A number of small business tax cuts have been extended into law. The specifics, though, are relatively unknown and rarely discussed. Journalists and pundits sweepingly refer to them all as “the small business tax cuts” rather than naming what each one actually entails. Today, we’ll take a closer look at some of these recent tax cuts and when they come into play for small business owners.
Small Business Health Care Credit
Small business owners are eligible for a new health care tax credit, provided they meet certain eligibility requirements. According to the IRS website, your business:
- Must cover at least 50% of your employees’ health care costs
- Less than the equivalent of 25 full-time workers (thus, a company with 50 part-time workers could be eligible to participate)
- Average annual wages of less than $50,000
Both for-profit and non-profit entities can claim this credit, which “is worth up to 35 percent of a small business’ premium costs in 2010 (25% for tax-exempt employers.)” The deal gets even sweeter in 2014, when 50 percent of premium costs are credited – although the 35 percent figure remains in effect for non-profits. Not sure whether your business qualifies? Use this three step fact sheet to find out.
75% Exclusion Of Small Business Capital Gains Tax
Prior to the American Recovery and Reinvestment Act of 2009, only 50% of capital gains on qualifying small business stock (issued after February 2009) was exempted from taxes. That threshold has since been raised to 75%. The remaining 25% of capital gains are taxed at a “maximum rate of 28 percent”, according to the Tax Policy Center. There are some requirements and restrictions, however.
First: to qualify as a “small business” and become eligible for this exemption, your business must have below $50 million in gross assets and must not operate as an S corporation. Furthermore, the “maximum gain eligible for the exclusion is the greater of $10 million ($5 million for married taxpayers filing separately) less any gain reported on prior tax returns, or 10 times the taxpayer’s cost basis (purchase price plus fees).”
Five-Year Carryback Of Net Operating Losses
In 2009, small business owners received a sorely needed lifeline from the IRS: five-year carryback of net operating losses. This deduction (which allows business owners to offset taxes owed in one year with losses from another) was formerly only allowed for two years at a time. Per the IRS:
“The Worker, Homeownership and Business Assistance Act of 2009 allows most taxpayers to elect a 3, 4, or 5-year carryback period for an applicable NOL or loss from operations to offset taxable income in those preceding taxable years.”
One key requirement for claiming this privilege: the election to use the NOL carryback must be made within six months of a return’s due date.
$10,000 Startup Expense Deduction
Prior to last year, entrepreneurs could only deduct up to $5,000 in startup costs stemming from the launch of a new business. But as part of the Small Business Jobs Act, this deduction was expanded:
“The bill temporarily increases the amount of start-up expenditures entrepreneurs can deduct from their taxes for this year from $5,000 to $10,000, offering an immediate incentive for someone with a new business idea to invest in starting up a new small business today.”
This is directly applicable to your upcoming 2010 tax return. If you launched a business last year, it’s in your best interest to claim as many legitimate deductions (up to the temporarily expanded $10,000) as possible.
0% Capital Gains on Small Business Investments Held 5 Years Or More
We’ve already alluded to the 75% small business capital gains tax deduction enacted in 2009. Last year, though, an even sweeter (albeit temporary) incentive was put forth. In 2010 only, over a million small businesses were eligible to exclude from the capital gains tax investments – as long as they were held for five years or more.
This provision (which was included in the Small Business Jobs Act) affects your 2010 tax return. As of yet, there are no plans to extend this unusually generous allowance into future tax years, although that could change.
100% Expensing For 2011
Beleaguered small business owners have one thing to be happy about in 2011. For this year only, entrepreneurs can utilize “100% expensing” to deduct from income taxes all expenses in “productive capital investments”, including delivery trucks, machines and aircraft. Prior to this policy, the only option was to depreciate the cost of these items over several years (thus spreading out the tax benefit.)
A business that makes a $1 million investment and pays a 35% tax rate could shave $350,000 from its 2011 taxes instead of perhaps $50,000 under current law, Treasury says.
As USA Today explains, the hope is that firms will have “lower taxable income and more money to spend” as a result of the immediate write-off. A preliminary Treasury Department analysis says that some 2 million companies will take advantage, generating “roughly $50 billion in added investment.”
Simplified Cell Phone Deductions
It used to be that deducting cell phone expenses was a burdensome chore for small business owners. Since 1989, cell phones were considered “listed property” by the IRS, meaning that there were all kinds of onerous forms and paperwork to fill out before validly deducting them on income tax returns.
Thankfully for entrepreneurs, this all changed with the Small Business Jobs Act. Per LexisNexis, cell phones are now “de-listed” and thus exempt from the time-consuming requirements of old. Now, “employees will no longer need to keep detailed records to track their cell phone usage” in order to claim deductions.