The Small Business Jobs Act, which was signed into law by President Obama in September, contains $12 billion in tax breaks for businesses. There are no direct incentives for hiring -- the thinking is that stimulating capital investments and certain other actions by businesses will help to create new jobs.
Whether or not this model works remains to be seen, but you may be able to benefit from one or more of these tax breaks -- if you understand what they are and act in time. So which tax breaks are right for your company? Here are five things you need to know.
1. If you are self-employed and pay own health insurance premiums, you will have a lower tax bill this year.
While the payment of premiums for your staff is a business deduction, your own premiums are a personal deduction (they reduce your gross income and you don't have to itemize deductions to write off the premiums).
What's new for 2010 only is that your premiums reduce your net earnings from self-employment for purposes of the self-employment tax (covering your Social Security and Medicare taxes for the year), which can save you considerable dollars. For instance, if you pay premiums of $10,000 in 2010, you'll save about $1,500 in self-employment tax. In effect, the tax savings reduces your out-of-pocket costs for the premiums to about $8,500.
2. You may be entitled to a tax refund from prior years.
The general business credit is not a separate credit but an overall limitation on business credits. If this limitation prevents you from claiming the full credit amounts this year, you can carry back and carry over the used amounts (collectively called a general business credit carryback and carryover). Usually there's a one-year carryback and the carryforward is 20 years. For credits arising in 2010, however, the carryback period is extended to five years. This means the unused credits from 2010 can offset tax liability in the prior five years, so you can receive a tax refund now.
3. You can simplify your recordkeeping for cell phones.
Until now, cell phones have been treated by the tax law, like computers and cars, as "listed property." This means the opportunity to write off the cost of cell phones in the year they were bought was only allowed if you could show that business usage was more than 50 percent (that you used the phone less than half the time for personal reasons) and you had records to back this up. The new law "delists" cell phones, allowing you to expense their full cost as long as there is only nominal personal use.
If you give your staff company-paid cell phones for business use, your employees no longer need to maintain records of their business and personal usage. The company can deduct the cost of the phones using expensing or accelerated depreciation.
4. You must act fast to benefit from some tax breaks.
While many of the tax breaks in the Small Business Jobs Act sound great, if you don't take action before the end of the year, you will lose out, because the breaks expire.
- 100 percent exclusion for gain from the sale of qualified small-business stock held at least five years. This exclusion applies only to stock of a C corporation that meets certain requirements and which is issued after Sept. 27, 2010, and before Jan. 1, 2011.
- First-year expensing. You can opt to deduct the cost of equipment up to a set dollar limit -- this is called first-year expensing or the Sec. 179 deduction. The limit had been250,000, but it's been doubled to500,000 for 2010 and 2011. And leasehold, restaurant, and retail improvements now qualify as Sec. 179 property even though they're not equipment. The cost of making such improvements in 2010 and 2011 can be deducted up to250,000 in the first year.
- 50 percent bonus depreciation. This allows you to write off half the cost of new (not pre-owned) equipment, in addition to any first-year expensing and a regular depreciation allowance. However, this break applies only to purchases in 2010. This break lets you depreciate an additional8,000 for the purchase this year of a new car, light truck or van used more than 50 percent for business.
- Startup costs. Expenses you paid before you opened for business can be deducted in the first year of operation up to a set dollar limit. Until now, that limit had been5,000, but for 2010 only, the limit is10,000. If you had startup costs totaling more than10,000, you can deduct them ratably over 180 months (15 years). But if your startup costs total more than 60,000, the initial dollar limit is phased out; all costs must be deducted ratably if they are more than70,000.
5. You can access some retirement income to help your business.
Many people start businesses when their jobs are phased out or they retire. Using retirement income to pay your personal expenses can help see you through the startup phase of a business. Two changes to note:
- Partial annuitization. If you own a commercial annuity, it's no longer all or nothing. Starting in 2011, you can opt to receive annuity payments on a part of your annuity contract, allowing the rest of the contract to continue to grow (this is called partial annuitization). The only requirement: Payments from the annuity must be set at 10 years or more, or for life.
- Transfers to Roth accounts. Roth accounts that are part of 401(k) or other qualified plans enable you to create tax-free income. Starting now, you can transfer distributions from a qualified plan to a Roth account. You'll pay tax on the distributions, but will be able to withdraw these amounts any time from the Roth account; income on these amounts becomes tax free after five years. The plan must permit such transfers, so check with the plan's administrator.
Caution: The Small Business Jobs Act likely is not the final word from Congress on taxes for your business this year. Dozens of tax breaks that expired at the end of 2009 may still be extended -- retroactively -- for 2010. Best advice? Stay in contact with a tax expert who can advise you on moves to make to benefit from existing and potential tax breaks.
Barbara Weltman is an attorney, author of several business books including J.K. Lasser's Small Business Taxes and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business, both available at www.barbaraweltman.com, and host of Build Your Business radio. Follow her on Twitter at Twitter.com/BarbaraWeltman.
The original version of this article appeared on AOL Small Business on 10/20/10.