More information on the new “Small Business Jobs Act”

Hire Act & Jobs

“The Small Business Jobs Act of 2010,” signed into law on September 27, creates several tax-saving opportunities for businesses. Here’s a summary of the key tax breaks.

* Section 179 deduction. The new law doubles the maximum amount that can be deducted for business equipment purchases to $500,000 annually for 2010 and 2011. Also, the dollar threshold at which the maximum deduction is phased out is increased from $800,000 to $2 million.

* Bonus depreciation. The new law revives the 50% bonus depreciation for qualified property placed in service in 2010 (through 2011 for certain property).

* Start-up expenses. For 2010, the maximum first year deduction for qualified costs of starting a business is increased to $10,000, with a $60,000 phase-out threshold.

* Qualified small business stock. Investors in “qualified small business stock” may be able to exclude 100% of the gain from the stock’s sale if it is held at least five years (for acquisitions from September 28, 2010, through December 31, 2010).

* Business credits. Normally, general business credits can’t offset alternative minimum tax (AMT) liability. The new law removes this restriction for an “eligible small business” and permits carrybacks of general business credits for five years.

* Health insurance. For 2010 only, self-employed individuals can deduct health insurance costs from their self-employment income in computing self-employment tax.

* Cell phones. The new law removes strict substantiation requirements for cell phones and similar devices used in business and treats employee use as a tax-free fringe benefit.

* Roth accounts. Participants in 401(k), 403(b), and 457(b) plans can now roll over funds to a Roth account. For rollovers in 2010, the resulting taxable income can be divided between 2011 and 2012.

2010 Tax Planning

Bookkeeping Services 

Tax planning for 2010 may require an understanding of one of the most complicated tax years in recent memory.  This year represents a critical time to ascertain and identify any tax traps while maximizing opportunities for dramatic tax savings. Next year may truly be too late …

 There have been no less than six tax Acts this year, and more changes are anticipated after this election cycle. As always, the key to effective tax planning is to estimate your anticipated income levels not only for 2010 – but also for the next couple of years.

 Although the typical tax planning wisdom has been to avoid paying any taxes for as long as possible, this strategy may have to be dramatically altered. Deductions may be worth a great deal more in a year or two.

 Any tax projections may require you to predict a series of unknown future events, and make educated guesses and reasonable assumptions. Remember, no tax strategy is cast in stone until the time for changing strategies has passed. Tax planning is a dynamic process, and the earlier you start, the better.

 Here are some basic principles that can help guide your overall thinking:

  •  If you expect your tax rate will be higher next year, you may want to accelerate income into this year and defer deductions into next year.
  •  If you think your tax rate might be lower in 2011, consider deferring income to next year and accelerating deductions into this year.
  •  Remember to pay careful attention to your marginal tax rate – the highest rate at which your last, or marginal, dollar of income will be taxed.
  •  Without additional legislation, overall tax rates are scheduled to rise in 2011. However, if your 2011 income will be substantially lower than 2010, your marginal tax rate may decrease.

 We believe proactive tax planning is the key to keeping more of your income.  Proactive tax planning means analyzing your income and expenses for every available deduction, credit, and opportunity, without the need for “aggressive” strategies, “gray areas” or “red flags.”

 We have recently implemented a new tax planning tool, that will help us more than ever before, to identify and explore opportunities with you to cut your tax bill.  Innovative analysis, combined with our years of experience, gives you the proactive advice you need.

 The critical step is to meet with us now, during the 2010 tax year, while there is still plenty of time to consider and implement appropriate planning strategies.

 Our tax planning and coaching services give you a plan for legally beating the IRS.  Please contact uswithin the next couple of weeks todetermine if 2010 tax planning makes sense for you. If you are ready to start planning, please call  to begin.

S-Corp owners – Pay yourself reasonable wages

s-corp owners wages

What rule do you follow if there are no rules to follow?

As the owner of an S corporation trying to determine a reasonable salary to pay yourself, the question is important – and difficult to answer. The reason: At present, there are no specific regulations, safe-harbor provisions, or minimum wage requirements defining what amount of compensation is “reasonable” for S corporation shareholder-employees.

As a result, when times are tough, the lack of hard and fast rules could tempt you to forego paying yourself a salary and instead take money from your corporation in other ways, such as distributions or loans. Yet that approach might be costly.

Why? While these methods can be legitimate, without the presence of a reasonable salary, it’s possible for distributions and loans that you pay yourself from your S corporation to be reclassified as wages. If that happens, you could end up owing interest and penalties in addition to payroll taxes.

Here are two general guidelines for setting your salary.

* How much you pay key employees. Wages and other amounts you pay unrelated, non-owner staff can indicate a starting point for your own compensation.

* The average salary for your profession or industry. Information from government wage surveys and online benchmarking tools offer compensation trends and information.

Congress is considering new rules concerning certain professional services and the salary paid by S corporations. Give us a call to review your situation.

Don’t forget: Distributions from retirement plans are required again

Required minimum distributions from retirement plans are back for 2010. After a one-year hiatus, taxpayers age 70½ and older (and those who inherited a retirement account) are again required to take taxable annual distributions. 2010 distributions must be taken by December 31 or a 50% penalty could apply.

If you turn 70½ this year, you could wait until April 1, 2011, to take your first distribution. In deciding, consider the likelihood of higher tax rates next year and the fact that a delay means you’ll have two taxable distributions for 2011.

Don’t leave your decision until the last minute. Your plan trustee will need time to execute your instructions. For assistance in reviewing your options and the tax consequences, give us a call.

A review course on education tax credits

As the fall semester starts up, so do questions about education tax credits. The interest is natural – credits are valuable tax breaks, because you can subtract them directly from the income tax you owe.

So what education credits can you claim on your 2010 federal income tax return? The Hope Scholarship/American Opportunity Credit and the Lifetime Learning Credit are available this year, and, as you may already know, have many similarities.

For instance, to be eligible for these credits, the qualified out-of-pocket education expenses you pay in 2010 must be for academic periods that begin this year or in the first three months of 2011. Tuition and fees are qualified education expenses for purposes of claiming the credits, while room and board are not.

How do the credits differ? One difference is the maximum available amount. Generally, you can claim up to $2,500 per eligible student when you qualify for the Hope Scholarship/American Opportunity Credit, while the most you can claim for the Lifetime Learning Credit is $2,000.

Another difference is the adjusted gross income level at which the credits begin to shrink. For 2010, the phase-out for the Hope Scholarship/American Opportunity Credit starts at $80,000 when you’re single ($160,000 for married filing jointly). For the Lifetime Learning Credit, the phase-out begins at $50,000 for singles ($100,000 when you’re married filing jointly).

Call for more information. We have a complete list of education tax benefits, including qualified savings bond interest, student loan deductions, and withdrawals from IRAs and college savings plans.

New law raises insurance coverage on bank accounts

For years, bank accounts were FDIC-insured up to $100,000. Then during the recent financial crisis, the insurance limit was increased to $250,000. But this increase was only temporary; it was scheduled to drop back to $100,000 in 2014.

The good news is that the financial reform law just signed permanently sets the FDIC insurance limit at $250,000 per account, per depositor, per bank. The $250,000 coverage applies for each of four categories of ownership: individual, joint, retirement, and trust accounts.

Look into this new 2010 tax credit for your small business

When small business owners think about the recent health care reform, they may be thinking only of its long-term implications. But the legislation actually provides an immediate tax break for qualified small businesses and nonprofit organizations. Beginning this year, the “Patient Protection and Affordable Care Act” offers a tax credit of up to 35% of employer-paid health care costs. Does your business qualify? The answer lies in a little math.

* First, you must have fewer than 25 full-time employees. Keep in mind that owners and their family members who draw a salary are not counted in the total. Neither are seasonal employees working 120 days or less per year. The term “full-time employee” is actually a bit of a misnomer; the IRS is really counting full-time equivalents, or FTEs. To figure your FTEs, add up the annual hours you paid to non-owner, nonseasonal employees (full-time or part-time) and divide by 2,080. If the result is less than 25, you’re ready to move to the next step.
 
* Next calculate your employees’ average wages. Just as in the calculation of full-time workers, you don’t count wages paid to owners, family members, or seasonal workers. After subtracting out the above pay, divide the net figure by the number of FTEs above, and if the result is less than $50,000, you are still in the running for the credit.

* To meet requirement number three, your business must cover at least 50% of the cost of employees’ health insurance. For 2010, you need only pay 50% or more of the single coverage premium even if the employee is enrolled in a family plan. Next year this special rule goes away.

From now through the year 2013, the maximum tax credit is 35% of the employer’s share of the premiums. But only businesses with 10 or fewer full-time employees and average wages of $25,000 or less actually get this rate. The percentage drops as the number of employees or the average pay increases. Another little wrinkle: Beginning in 2014, the maximum credit rises to 50%, but the tax break becomes available only to those businesses that purchase their health insurance through a state exchange. And even then, you can only claim the credit for two years.

Nonprofit organizations that meet the same qualifications mentioned above can receive a maximum credit this year of 25%.

If you’re a small business owner, look into this tax perk as soon as possible. For help in running the numbers, just give us a call

IRS increases audits

As part of its plans to increase audit coverage, the IRS will be doing more correspondence audits – notices mailed to taxpayers that typically focus on a single item on the tax return. Correspondence exams can be as simple as asking about a tax return data discrepancy or requesting a missing form. But the IRS is also using these audits to focus on other issues, such as employee business expenses, the earned income credit, charitable deductions, and the tax credit for buying a home.

If you receive an IRS notice, don’t ignore it. Let us know about it right away. The problem can be resolved in less time and with less fuss if an experienced professional is involved right from the beginning.

Some help? – Small business jobs bill becomes law

A new law signed on September 27 will give small businesses some tax breaks and assistance in getting loans. The law provides a $30 billion fund to encourage community banks to lend to small companies.

 It extends 50% bonus depreciation for new business equipment purchased in 2010 and increases first-year expensing of new and used equipment purchased in 2010 and 2011 to $500,000.

The 2010 deduction for business start-up expenses doubles to $10,000, and self-employed individuals are allowed to deduct the cost of health insurance for themselves and their families in calculating self-employment taxes.

For more information, give us a call.

Tax Rates Over the Years

Tax rates over the years

Tax rates are scheduled to go higher next year, with the top rate once again hitting 39.6%. For a look at tax rates over the years, here’s a partial history of our federal income tax rates for individuals since the income tax was created in 1913.

Federal Income Tax Rates Since 1913

Year              Lowest bracket    Top bracket

1913-1915               1%                   7%

1918                         6%                  73%

1923                         3%                  56%

1925-1928               1.5%                25%

1936-1939                4%                  79%

1944-1945               23%                 94%

1964                        16%                 77%

1971-1981               14%                 70%

1982-1986               12%                 50%

1988-1990               15%                 28%

1993-2000               15%                39.6%

2003-2010               10%                 35%

David Bradsher, CPA  is a Washington DC / Northern Virginia area CPA who works with small business owners and non profit leaders on a monthly basis to provide them with guidance and advice on how to grow their organizations, minimize their tax liabilities and increase their bottom line.