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2011 CCH Whole Ball of Tax
Defining a Small Business May Be Biggest Hurdle in Claiming New Tax Breaks
CCH Reviews New Tax Savings Available to Entrepreneurs for 2010-2011
(RIVERWOODS, ILL., January 2011) – Whether or not giving tax breaks to small businesses will encourage expansion and hiring remains to be seen, but Congress is giving it a shot with a slew of generally temporary tax incentives for small businesses, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).
“Many of the tax packages that passed in 2010 included provisions specific to or beneficial to small businesses,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA . “Because each law – and sometimes different provisions within the same law – defines small businesses differently, business owners will need to look closely to determine if their business is indeed small in the eyes of the lawmakers.”
For example, the new carryback period for small business credits applies to small businesses with gross receipts of $50 million or below while new tax breaks for employer-provided health care coverage are available to small businesses with fewer than 25 employees.
Below CCH explores tax law changes that small business owners may be able to take in 2010 or 2011 to lower their tax bills.
- Carryback of small business credit extended. As part of the Small Business Jobs Act of 2010 , the carryback period for small business credits is extended from just one year to five years, effective for tax years that start in 2010. For purposes of this credit, a small business is a non-publicly traded corporation, partnership or sole proprietorship with $50 million or less in average annual gross receipts during the preceding three years.
“Typically, the rule has been to carryback one year and carry forward 20 years. Now, small businesses will be able to realize an immediate benefit for any credits they can claim in 2010 against the past 5 years,” said Luscombe. “They will need to amend previous years’ returns they’ve filed. However, it may be well worth the effort.”
Additionally, they will need to wait to file their 2010 tax return until mid to late February 2011 as IRS Form 3800, used to claim the general business credit, is one of the forms the IRS has reported will be delayed for last-minute updates.
- Extended and expanded Code Sec. 179 expensing. As part of the Small Business Jobs Act, 2010 and 2011 annual expensing increased to $500,000 for investments up to $2 million. Had Congress not acted, the expensing amount would have dropped to $25,000 in 2011 and only been available for investments of up to $200,000. In 2010, it would have stayed at a $250,000 level with an $800,000 investment cap.
Under additional legislation, expensing of property for 2010 and 2011 is expanded to include qualified leasehold investment property, restaurant property and retail improvement property. However, any of this property expensed continues to be capped at the $250,000 limit. Examples of other types of property that would qualify for the $500,000 double expensing includes office equipment or equipment used in the manufacturing process as well as off-the-shelf computer software . For 2012, the expensing limit will be reduced to $125,000 and investment limits to $500,000, indexed for inflation.
- 100-percent bonus depreciation. Under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act), bonus depreciation doubled from 50 percent to 100 percent for most property acquired from September 8, 2010 through all of 2011. For 2012, there will be 50-percent bonus deprecation.
According to Luscombe, there is no restriction on size of business or on the dollar amount of investing, which may make 100-percent bonus depreciation more attractive to any size business. However, bonus depreciation only applies to new property.
- Expanded business start-up expense deduction. For 2010 only, t he Small Business Jobs Act doubled the expense deduction for start-up costs from $5,000 to $10,000 and increased the threshold for taking the full deduction to $60,000 in expenses. The deduction returns to $5,000 and the threshold to $50,000 for 2011.
- Shortened S corp built in gain period. Generally, a C corporation that converts to an S corporation must hold appreciated assets for 10 years following the conversion. If it doesn’t, it must pay tax on the appreciation at the highest corporate level, which currently is 35 percent. Under t he American Recovery and Reinvestment Act of 2009, the 10-year holding period was shortened to seven years for assets disposed of in tax years 2009 and 2010. The Small Business Jobs Act further shortened the holding period to five years for assets disposed of in tax year 2011.
“An S corp that converted from a C corp six years ago could now in 2011 sell those assets without worrying about a corporate level tax,” said Luscombe. “So this allows businesses more flexibility in shedding assets that may no longer suit their business needs or whose sale could provide additional capital to help the corporation weather through a tough economy.”
- 100-percent exclusion for investments in qualified small business stock . Non-corporate taxpayers who acquire qualified small business stock after September 28, 2010 through the end of 2011 and hold it for at least five years will not have to pay any federal income tax on gains from the sale or exchange of the stock. Additionally, the gain is not subject to the AMT.
- Expanded health care tax breaks for small businesses. Starting for 2010 through 2013, the Patient Protection and Affordable Care Act (Patient Protection Act) allows small employers (those with fewer than 25 full-time employees and average annual wages below $50,000) to receive a credit of up to 35 percent of the premium they pay for an employee’s health insurance. In order to be eligible to receive the full credit amount, an employer must have 10 or fewer employees and average wages of less than $25,000. The Patient Protection Act also relaxes cafeteria rules to encourage small employers to offer more tax-free benefits to employees, including health insurance coverage. It does this by relaxing the nondiscrimination rules to allow for more flexible contribution and participation requirements for cafeteria plans serving employees with 100 or fewer employees.
- Deduction of health insurance costs from self-employment income. Self-employed people have been able to deduct 100 percent of their health insurance costs for income tax purposes. However in determining how much of their self-employment income is subject to self-employment tax (e.g., SECA), they were not able to deduct health insurance costs. Under the Small Business Jobs Act, for 2010 only, they can deduct the cost of health insurance when calculating their net earnings subject to self-employment taxes.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (www.wolterskluwer.com).
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