It’s been another rough-and-tumble year for businesses large and small. But with it have come some tax breaks designed to help businesses survive and grow in a tough economy.
The National Society of Accountants (NSA) offers the following checklist of tax tips for businesses, courtesy of CCH, a provider of information services, software, and workflow tools for tax, accounting, legal and business professionals.
Take advantage of bonus depreciation. Congress passed special temporary bonus depreciation rules as part of the 2010 Small Business Act. But the window is small— taxpayers generally must place qualified property in service before Jan. 1, 2011.
New rules for business expensing. Under Internal Revenue Service (IRS) Code Section 179, taxpayers can elect to recover part or all of the cost of qualified property, up to a limit, by deducting it in the year it is placed in service. Code Section 179 expensing is often called small business expensing, but recent increases have significantly expanded its scope. The dollar and phase-out investment limits are $500,000 and $2 million, respectively, for tax years beginning in 2010 and 2011. The Code Section 179 expensing deduction enables many businesses to deduct the entire cost of their depreciable property during the year it is purchased and placed in service.
Payroll tax exemption. Employers that hire certain unemployed individuals after Feb. 3, 2010, and before Jan. 1, 2011 may qualify for a 6.2-percent payroll tax incentive. The incentive exempts businesses from paying the employer’s share of Social Security taxes on wages paid to qualified new hires after March 18, 2010 and before Jan. 1, 2011. Not every new hire may qualify for the incentive. Generally, a qualified employee is an individual who was unemployed or who was employed but worked 40 hours or less during the 60-day period ending on the date of new employment. The individual also must not have been hired to replace another employee of that employer, unless the other employee separated from employment voluntarily or was terminated for cause.
Worker retention credit. Related to the payroll tax exemption is a new but temporary worker retention credit. An eligible employer may claim the credit for each new hire who meets certain retention requirements. A retained worker is a qualified employee (as defined for purposes of the payroll tax exemption) who remains an employee for at least 52 consecutive weeks, and whose wages (as defined for income tax withholding purposes) for the last 26 weeks equal at least 80 percent of the wages for the first 26 weeks. The amount of the credit is the lesser of $1,000 or 6.2 percent of wages paid by the employer to the retained worker during the 52-consecutive-week period. The credit may be claimed for a retained worker for the first taxable year ending after March 18, 2010 for which the retained worker satisfies the 52-consecutive-week requirement.
Domestic production activities deduction. This often overlooked provision under IRS Code Section 199 is targeted to US taxpayers engaged in manufacturing activities. The definition of manufacturing is broad for purposes of the deduction but its under-utilization may be due to the complexity surrounding the deduction. Generally, the maximum deduction is equal to a percentage of the lesser of either the taxpayer’s qualified production activities income (QPAI) or taxable income. The maximum deduction for 2010 is, for most taxpayers, nine percent. The deduction is, however, limited to 50 percent of the W-2 wages actually paid to employees and reported by the employer.
Health insurance coverage tax credit. The IRS Code Section 45R tax credit applies to small employers offering qualified health insurance coverage to their employees. It is generally available to small employers that pay at least half the cost of qualified coverage. For the 2010 tax year, the maximum credit is 35 percent of premiums paid by eligible employers (non-profit employers may be eligible for a reduced credit of 25 percent). The maximum credit goes to employers with 10 or fewer full-time equivalent (FTE) employees paying average annual wages of $25,000 or less. The credit is completely phased out for employers with more than 25 FTEs or with average annual wages of more than $50,000. Code Section 45R credit has many restrictions, so check the rules carefully.
Business credit changes. The 2010 Small Business Act made some taxpayer-friendly changes to the IRS Code Section 38 general business credit. The eligible small business credits of an eligible small business (ESB) determined in the first tax year of the business that begins in 2010 may be carried back five years and forward for 20 years. An ESB is a corporation without publicly traded stock, a partnership, or a sole proprietorship [Code Sec. 38(c)(5)(C), as added by the 2010 Jobs Act]. Additionally, the ESB must have average annual gross receipts for the three-tax-year period before the tax year of $50 million or less. The provision is intended to encourage ESBs to accelerate their business expenditures to 2010.
Energy tax incentives. A variety of tax incentives are available to encourage businesses to invest in energy conservation, energy efficiency and the production of alternative energy. Taxpayers generally have through Dec. 31, 2013 to place in service biomass, marine and other types of renewable energy property to claim the renewable energy production tax credit (although the placed-in-service date for wind facilities is through Dec. 31, 2012).
Accelerating taxable income. Although most profitable businesses use year-end planning strategies to accelerate deductions and defer income, not all businesses profit from these techniques. Some businesses should do just the opposite to come out ahead. For example, a business that had net operating losses (NOLs) in the past can generally carry them forward into the next tax year to offset income for a finite period. If the NOLs are about to expire, a business may want to accelerate income and defer deductions as much as possible to use those expiring NOLs now and benefit from deferred deductions in the future.
Not all businesses are the same, and each situation requires a look at each business’s unique circumstances to customize year-end tax planning techniques to yield maximum value. NSA recommends consulting accounting and tax professionals to determine the best approach.
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