The Small Business Jobs Act of 2010, which was signed into law on September 27, 2010, created new opportunities for businesses to save on their taxes in 2010 and beyond. To claim your share of the $12 billion in tax cuts, you need to act quickly as many breaks only run for a limited time.
Here are some actions that can prove beneficial to you:
Buy new equipment and vehicles
Need a new machine? Want to upgrade your computers? Act now and you can deduct the cost rather than depreciating it over a number of years. You can opt to claim first-year expensing (the Sec. 179 deduction) of up to $500,000 for the cost of equipment and machinery in 2010 and 2011. Key points:
- You must be profitable to benefit from this write-off.
- It applies to both new and pre-owned equipment.
- You can claim first-year expensing whether you pay cash or finance your purchase.
You can also claim "bonus depreciation," which is another first-year write-off for equipment purchases. You can deduct 50 percent of the cost in the first year. This break is only for 2010 (unless Congress extends it beyond this year). Key points:
- Bonus depreciation only applies to new equipment.
- It can be claimed in addition to first-year expensing.
- It can be claimed regardless of profitability. If you have a loss for the year, bonus depreciation can create or increase a net operating loss, which can enable you to use a net operating loss carry-back to obtain a tax refund from prior years.
If you need a business car, light truck or van, a purchase of a new vehicle this year has a higher first-year write-off due to bonus depreciation. For example, if you buy a new van used exclusively for business, you can depreciate the cost in the first year up to $11,160; without bonus depreciation, the depreciation allowance would have been only $3,160.
If you need a cell phone for yourself and/or staff, note that this item is no longer treated as "listed property" for depreciation purposes. The "delisting" of cell phones starting in 2010 makes it easier to write-off their cost.
Make improvements to your space
If you make certain leasehold, restaurant, or retail improvements, you can deduct the cost up to $250,000 rather than depreciating it over 39 years. For two years —2010 and 2011 — these improvements qualify as Sec. 179 property subject to first-year expensing, but the dollar limit on the deduction is capped at $250,000, rather than $500,000. Be sure to determine which types of improvements can qualify for this accelerated write-off. For example, exterior improvements or any internal structural framework do not qualify.
Get medical coverage
If you're self-employed and pay for health insurance, the premiums in 2010 reduce your net earnings from self-employment for purposes of the self-employment tax. The Social Security portion of the tax is 12.4 percent of net earnings up to $106,800; the Medicare portion is 2.9 percent on all net earnings.
If you decide to get coverage now and pay for three months of premiums at $1,000 per month, your savings on the self-employment tax would be over $450. This tax break applies only for 2010, unless Congress extends it.
Note: The premiums continue to be deductible for income tax purposes.
Invest in a corporation
If you buy stock in an eligible small corporation and hold it for at least five years, you won't pay any tax on your profits. To qualify for this important tax break, you must meet all of the following conditions:
- The stock must be issued after September 27, 2010, and before January 1, 2011.
- The corporation must be a C corporation (not an S corporation).
- The assets of the corporation can't be more than $50 million.
- The corporation must be an active trade or business.
If you can't close the deal on time, then half rather than all of your gain will be exempt from capital gains tax as long as you hold the stock for at least five years.
Start a business
If you're thinking of starting a business—your first or your 50th—you can deduct in your first year of business the costs you paid before commencing operations. For instance, the travel costs, research expenses, grand opening invitations and other costs you had before you opened for business are deductible in your first year of business. For 2010, the dollar limit on the deduction for startup costs is $10,000, or double what it was in 2009 and will be in 2011.
Note: Businesses with sizable start-up costs—amounts over $60,000—lose some or all of the initial write-off. These costs can be deducted ratably over 180 months (15 years).
Don't delay acting on any of the new tax rules that could be beneficial to your business. Work with your tax adviser to determine which may apply to you and what needs to be done to nail down the tax breaks.
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com and host of Build Your Business radio. Follow her on Twitter @BarbaraWeltman.