It’s that time again -- the tax season -- when individual and business tax returns must be prepared. This year is particularly challenging because of new legislation and the expiration of old provisions. Here are some important changes for small business owners to note on this year’s return.
Certain business-related deductions, credits, and other beneficial tax rules expired at the end of 2009 and have not been extended for 2010. These include:
The five-year recovery period for depreciating farming business machinery and equipment. Longer recovery periods apply for 2010.
An extended net operating loss (NOL) carryback, which had been up to five years in 2009. The carryback period for NOLs arising in 2010 usually is limited to two years (there are some exceptions).
Reduced estimated tax payment requirements for small business owners. Estimated tax penalties will apply for 2010 underpayments that do not meet the usual safe harbors of 90% of current year liability or 100% of prior year liability (110% for high-income taxpayers).
New for 2010 returns
Tax legislation, particularly those enacted in 2010, has created or expanded a number of tax breaks for small business owners. These include:
Writing off the cost of equipment purchases. If your business bought equipment or machinery in 2010, you can elect to deduct the cost (“expensing”) up to $500,000 as long as you were profitable. You can also use bonus depreciation to deduct 50% of the cost for purchases before September 9 and 100% for purchases after September 8. Bonus depreciation does not require that you were profitable, but it only applies to new items (not pre-owned items); expensing can be used for pre-owned items. Find out more about changes in writing off equipment purchases at the IRS.
If you purchased a cell phone in 2010, it is now easier to write off the cost, as well as the ongoing monthly charges. The cell phone is no longer treated as “listed property,” a category in the tax rules that limited accelerated write-offs for purchases, and required special substantiation for business usage.
Small business health insurance credit. There is a tax credit of up to 35% of premiums paid by a small business for employee health coverage. The business must pay at least half of the cost. To qualify for the full credit, the business can have no more than the equivalent of 10 full-time employees with average annual compensation of no more than $25,000. A partial credit is allowed for companies with 10 to 25 employees and with average annual compensation between $25,000 and $50,000. You can learn more details about the credit from the IRS.
Small business general business credit carryback. Business-related tax credits are subject to an overall limitation, called the general business credit. When the total exceeds the limit, the excess usually can be carried back for one year and forwarded for up to 20 years. New for 2010 is the ability of small businesses to carry back 2010 credits for five years. A small business for this purpose is a privately-held corporation, partnership, or sole proprietorship with average annual gross receipts in the three prior years not exceeding $50 million.
Self-employment tax reduction. Self-employed individuals can, as usual, deduct their health insurance premiums as an “above-the-line” deduction (not as a business deduction) on Form 1040. But new for 2010 is the ability to reduce net earnings from self-employment by the premiums when figuring self-employment tax (Social Security and Medicare taxes for self-employed individuals). This amounts to a tax savings of more than 15% of the premiums.
These are not the only changes appearing on 2010 returns. Be sure to view “What’s New” in IRS instructions to its forms and schedules. You may want to work with a knowledgeable tax professional who can advise you on new tax breaks you may qualify for on your 2010 return.
One last new thing: The filing deadline for 2010 returns for individuals and partnerships is April 18, 2011. If you can’t file by this date, just ask for a filing extension so you’ll have until October 17, 2011, to submit the return and avoid late filing penalties.
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 her monthly e-newsletter Big Ideas for Small Business®; both are available at www.barbaraweltman.com, and host of Build Your Business Radio.