Do you know how recent legislation will impact your business’s tax liabilities for 2010 and beyond?
Everything from capital expense deductions and deductions for startup expenditures to incentives related to hiring and employee benefits could impact your company. Here are several business-related deductions that may help mitigate your tax burden as you wrap up your 2010 tax requirements and focus on the New Year.
• Capital expenditures. Businesses that acquired assets, equipment or property in 2010 may qualify for additional tax deductions through the Small Business Jobs Act. This act increases Section 179 expensing to $500,000 for the 2010 and 2011 tax years for the purchase of machinery and equipment. The new, enhanced deduction is phased out once qualifying fixed-asset additions reach $2 million and is fully phased out when qualifying fixed-asset additions exceed $2.5 million. In addition, the definition of qualified Section 179 property has been expanded to include up to $250,000 of qualified leasehold improvement property, restaurant property and retail property.
• Bonus depreciation. Business owners who bought new property also should be aware that certain equipment placed in service also qualifies for a 50 percent bonus depreciation deduction for 2010. This bonus depreciation is in addition to the normal Modified Accelerated Cost Recovery System depreciation deduction. To qualify, equipment must be new and placed into service in 2010. The Small Business Jobs Act extended—through December 31, 2010—50 percent first-year bonus depreciation, which had expired at the end of 2009. The extension is retroactive to January 1, 2010. The new law also extends, through 2011, the additional year of bonus depreciation allowed for property with a recovery period of 10 years or longer, and for transportation property (tangible personal property used to transport people or property).
• Startup expenses. If you started a business in 2010, you may be allowed to deduct up to $10,000 in qualified startup expenses. This deduction starts to phase out when total startup expenses exceed $60,000. There are many expenses that are considered startup expenses including legal, accounting, promotional, and marketing types of expenses. The increased amounts apply only to 2010.
• Manufacturing Deduction. Code Section 199 allows for an often overlooked deduction related to qualifying domestic production activities. If you are engaged in production activities within the U.S., the deduction for 2010 and forward is equal to nine percent of the lesser of (1) qualified production activities income for the tax year, or (2) taxable income that does not take the deduction into account. The deduction cannot exceed 50 percent of W-2 wages allocable to the domestic gross receipts.
• Cell Phones. The Small Business Jobs Act removes cell phones and similar personal communication devices from their current classification as listed property under Code Section 280F thereby lifting the strict substantiation requirements of use and the additional limits placed on depreciation deductions. In addition, the provision enables the fair market value of personal use of a cell phone or other similar device provided to an employee predominantly for business purposes to be excluded from gross income.
• Hiring/Retention Tax Incentives. The Hiring Incentives to Restore Employment Act (“HIRE Act”) put in place incentives that combine payroll forgiveness for Social Security taxes paid on qualified new hires, along with tax credits for keeping them on the payroll for at least 52 consecutive weeks. Under the HIRE Act, a qualified employer’s 6.2 percent Old Age Survivors Disability Insurance (OASDI) Social Security tax liability is forgiven for wages paid on previously unemployed new hires for any 2010 period starting after March 18, 2010 through December 31, 2010. A “qualified employee” must meet certain requirements. The credit for keeping these individuals on the payroll for at least 52 consecutive weeks generally will be taken on the employer’s 2011 income tax return because of the 52 consecutive week prerequisite. The retention credit is generally the lesser of $1,000 or 6.2 percent of wages paid by the taxpayer to the qualified retained worker during a 52 consecutive week period.
• Small Business Health Care Tax Credit. The Patient Protection and Affordable Care Act (“Health Care Reform Bill”) put in place a health care refundable credit for certain qualified small employers to encourage small employers to offer health care coverage for their employees. This credit starts in 2010 and continues into future years. To qualify an employer must (1) cover at least 50 percent of the cost of health care coverage for some of its workers based on a single rate, (2) must pay average wages below $50,000 per year, and (3) must have fewer than 25 full-time equivalent employees. If qualified, the employer may be able to claim a credit of up to 35 percent of the premium cost in 2010 through 2013 and potentially higher amounts starting in 2014. The full credit is available for employers with 10 or fewer full-time equivalent employees and average annual wages of less than $25,000. The full credit begins to phase out at levels above these amounts.
Above are only a handful of the new or expanded deduction and incentive opportunities for business owners which should be considered as you close out 2010 and look into 2011. These deductions and incentives may not apply to all businesses. It is best to seek advice from a tax professional to determine how the rules apply to your specific situation.
Content contributed by the Charlotte office of Elliott Davis, PLLC, an accounting, tax and consulting services firm providing clients the solutions needed to achieve their objectives in 10 offices throughout the Southeast. For more information, contact Dan Warren at 704-808-5210 or visit www.elliottdavis.com.