There's one thing worse than that sick-in-the-gut-feeling you get paying a big tax bill: the idea that you left money on the table. And yet many small-business owners do exactly that, by not claiming all the business tax credits and deductions they qualify for, according to attorney, author and small-business advocate Barbara Weltman. They overlook credits or deductions "either because they think it's too complicated or it's so new, they aren't even aware of it," Weltman said.
On the other hand, taking these credits and deductions into account could affect your business decisions this year, from hiring to health care. "If you're looking at two eligible candidates, one who's going to give you a tax credit and one who's not, that could be a tipping point in who you hire," Weltman said. "For health care, if you're currently paying 40 percent of workers' coverage, a tax credit could be the tipping point to get you to pay 50 percent."
Here are 10 tax credits and deductions that Weltman says can slash your small-business tax bill for 2012:
1. Small employer health insurance credit. Small businesses with fewer than 25 full-time-equivalent employees with average wages of $50,000 a year and that cover at least half of those employees' health-care insurance are eligible for a tax credit of 35 percent of those premiums. Weltman said this is widely considered the most overlooked, underutilized small-business tax break. Although it was created as part of the Affordable Care Act of 2010 to help small-business owners save money on employees' health-care coverage, Weltman explained many employers have bypassed it because they don't know about it, it's not on their accountants' software or simply because it's so complicated. "Businesses don't know just by looking at it whether they're going to be entitled to it," she said, "but it's significant and very helpful to those who do qualify." Weltman explained that the biggest misunderstanding of this credit is that it's not about number of employees, but number of hours. "That's where people get tripped up," she said. "It's not bodies. You have to add up the hours. So maybe two part-time people could equal a full-time equivalent. Then you take your whole payroll, minus the salary of the owners and the owners' families, and divide it by your full-time-equivalent to see what your average is." No wonder many just decide to skip it instead of decipher it. "There's a big push by the IRS to inform employers about this credit, but people aren’t using it," Weltman said.
2. Retirement plan tax credit. According to Weltman, you can take a credit of $500 per year for up to the first three years after setting up the plan to cover administrative costs. Those administrative costs can include the costs of educating your employees on a new 401(k) plan, but it doesn't apply if you're self-employed setting up a plan just for yourself or your spouse. Also, to qualify, you must have fewer than 100 employees. "This isn't new, but it's one of those credits that doesn't get talked about much," Weltman said. "For businesses that are just starting and don’t have retirement plans, this is something they should pay attention to."
3. Work opportunity credit. There are new breaks for hiring certain veterans after Nov. 21, 2011, and before Jan. 1, 2013. Weltman said this is a new credit offered as an incentive to hire qualified veterans before the end of 2012.
4. Disabled access credit. If you spend money to provide access to your business for people with disabilities, you get a non-refundable credit. To be eligible, you have to earn $1 million or less and have employed 30 or fewer full-time workers the previous year.
5. General business credit carryover. Subject to the general business credit limit, credits which are not used up in the prior year can be carried over for 20 years. This could be a benefit particularly if your business hits a year in which it has losses -- you can offset those annual losses with a previous year in which you recorded profits and boost your refund.
6. Mileage cost tax deductions. If you use your personal car for business driving, the mileage deduction rate for 2012 is 55.5 cents per mile, though Weltman warned that if the price of gas keeps going up, the IRS could raise the rate later in the year, as they did last year. "The key for this tax break, of course, is to keep good records," Weltman said. "Now there are a number of business apps that help you track the miles, which makes it a lot easier to do."
7. Health savings account deduction. "For 2012, small-business owners who pay a tremendous amount in health-care premiums may want to consider a health savings account," Weltman said. These accounts combine a high deductible health plan with a savings-like account. In 2012, the amount that employees can contribute to HSAs has increased. "Once employees are educated about how they work, a lot of them like it," Weltman said, "because if you don’t use up the money, you can carry it over. It's a very good tax break."
8. Qualified retirement plan limits. The limits employees can contribute to a 401(k) or profit sharing plan also increased slightly for 2012. "You can shelter more of your income, and that can be very helpful to profitable business owners," Weltman said.
9. Equipment deductions. The writeoffs for equipment purchases have been scaled back for 2012 vs. 2011. The deduction in 2012 is 50 percent vs. 100 percent in 2011, though Weltman said there have been talks to increase that.
10. First-year expenses. This deduction also decreased for 2012, to a dollar limit of $139,000 from $500,000 in 2011. This deduction, aiming to help with startup expenditures, covers preowned machinery as well as new property.
Although you should take action now to get your maximum deductions, Weltman points out a caveat: "Unfortunately, there are many unknowns. At the end of 2011, about 50 tax breaks expired, many of them for business. Experience shows they're likely to be [reinstated], but we just don't know. Congress may stall, as they have in the past, and extend the breaks retroactively. You have to stay aware, because if breaks are created or extended sometime during the year, you want to know about it so you can take action on it. If you wait until you see your accountant next year, it'll be too late."