If you were one of the many small business owners up in arms when lawmakers slipped into the 2010 health care bill a rule requiring all businesses to file 1099 forms for payments to vendors of $600 or more, you may soon have reason to celebrate. Yesterday, Congress passed a repeal of that rule, and President Obama is expected to sign it.
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The IRS announced this week that taxpayers will have until Monday, April 18, 2011 to file their 2010 tax returns and pay any taxes due. The usual April 15th deadline was extended by three days because Emancipation Day, a holiday observed by the District of Columbia, falls on Friday, April 15th this year. Taxpayers who file for extensions will have until October 17, 2011 to file their 2010 tax returns.
In addition, because of the year-end tax changes signed into law in December 2010, some people will have to wait until mid- or late February before they file their returns. The IRS needs to make changes to its systems before it can process certain types of returns. Taxpayers who can't file their returns until the IRS changes its systems include:
• taxpayers who claim itemized deductions on Form 1040 Schedule A
• taxpayers who claim higher education deductions on Form 8917, and
• teachers who claim a $250 deduction for classroom expenses.
The Tax Relief Act of 2010, signed into law on December, 17, 2010, contains a wide range of income tax, estate tax, and unemployment insurance changes affecting individuals and businesses. For small businesses, the two most significant changes involved bonus depreciation and Section 179 expensing.
Bonus Depreciation Increased to 100% for 2011 and 50% for 2012
Bonus depreciation was first enacted in 2008 as a temporary measure to help our ailing economy. As first enacted and then extended for two years, the deduction was a first-year 50% bonus deduction. It allowed taxpayers to depreciate 50% of the cost of qualified property during the first year the property was placed in service. It was scheduled to expire at the end of 2010.
Under the tax laws passed in December 2010, bonus depreciation is extended and increased to 100 percent for qualified investments made after September 8, 2010 through the end of 2011. In addition, 50% bonus depreciation will be available in calendar year 2012.
Section 179 Expensing Increased to $125,000 for 2012
Section 179 allows you to currently deduct in one year the cost of long-term assets purchased that year instead of deducting the cost over time under regular depreciation rules. For 2010 and 2011, the maximum annual amount you could deduct under Section 179 was $500,000, subject to a phase-out once your total expenditures exceeded $2 million. The annual deduction limit was scheduled to go down to $25,000 in 2012, with a $200,000 overall property value limit. Under the new tax laws passed in December 2010, the Section 179 deduction limit is increased to $125,000 and the overall property value limit to $500,000.
The IRS provided additional guidance this week for small employers who want to claim the new small business health care tax credit for the 2010 tax year. The credit was part of the Affordable Care Act enacted in March and 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 that primarily employ moderate- and lower-income workers.
The new guidance clarifies that the credit is available in situations where small employers cover their workers through insured multiemployer health and welfare plans, or where they subsidize their employees' health care costs through a broad range of contribution arrangements.
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. The maximum credit will increase to 50 percent in 2014.
The maximum credit goes to the smallest employers--those with 10 or fewer full-time equivalent (FTE) employees--paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year.
There is a new IRS form--Form 8941, Credit for Small Employer Health Insurance Premiums--that employers use to claim the credit. The IRS has the instructions to Form 8941 on its website which are designed to help small employers correctly figure and claim the credit.
See the IRS website for more information about the credit, including a step-by-step guide to claiming the credit and answers to frequently asked questions.
The IRS released a draft of the form to be used for the new small business health care credit which is available starting in 2011. Small businesses will use the new Form 8941 to calculate the amount of the credit they are entitled to take. They will then include that amount as part of the general business credit they claim on their income tax return.
The health care credit was part of the Affordable Care Act passed in March. It is generally available to small employers that contribute an amount equal to at least half the cost of single coverage for health insurance for their employees. It is aimed at helping small businesses that employ moderate- and lower-income workers. For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by the employer; it will increase to 50 percent of premiums paid in 2014. Businesses with 25 or more full-time employees or that pay average wages of $50,000 or more per year are not eligible to use the credit.
For more information on the health care credit and to see a draft of Form 8941, go to the IRS website.
- landlords who obtain substantially all of their rental income from renting their principal residence on a temporary basis
- landlords whose annual rental income is less than a minimum amount (to be established by the IRS), and
- other investor-landlords for whom complying with the reporting requirements would cause hardship. The IRS will adopt regulations providing guidelines on what constitutes a hardship. The IRS can impose monetary penalties on landlords who fail to comply with the reporting requirements. The penalty is $250 for each 1099 you intentionally fail to file. The penalty is less if the failure is not intentional, ranging from $30 to $100, depending on how quickly you fix the error.
- For more information on this and other landlord tax issues, see Every Landlord's Tax Deduction Guide, by Stephen Fishman (Nolo).
On September 27th, President Obama signed into law the Small Business Lending Fund Act of 2010. The law creates a lending fund for small businesses and also includes important tax breaks for small businesses. Some of the key tax breaks include:
Section 179 deduction increased. The Section 179 depreciation limit was increased from $250,000 to $500,000 for 2010 and 2011. Under this provision, small businesses can immediately deduct up to 100% of the cost of new or used equipment purchased in 2010 or 2011 up to the $500,000 limit. This includes any business items such as computers, trucks, machinery, and office furniture. The annual phase-out threshold for total equipment purchases was increased to $2,000,000.
Bonus depreciation extended. First-year bonus depreciation was extended for 2010 and 2011. This allows businesses to immediately deduct up to half of the cost of new business property purchased and placed in service in 2010 and 2011.
Start-up cost deduction increased. The start-up cost deduction for small businesses was increased from $5,000 to $10,000 for 2010 only. The phase-out threshold for the deduction was increased to $60,000 from $50,000.
New health insurance deduction for self-employed. When calculating their self-employment taxes and income, self-employed people can deduct the cost of health insurance they pay for themselves and their families (including their spouse, dependents, and any children under age 27).
Cell phones no longer listed property. Beginning with tax year 2010, cell phones are no longer considered "listed property" for IRS purposes. This means cell phones can be deducted without the burdensome documentation required for listed property.
For more information, see the White House press release on the new tax law.
When you lease a car, you are paying rent for it--a set fee each month for the use of the car. At the end of the lease term, you give the car back to the leasing company and own nothing. As a general rule, leasing a car instead of buying it makes economic sense only if you absolutely must have a new car every two or three years and drive no more than 12,000 to 15,000 miles per year. If you drive more than 15,000 miles a year, leasing becomes an economic disaster because it penalizes you for higher mileage.
There are numerous financial calculators available on the Internet that can help you determine how much it will cost to lease a car compared to buying one. Be careful when you use these calculators--they are designed based on certain assumptions, and different calculators can give different answers. For a detailed consumer guide to auto leasing created by the Federal Reserve Board, go to the Board's website at www.federalreserve.gov/pubs/leasing.
For more information on deducting car and local travel expenses, see Deduct It! Lower Your Small Business Taxes, by Stephen Fishman (Nolo).
One of the most powerful weapons in the IRS arsenal is the hobby loss rule. Under this rule, only taxpayers engaged in a bona fide business--as opposed to a hobby--can take business deductions. This means you need to be regularly engaged in an activity and your primary purpose must be to earn a profit. You don't have to show you earn a profit every year. But making a profit must be your primary purpose. Your business can be full time or part time, as long as you work at it regularly and continuously. In contrast, if the IRS decides that you are indulging a hobby rather than operating a business, you will face some potentially disastrous tax consequences. You may still be able to deduct some of your hobby-related expenses but there are serious restrictions and limitations on these deductions.
The IRS has established two tests to determine whether someone is in business. One is a simple mechanical test that looks at whether you have earned a profit in three of the last five years. The other is a more complex test designed to determine whether you act like a business. Under this test, the IRS looks at certain objective factors to determine whether you are behaving like a person who wants to earn a profit. The most important of these are that you act like you're running a business, you have a certain amount of expertise in the area, and you spend sufficient time and effort on the activity.
For more information, see Home Business Tax Deductions; Keep What You Earn, by Stephen Fishman (Nolo).