The first major deal between President Obama and Congressional Republicans -- an $858 billion package of tax cuts and unemployment benefits -- has generated no shortage of controversy. After some contentious debate and brokering, the deal, which extends the Bush-era tax rates for two years and provides a one-year payroll tax cut for most Americans, passed the House 277 to 148 and the Senate 81 to 19. President Obama signed it into law on Friday.
While the two sides largely came together in the end, Democrats claimed that the deal would inflate the deficit with unnecessary tax cuts for the wealthy, while Republicans maintained the cuts were necessary to keep the economy on the right track and would help small businesses.
So how will the new law affect small-business owners? Here are five things you need to know.
1. Continue to use conventional year-end tax planning strategies.Businesses using the cash method of accounting are usually advised to shift income to the following year while accelerating deductions into the current year as a way to minimize taxes for the current year. With the extension of the Bush tax cuts for all taxpayers for 2011 and 2012, this tried-and-true tax tax strategy will remain valuable this year and next.
- Deferring income. This is best done by delaying year-end billing so payment will be received next year. Of course, don't delay if you have any concern about receiving payment or you need the cash now -- the sooner you act after providing goods or services, the more likely it is that you'll be paid.
- Accelerating deductions. This can be done by stocking up on supplies you expect to need for the coming year, paying for subscriptions or association dues for next year, and settling up all outstanding bills you owe.
2. Designate research expenditures.Small businesses historically produce 13 times more patents per employee than large patenting firms. Some businesses had placed their R&D projects on hold while waiting for Congress to extend the research credit (this credit expired at the end of 2009). Now the credit has been extended retroactively for 2010, as well as through 2011, which gives small businesses at least a one-year assurance of this prized tax break in order to budget for R&D.
The basic research credit is 20 percent of increased expenditures. Details of the credit can be found in the instructions to Form 6765.
3. Make plans to purchase equipment.The new law creates an unlimited bonus depreciation rule for the cost of equipment and machinery bought and placed in service after Sept. 8, 2010 (and before January 1, 2012). The bonus depreciation applies not only to equipment and machinery, but also to off-the-shelf software and qualified leasehold, restaurant and retail improvements.
However, there continues to be a dollar limit on the purchase of cars, light trucks and vans used for business. The dollar limit set by the IRS on depreciation for a car purchased in 2010 is $3,060 ($3,160 for a light truck or van); if it's new rather than pre-owned, the addition of $8,000 (an amount set by law) means the limit for a car is $11,060 ($11,160) for a light truck or van). New limits, which are set by the IRS, will be announced for 2011.
4. Decide whether to hire new employees.One of the key reasons cited by many small-business owners for not hiring workers at this time has been uncertainty about tax rules and other matters. With the top tax rate for individuals maintained at 35 percent for 2011 and 2012, along with other current tax rules, owners may feel more comfortable about taking on new employees. Owners have certainty about their taxes -- at least for 2011 and 2012.
Those who operate businesses in certain economically distressed areas may be entitled to a tax credit for hiring. The empowerment zone employment credit has been extended for 2010 and 2011.
5. Review your estate plan.Business owners often are concerned that their demise will be the downfall of their companies. Their concern stems not so much from worry that the loss of their talent will adversely affect the company, but more that the estate tax will drain valuable resources from the family and could even result in a forced sale of the business. The new tax deal ends such worries for owners with estates no greater than $5 million.
Even if a business owner's estate is worth more than this amount, the tax rate is only 35 percent instead of the 55 percent that had been slated to apply in 2011 in the absence of the new tax law plan.
Nonetheless, the value of businesses isn't stagnant; a company worth $2.5 million today could be worth 10 times more in a few years, requiring estate planning for the business owner. Business owners should:
- Review the terms of their wills in light of tax changes if they come about.
- Reassess the need for life insurance to provide the cash to pay the estate tax.
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 12/17/10.