New Tax Benefits for Small Businesses and the Self-Employed
Small businesses and self-employed individuals have an array of deductions and credits of which to take advantage that have been expanded or created by new tax laws (for instance, the Patient Protection and Affordable Care Act and the Small Business Jobs Act of 2010) when completing their tax returns and making business decisions in 2011 and beyond.
The changes include: (1) the allowance of the health insurance deduction to reduce self-employment tax; (2) the offsetting of the general business credit against both regular income and alternative minimum tax; (3) the new small business health care tax credit; (4) higher expensing and depreciation limits; (5) the increase of depreciation limits on business vehicles; and (6) bonus depreciation.
Self-employed folks who pay their own health insurance costs can now reduce their net earnings from self-employment by these costs. Previously, the self-employed health insurance deduction was allowed only for income tax purposes. But, for tax year 2010 only (as of this writing), the self-employed can also reduce their net earnings from self-employment subject to SE taxes on Schedule SE by the amount of the self-employed health insurance deduction claimed on line 29 of Form 1040.
A new credit, the small business health care tax credit, is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower income workers.
Small businesses can claim the credit for 2010 through 2013 and for any two years after that. For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. Beginning in 2014, the maximum tax credit will increase to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible tax-exempt organizations.
Another credit change involves the general business credit. The general business credits of eligible small businesses in 2010 are not subject to alternative minimum tax. The new law allows general business credits to offset both regular income tax and alternative minimum tax of eligible small businesses.
The new laws also provide higher expensing and depreciation limits. For tax years beginning in 2010 and 2011, small businesses can expense up to $500,000 of the first $2 million of certain business property placed in service during the year.
The total depreciation deduction (including the Code Sec. 179 expense deduction and the 50- or 100-percent bonus depreciation) that can be claimed for a passenger automobile used in the business that is not a truck or a van and is first placed in service in 2010 is increased to $11,060. The maximum deduction that can be claimed for a truck or van used in the business and first placed in service in 2010 is increased to $11,160.
If no bonus depreciation is claimed for the passenger automobile, truck, or van used in the business and first placed in service in 2010, the maximum deduction that can be claimed for a passenger automobile is $3,060 and for a truck or van is $3,160.
Finally, businesses that acquire and place qualified property into service after September 8, 2010, can claim a depreciation allowance of 100 percent of the cost of the property. The property must be placed in service before January 1, 2012 (January 14, 2013, in the case of certain longer-lived and transportation property).
If the assets you purchased were acquired before that date, don't worry, there's something for you too. Businesses that acquired qualified property during 2010 on or before September 8, 2010, can claim a depreciation allowance of 50 percent of its cost. The property must be placed in service before January 1, 2013 (January 1, 2014, in the case of certain longer production period property and for certain aircraft).
These new higher depreciation and expensing rules are great, but they may not be for everyone. We have encountered situations where taking the higher deductions didn't necessarily benefit the taxpayer and in some cases actually worked against them.
For instance, some individuals who possibly qualify for the earned income credit, or EIC, could actually have the EIC reduced or even eliminated due to taking the higher deductions. There are certain situations in which other small business entities could similarly be affected to their detriment.
Because of this, it is possible to elect out of the bonus depreciation treatment. Taking a look at what is best over the long-term, rather than just one year, is vital. Bottom line is, don't make the decision in a vacuum, but rather realize a certain amount of analysis may be wise.
