NEW TAX BREAKS FOR BUSINESS OWNERS

by Andrew D. Schwartz, CPA

Taxes are going up.  With many of the provisions of the 2001 Tax Act expiring at the end of this year, most tax brackets are set to increase by a few percentage points on New Year's Day.  For high income taxpayers, the top bracket will increase by 4.6%, from the current rate of 35% up to 39.6%.  Meanwhile, the tax credit for a child under the age of 17 is slated to be slashed in half to $500, and the dependent care credit will be cut by 20%.  Plus, we'll see the return of the marriage penalty and the stealth tax.

Sounds rough, right?  There is some good news for business owners, however.  Let's take a look at a few new tax breaks enacted earlier this year:

The HIRE Act

On March 18, 2010 President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act into law.  Any business with staff stands to benefit from this new tax break by hiring one or more qualified employees.

Here is who qualifies as a "qualified employee": 

• Employment begins after 2/3/10 and before 1/1/11.
• Employee certifies on a Form W-11 that he or she has not been employed for more than 40 hours during the 60-day period ending on the employment start date.
• The new employee is not replacing a terminated employee, unless the former employee left voluntarily or was terminated for cause.
• The new employee is not related to you, and is not a household employee.

This tax break is pretty good.  As the employer, you don't pay the 6.2% social security match on wages paid to any qualified employee between 3/19/10 and 12/31/10.  So you'll save $620 for every $10k of wages earned by qualified new hires.

There is no income limitation on who is eligible to claim this tax break.  Plus, there is no per-employee wage limit.  So expect to exclude paying the 6.2% Social Security tax match on all wages paid to each eligible employee for the remainder of the year.  Hiring a high school student or college intern counts too, as long as they certify that they haven't worked more than 40 hours in the 60 days prior to starting their employment with your practice.

Since you'll claim this tax break as part of the filing of the newly revised Form 941, Employer's Quarterly Federal Tax Return, make sure to provide your payroll service with the W-11 Forms that you collect from each qualified employee.  This will ensure that you realize this tax break as quickly as possible.

 Retention Credit

The amount of the credit is the lesser of $1,000 or 6.2 percent of wages that you pay to the qualified employee during his or her first year of employment with your business.  Unlike the new hire tax break that is claimed in connection with the quarterly payroll tax reporting process, you'll claim the retention credit as part of filing the business's 2011 income tax return.  The IRS is working on a new form for this tax credit.

For more info on these two tax breaks for hiring and retaining new staff members, check out the IRS' HIRE Act: Questions and Answers for Employers.

Small Business Health Insurance Credit

The Patient Protection and Affordable Care Act was passed by Congress and signed by President Obama on March 23, 2010.  According to the IRS, "Small employers that provide health care coverage to their employees and that meet certain requirements generally are eligible for a federal income tax credit for health insurance premiums they pay for certain employees."

The tax credit is worth up to 35% of the health insurance premiums paid each year, so it can be substantial.  Please note that the maximum credit is limited to 35% of the average premium for the small group market in a state (or an area within the state) as determined by the Department of Health and Human Services (HHS).  Check out the IRS' Revenue Ruling 2010-13 to find the maximum monthly premium you can claim for this tax credit.

To qualify for the full tax credit:

• Your business must have less than 10 full time equivalent (FTE) employees.

• The average annual wages for your staff can't exceed $25,000 per FTE.

• You must pay the premiums under a "qualifying arrangement", which, according to the IRS, means you must pay "premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage."

What happens if you have more than 10 FTEs or an average annual wage per FTE of $25k?  You might still qualify for a reduced tax credit as long as you have less than 25 FTEs and pay an average wage of less than $50k per FTE.

I know what you're thinking.  Because you have a successful business, there is no way that your average wage is less than $50k per FTE.  Fortunately, the owner's compensation and hours are excluded from these calculations.  Take a look at this Question and Answer taken from the IRS' Small Business Health Care Tax Credit: Frequently Asked Questions:

Q. If an owner of a business also provides services to it, does the owner count as an employee?

A. Generally, no. A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit. Thus, the wages or hours of these business owners and partners are not counted in determining either the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.

You'll claim this tax credit, which is effective for 2010, as part of the 2010 tax return filed for your business.  The IRS is working on a new form for this tax credit.

Form Before Substance

The IRS is working on new forms for these new tax breaks for businesses that hire employees and/or provide health insurance for their staff.  Completing these forms could save you and your business substantial taxes.

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HIRE ACT EXTENDS HIGHER 179 DEDUCTION THROUGH 2010

According to our friends at the IRS, 2010 continues to provide a huge tax incentive for you to open your own business, expand your existing business, or purchase someone else's business:

A qualifying taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property. The Hiring Incentives to Restore Employment (HIRE) Act of 2010 extends the dates of the IRC Section 179 temporary increase in limitations on expensing of depreciable business assets.

Under HIRE, qualifying businesses can continue to expense up to $250,000 of section 179 property for the 2010 tax year. Without HIRE, the 2010 expensing limit for section 179 property would have been $125,000. The $250,000 amount provided under the new law is reduced, but not below zero, if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000.

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2009 & 2010 TAX FACTS

• For 2009 and 2010, the standard deduction for a single individual is $5,700 and for a married couple is $11,400. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2009 and 2010, the personal exemption is $3,650. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes is $106,800 for 2009 and 2010.
  
• The standard mileage rate is $.50 per business mile as of January 1, 2010, down from $.55 per mile for 2009.
  
• The maximum annual contribution into a 401(k) plan or a 403(b) plan is $16,500 in 2010. And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account this year.
• The maximum annual contribution to your IRA is $5,000 for 2010.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2011 to make your 2010 IRA contributions. 

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