax changes. 

In 2011, reduce the Social Security portion of withholding from employee pay by two percent, which gives employees a payroll tax holiday this year on wages up to $108,600. The IRS has guidance on this change. There is no change in the Medicare tax withholding for employees; the FICA tax for employers is also unchanged. Self-employed individuals— sole proprietors, independent contractors, partners, and members of limited liability companies—get the same 2 percent reduction in their selfemployment tax, which can be realized through reduced quarterly estimated taxes for the year. This does not apply to S Corp owners or partners. 

1099 reporting. 

Businesses of all sizes are required to report their 1099 payments for goods and services of $600 or more. To do this, businesses must update their accounting programs to track payments throughout the year, although the Form 1099 used to report the payments won’t be due until January 31, 2012. However, there is considerable support for repealing this reporting requirement. Businesses may want to wait a little while before investing in accounting changes to see whether the reporting requirement will be eliminated. But, while waiting for repeal, it won’t hurt to obtain a Form W-9 from each vendor before paying them—just in case. 

Employee retention credit. 

If you hired an unemployed worker in 2010, who entitled you to a payroll tax holiday through the end of the year (the workers completed Form W-11) and you keep the worker on your payroll for at least 52 consecutive weeks, you’ll be eligible this year for a tax credit of $1,000. There is no limit on the number of eligible workers can entitle your company to a credit. 

Ne w mileage rate for vehicles. 

If you use your personal car or truck for business, carefully track your mileage so you can deduct the cost. If you reimburse employees for business driving, you can use this rate to reimburse them; they won’t have to prove their costs to you, only their mileage. The IRS-set standard mileage rate for 2011 is 51 cents per mile (up from 50 cents per mile in 2010). If the price of gasoline skyrockets, the IRS could increase the rate during the year as it did in 2008. 

Equipment purchases. 

If you need new equipment or need to upgrade what you have, favorable tax rules in 2011 allow you to write- off all or most of the cost. You can claim 100 percent bonus depreciation for new equipment, computers, office furniture, and off-the-shelf software; however, pre-owned items don’t qualify. For used equipment, you can deduct the cost under Code Sec. 179 up to $500,000; but you have to be profitable to use this deduction. The purchase can be financed in whole or in part whether you use bonus depreciation or the Sec. 179 deduction. 

Capital gains break for business investments. 

If you acquire stock in certain types of C corporations this year and hold the stock for at least five years, you won’t pay any capital gains on profits when you sell the stock. Initially, this break had been created for investments only from September 28, 2010, through the end of the year, which made it virtually impossible to close deals in time to qualify for the break. Now, the break has been extended through 2011. Caution: There are many rules that apply to this break so check with a tax advisor about which types of companies to invest in if you are interested in the 100 percent exclusion from tax. 

Research credit. 

There is a 20 percent tax credit for increasing research activities. This credit expired at the end of 2009, but has been extended through 2011. The extension enables businesses to plan for their R&D expenses this year. For more on the R&D credit, see the IRS’s Audit Techniques Guide.