Nolo's Small Business Legal Blog

In an effort to stimulate hiring and increase employment, the Obama administration has proposed a one-year tax credit for businesses that hire new employees in 2010. Under the proposal, any firm that hires a new employee in 2010 would get up to a $5,000 tax credit for each hire. The credit is capped at $500,000 per company. In addition, firms that hire new employees or increase salaries of current employees would be reimbursed for Social Security taxes related to their increased payroll. The Social Security reimbursement would not apply to wages above the $106,800 Social Security maximum to make sure the benefit is tied to -- and encourages the hiring of -- less highly paid workers.

The administration estimates 1 million small businesses will take advantage of the credit, which is expected to cost the government $33 billion. The money would come from savings from the Troubled Asset Relief Program, which officials now think will cost $200 billion less than expected.  

The IRS announced the 2010 standard mileage rates for the use of a car (including a van, pickup, or panel truck). Effective January 1, 2010, the standard mileage rates are:
50 cents per mile for business miles driven 
16.5 cents per mile driven for medical or moving purposes 
14 cents per mile driven in service of charitable organizations 

The 2010 rate for business miles is lower than the rate that was in effect for 2009, which was 55 cents per mile. According to the IRS, the lower rate for business use of a vehicle for 2010 reflects "generally lower transportation costs compared to a year ago," such as the cost of gasoline.
Self-employed people can choose either the standard mileage rate with the rate set annually by the IRS or they can calculate their actual costs of operating a business vehicle. There are certain restrictions on using the standard mileage rate however. You must use that method the first year you use the vehicle in your business, and you can't have claimed accelerated depreciation deductions or have taken any Section 179 deductions for the vehicle.

If you learn only one number in the tax code, it should be Section 179. This humble piece of the tax code is one of the greatest tax boons ever for small business owners. Section 179 doesn't increase the total amount you can deduct, but it allows you to get your entire depreciation deduction in one year, rather than taking it a little at a time over the term of an asset's useful life--which can be up to 39 years. To qualify, the property must be long-term, tangible personal property that you purchase and then use in your business over 50% of the time.
In an effort to jumpstart the economy, the Section 179 limit was increased to a whopping $250,000 for 2009 (from $128,000 in 2007). It is scheduled to go back down to $133,000 in 2010 and then $25,000 in 2011. So if you're planning on purchasing more than $25,000 of eligible property for your business and want to deduct the cost in one year, you should make your purchase before 2011.

See Deduct It! by Stephen Fishman (Nolo) for more information on small business tax deductions.

Most small businesses have at least some concern about the possibility of facing an IRS audit. You may be wondering how the IRS decides to audit, how likely it is that you'll be audited, and what you can do to avoid being one of the unlucky ones. Let's take a look at some of the things that are most likely to draw the attention of the IRS. That way you can take steps to avoid that unwanted attention--or come out of an audit unscathed if you find yourself in the government's crosshairs.
When auditing small business owners, the IRS is most concerned about whether you have done one of the following:
• Underreported your income. Unlike employees who have their taxes withheld, business owners who are not employees have no withholding--and many opportunities to underreport how much they earned, particularly if they run a cash business.
• Claimed tax deductions to which you were not entitled. For example, you claimed that nondeductible personal expenses, such as a personal vacation, were deductible business expenses.
• Properly documented the amount of your deductions. If you don't have the proper records to back up the amount of a deduction, the IRS may reduce it, either entirely or in part. Lack of documentation is the main reason small business owners lose deductions when they get audited.
• Taken business deductions for a hobby. If you continually lose money, or you are involved in a fun activity such as art, photo¬graphy, crafts, or writing and don't earn profits every year, the auditor may question whether you are really in business. If the IRS claims you are engaged in a hobby, you could lose every single deduction for the activity.

For more information on this and other small business tax deductions issues, see Deduct It, by Stephen Fishman.

When you're totaling up your business's expenses at the end of the year, don't overlook these valuable business deductions. Remember, the more tax deductions your business can legitimately take, the lower its taxable profit will be. It's that simple. But you need to know what is -- and isn't -- deductible, and pay careful attention to IRS rules. Here are some of the more common deductible business expenses that you won't want to miss.
1. Expenses of Going Into Business. The costs of getting a business started are capital expenses, $5,000 of which you may deduct the first year you're in business; any remainder must be deducted in equal amounts over the next 15 years.
2. Equipment Purchases. Under Section 179 of the Internal Revenue Code, you can fully deduct up to $250,000 of certain business equipment you purchase in 2009 (subject to a phase-out if you spend more than $800,000). There is also a first-year bonus depreciation deduction in effect for 2009 which allows you to depreciate 50% of the adjusted basis of qualified property purchased during the year. Take advantage of these tremendous tax savings if you can--the Section 179 deduction is scheduled to go down to $133,000 in 2010 and bonus deduction expires at the end of the year.  
3. Auto Expenses. If you use your car for business, or your business owns its own vehicle, you can deduct some of the costs of keeping it on the road. Mastering the rules of car expense deductions can be tricky, but well worth your while.
4. Business Entertaining. If you pick up the tab for entertaining present or prospective customers, you may deduct 50% of the cost.
5. Travel. When you travel for business, you can deduct many expenses, including the cost of plane fare, taxis, lodging, meals, telephone calls, faxes, and tips.
6. Legal and Professional Fees. Fees that you pay to lawyers, tax professionals, or consultants generally can be deducted in the year incurred. However, if the work clearly relates to future years, they must be deducted over the life of the benefit you receive.
7. Bad Debts. If someone stiffs your business, the bad debt may or may not be deductible -- it depends on the kind of product your business sells. If your business sells goods, you can deduct the cost of goods that you sell but aren't paid for. If your business provides services, no deduction is allowed for time you devoted to a client or customer who doesn't pay.
8. Interest. If you use credit to finance business purchases, the interest and carrying charges are fully tax deductible. The same is true if you take out a personal loan and use the proceeds for your business. Be sure to keep good records demonstrating that the money was used for your business.
9. Taxes. Taxes incurred in operating your business are generally deductible. How and when they are deducted depends on the type of tax.
10. Advertising and Promotion. The cost of ordinary advertising of your goods or services -- business cards, yellow page ads, and so on -- is deductible as a current expense. Promotional costs that create business goodwill -- for example, sponsoring a peewee football team -- are also deductible as long as there is a clear connection between the sponsorship and your business.
See Deduct It! by Stephen Fishman (Nolo) for more information on tax deductions for your small business.

Business owners who got extensions last April for their 2008 income tax returns must now face the music. October 15th is the final deadline for filing 2008 income tax returns. Don't have all the money you owe? It doesn't matter--business owners should file a return by this deadline even if they can't pay what they owe to the IRS.

It's always a good idea to make some effort to pay when you file your tax return, even if it's not the full amount you owe. First of all, this will reduce the penalty and interest charges you will incur for late payment. It also puts you in a better position to negotiate with the IRS for additional time. Depending on your circumstances, you may be able to reach an agreement with the IRS to "full pay" within 60 or 120 days--meaning you will come up with all the money you owe the IRS within a 60 to 120 day timeframe. This arrangement buys you a little time if that's all you need and the charges, penalties, and interest you incur during this period will be less than they would be if you have to do a longer term installment agreement.

If you can't do a full pay agreement and you still owe the IRS money, you will probably need to enter into an installment agreement. If you owe the IRS less than $25,000 in taxes, penalties, and interest, you can complete an Online Payment Agreement (OPA) on the IRS's website. Alternatively, you can download Form 9465 from the IRS website and mail it in. If you owe more than $25,000 in taxes, penalties, and interest, you made need to complete a Collection Information Statement, Form 433F, in addition to the installment agreement. This form requests some financial information to assist the IRS in coming up with a payment plan.

For more information on your late payment options, see "Filing Late and/or Paying Late" on the IRS website.  

If your business had a large loss in 2008 and any profitable years in the prior five-year period, you'll want to take advantage of a special one-time refund offer from the IRS. Under a new provision of the American Recovery and Reinvestment Act, small businesses that had a net operating loss (NOL) in 2008 can elect to carry back that loss for up to five years instead of the usual two. This extended NOL carryback can be used only once and is only available to businesses that average $15 million or less in gross receipts for the three-year period ending with the NOL carryback election year.

Eligible small businesses will need to act quickly to take advantage of this one-time offer from the IRS. Individuals--which includes sole proprietors, partners in a partnership, and shareholders in an S corporation--have until October 15, 2009 to elect the three, four, or five-year carryback period. The deadline for calendar year corporations ended on September 15, 2009. The deadlines for fiscal-year taxpayers vary depending on their year-end date. For more information, see IRS Issue Number IR-2009-072.

Do you need a basic bookkeeping program for your small business--something more sophisticated than a pencil and paper system but less complicated than a full-blown accounting program? There's a relatively new online bookkeeping service called Outright that may be just the thing you are looking for. An article in Small Business Trends describes how easy the program is to use. You are asked to track only two things--earnings and expenses. You provide this information and the program helps you figure out your quarterly estimated taxes and business deductions. For many small businesses, it may be the perfect bookkeeping solution, providing essential bookkeeping services while avoiding the headaches and hassles of a program that offers more than you need. It's designed for sole proprietors and single-member LLCs, and it's free (at least for now).            
           

The mileage rates for 2009 are lower than that of the second half of 2008, reflecting the reversal of rising gasoline prices in late 2008, but are still higher than the rates in effect at the beginning of 2008.

Here they are the mileage rates for this year and last:

2009 Mileage Rates

The standard mileage rates for 2009 are:

• 55 cents per mile for business driving, and
• 24 cents per mile for medical or moving purposes.

For those who haven't yet filed taxes for the 2008 tax year, here are the rates for 2008:

2008 Mileage Rates

The standard mileage rates for the first half of 2008 were:

• 50.5 cents per mile for business driving, and
  
• 19 cents per mile for medical or moving purposes.

Because of the increases in fuel prices in mid-2008, the standard mileage rates for the second half of 2008 were:

• 58.5 cents per mile for business driving, and
• 27 cents per mile for medical or moving purposes.

For most businesses, April 17 is the last day to elect to carry back a business operating loss from the tax year 2008. (As we reported back in February in the post Business Loss Carrybacks Extended by Stimulus Package, under the stimulus package, a loss can now be carried back five years instead of two, to be applied against prior year profits.) The April 17 deadline doesn't apply to businesses that file extensions or use a fiscal tax year rather than the calendar year.