As we approach the end of the calendar year, now is a good time to make sure that your business has taken advantage of changes in tax laws. There are a number of changes that occurred in 2010 that could significantly reduce your business' payroll and income tax liabilities.
In early 2010, Congress passed the Hiring Incentives to Restore Employment Act (HIRE Act), which provides a tax incentive for hiring and retaining new workers. The HIRE Act exemption can be claimed on your company's Form 941 (Employer's Quarterly Federal Tax Return) for any qualified employees to whom you paid wages after March 19, 2010. The credit is equal to the 6.2 percent tax imposed on the qualified employee's wages and tips. The exemption applies to the employer's tax liability only and expires on December 31, 2010. In addition, employers who have hired employees that qualify for the payroll tax exemptions above, and keep those employees on the payroll for at least 52 weeks, may be eligible for a tax credit equal to the lesser of $1,000 or 6.2 percent of the wages paid to the qualified employee during a consecutive 52-week period. This retained worker credit is claimed and taken on the employer's federal income tax return.
This fall, Congress passed the Small Business Jobs Act, which was signed into law on September 27 2010. Several important provisions of the act are retroactive to the beginning of 2010.
One of the provisions of the Jobs Act, which is retroactive to Jan. 1, 2010, is the increase in the Section 179 deduction. The Section 179 deduction is used to write off capital assets in the year of purchase, rather than depreciating them over their useful lives. This allows a business to receive an immediate deduction for the full cost of the asset (subject to limitations) in the year of purchase. The Jobs Act increased the amount of the deduction from $250,000 to $500,000 and raised the phase-out threshold from $800,000 to $2 million. Keep in mind that the total amount of Section 179 deductions a business can take in the year is limited to its earned income, meaning that the business cannot create a loss by using the deduction. Unused Section 179 deductions can be carried over and used in subsequent years, providing there is enough earned income. The increased Section 179 deductions will be available for tax years beginning in 2010 and 2011.
Another retroactive provision in the Jobs Act is the extension of the "Bonus" depreciation provisions, which had expired at the end of 2009. The Bonus depreciation is an immediate deduction of 50 percent of the cost of capital assets purchased and is not limited by the total amount of assets placed into service, or the earned income limitations. The 50 percent Bonus depreciation is taken along with any regular depreciation available on the asset and can be combined with any Section 179 depreciation. Unlike the increased Section 179 deductions, the 50 percent Bonus depreciation is only available for tax years beginning in 2010.
The Jobs Act also raises the deduction limit to $10,000 with a phase-out threshold of $60,000 for start-up expenses incurred when creating or investigating the creation of a new business. This increased deduction is currently only available for start-up expenses incurred in 2010.
There are a number of provisions that take place after the date of the Jobs Act enactment that may provide other tax-saving opportunities. Of note is an increase of an often-underused gain exclusion provision relating to qualified small business stock (QSSB). In a 2009 tax act, the exclusion of gain on the sale of QSSB was increased from 50 percent to 75 percent for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011 which is held for more than five years. The 2010 Jobs Act increases the exclusion to 100 percent for QSSB acquired between September 28, 2010 and Jan. 1, 2011 and held for more than five years. This provision could be a useful investment planning tool.
In addition, the Jobs Act now allows 401(k), 403(b) and 457(b) retirement plans to be rolled over into Roth Ira accounts between Sept. 28 and Dec. 31, 2010. This mirrors the existing rules allowing conversions of traditional IRAs to Roth IRAs and the ability to pay the tax on such conversions in 2011 and 2012.
The greatest uncertainty in tax laws lies in the fate of the tax cuts enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and subsequent legislation. These tax cuts are slated to expire at the end of 2010, and many popular tax cuts will expire and tax rates, deductions, credits and other provisions will revert to where they were prior to EGTRRA. The expiration of these tax acts will have a significant effect on small business as well as individuals.
EGTRRA reduced the individual marginal income tax rates to 10, 15, 25, 28, 33 and 35 percent. If EGTRRA is allowed to expire, these rates are slated to increase to 15, 28, 31, 36 and 39.6 percent for tax years beginning after Dec. 31, 2010. In 2003, JGTRRA reduced the maximum tax rate on capital gains to 20 percent and created a 5 percent capital gains rate for those taxpayers whose marginal tax rates were in the 10 and 15 percent brackets. The 5 percent capital gains rate was subsequently lowered to 0 percent. If JGTRRA expires, the 15 percent capital gains tax rates will increase to 20 percent, with an 18 percent rate if the asset had been held over five years and the 0 percent rate will be replaced by a 10 percent rate (8 percent if held over five years). The increase would affect many transactions, including installment sales, making the collection on these sales taxed at rates in effect during the year of the payment, not the sale.
JGTRRA also reduced the tax rates on qualified dividends to 15 percent (0 percent for individuals in the 10 and 15 percent brackets). The expiration of JGTRRA would tax qualified dividends at the individual's marginal ordinary income rates.
Other tax breaks slated to expire include tax credits for employer-provided child-care facilities, educational assistance program deductions, Cloverdale education savings account contribution limits, student loan interest deduction phase outs, above-the-line deductions for higher-education expenses, itemized deduction phase-out's, dependent care credit limits, marriage penalty relief and lower estate tax levels.
There undoubtedly will be a new playing field come Jan. 1. Now is a great time to plan for a number of different scenarios to mitigate changes that may affect your business and your individual tax planning strategies. There is still time to take advantage of tax laws that are in effect and to plan for tax law changes.
Scott Fields is a partner at Kohn Colodny LLP, a full-service tax and accounting firm with offices in Reno and Carson City. He can be reached at 885-9136 or scottd@kohncolodny.com
