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4 New Small Business Tax Surprises

Here are two words small business owners seldom like to see together: “taxes” and “surprise!”  Trying to cope with overwhelming complex tax laws is hard enough without the occasional grenade the IRS tosses across the moat.  But BizBest figures you’d rather know now, before getting a notice in the mail.  Here, then, are tips on four recent or impending tax changes that you’ll want to know about (and one of them is actually good news!):

1)      If your employees earn tips, the IRS has you in its sights (again). The tax agency has launched a new effort to bill employers for Social Security (FICA) and Medicare taxes on tip income reported by employees to the IRS, but not to you.  The genesis of this is an IRS form you probably never heard of:  Form 4137: Social Security and Medicare Tax on Unreported Tip Income.  This is how tip-earning employees tell the IRS about tips they earned but did not report to an employer – including any “unallocated” tips shown on their W-2. And the threshold is low:  Any employee who received cash and charge tips of $20 or more in calendar month and didn’t report that income to you (the employer) must file a 4137. In past years, the IRS didn’t have an easy way to match that income to an employer.  But the form was changed and now requires the employee to include your tax ID number. This, of course, creates a new tax event for you (never mind you didn’t know about it), since you are responsible for paying the employer portion of FICA and Medicare taxes on this income.   IRS is collecting the information from the new 4137 forms it receives, and is sending tax bills or letters to employers telling them how much they owe.  Employers who pay up quickly – usually with the next scheduled payroll tax deposit – are not charged any penalty or interest.

2)      S-Corp business owners who pay themselves extremely low salaries in order to take more profits as lower-taxed dividends are also in the IRS crosshairs these days.  Be aware the IRS might argue that your pay is unreasonably low if it doesn’t come close to standards in your business or profession, and will seek back taxes on the income that it says should have been classified as salary.

3)      And here’s a reason to question the health insurance tax credit for small business that’s received such great fanfare since passage of health insurance form:  If you receive such a credit, it will also count against you by reducing the amount your small business can deduct for health insurance premiums.  Be sure to factor this in when calculating the value of the credit toward purchasing health insurance for your employees.

4)      And finally the good news:  Thanks to 2011 100% bonus depreciation, if your business buys a new heavy (gross vehicle weight over 6,000 pounds) SUV this year, you’ll qualify for a much larger tax break than before.  As long as the SUV is used 100 percent for business purposes, your company can write off the entire cost immediately under the bonus depreciation rule now in place.  Forget the old $25,000 maximum you may have seen as a lid on the amount of an SUV purchase that can be expensed. That doesn’t apply under 2011 bonus depreciation rules.  Both new and used heavy pickup trucks also qualify for full write-off.

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.

Bonus Depreciation Tax Breaks Make 2011 a Year to Buy

If you are thinking of buying new vehicles, equipment, machinery, phones, computers or other technology for your business, 2011 could be the year to do it.  That’s because not one, but two laws passed late last year have greatly increased the amount of your immediate tax write-off for making such purchases.

The so-called Section 179 deduction limit, slated to revert to $25,000, was increased to $500,000, and the total amount of equipment that can be purchased was increased to $2 million (up from $200,000). This includes most new and used capital equipment, and also includes software.  In addition, bonus depreciation was increased to 100 percent on qualified assets (new equipment only). When applying these provisions, Section 179 is generally taken first, followed by bonus depreciation. 

Bonus depreciation, a special depreciation allowance, is a limited-time tax benefit for business purchases of qualified items during 2011, or in some cases 2012 as well.  Basically, bonus depreciation offers a giant tax incentive for businesses to buy new property and other assets now by allowing you to write off (or “expense” in accounting lingo) the entire purchase (100 percent) immediately rather than having to take those write-offs in little pieces over many years (called depreciation). Normally, businesses recover these types of capital investments through annual deductions spread over as many as 20 years. 

Now 100%:  This provision of the Tax Relief Act passed late last year doubles the amount of bonus depreciation allowed – from half of the purchase cost, to the full amount (100 percent) for this year. That’s up from 30 percent a few years ago. In other words, if you buy some PCs, servers, phone equipment, machinery, or all kinds of other qualifying items, you can take the entire amount as a deduction on your 2011 tax return.   

The temporary rule change also makes 50 percent bonus depreciation available for qualified property placed in service during 2012. Some long-lived property and transportation property is eligible for 100 percent expensing if placed in service by the end of 2012. What’s more, there is no cap on the amount you can spend and deduct, and the benefit applies to businesses of any size.

Where Section 179 Fits:  Other benefits available only to small businesses fall under different provisions known as the Section 179 rules.   The maximum amount of property that small businesses could deduct immediately under Section 179 was scheduled to revert to its old limit of $25,000, but that’s now been raised to $500,000. This includes vehicles, machinery, furniture and other equipment.  A detailed list of qualifying types of property is available at IRS.gov.

To qualify for the Section 179 deduction, your property must have been acquired for use in your trade or business. Property you acquire only to produce income, such as investment property, rental property (if renting property is not your trade or business), and property that produces royalties, does not qualify.

When you use property for both business and non-business purposes, you can take the Section 179 deduction if you use the property more than 50 percent for business.  If you use it more than 50 percent for business, multiply the cost of the property by the percentage of business use. Use the resulting business cost to figure your Section 179 deduction.

When to Forego the Bonus: The IRS also ruled recently that you can forego bonus depreciation if you want to.  That’s something you might want to consider if your business has an expiring net operating loss, an expiring capital loss carryover, or you believe that much higher tax rates in the future will make deductions more valuable in later years.

The website Section179.org is a helpful resource for figuring out Section 179 deductions, and covers the details in plain language, including what property qualifies and the many ways that the deduction can impact your bottom line. The site also has IRS tax forms, and tools for you to use, including a free Section 179 deduction calculator.

Copyright © 2000-2011 BizBest® Media Corp.  All Rights Reserved.