|Dear Paul, |
Have You Done Your 2010 Tax Planning?
The 2010 tax filing season is upon us! However, there is still some time to do that tax planning to lower that corporate tax bill. Although congress could still act before the year is out to make additional tax law changes, here are a few of the changes for 2010 that are currently in effect.
Standard Mileage Rates: Beginning January 1, 2010, the standard mileage rates for the use of a car will be: 50 cents a mile for all business miles driven, down from 55 cents a mile in January 2009.
Depreciation and Section 179 Expense:
The maximum section 179 deduction you can elect for property you placed in service in 2010 is $500,000, increased from $250,000 in 2009, by the small business jobs act, for qualified section 179 property. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,000,000. So when your purchases reach $2,500,000 and above you no longer get the deduction. The definition of qualified section 179 property will include qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for tax years beginning in 2010 and 2011.
Under the American Jobs Creation Act of 2004, businesses cannot take a first year Section 179 expenses deduction of more than $25,000 for an SUV weighing over 6000lbs. The business would depreciate the remaining cost. The new limit does not affect other types of property where the taxpayer decides to expense the cost instead of depreciating the property.
The total depreciation deduction (including the section 179 expense deduction) you can take for a passenger automobile (that is not a truck or a van) you use in your business and first placed in service in 2010 is increased to $3,060. The maximum deduction you can take for a truck or van you use in your business, that weighs less than 6000lbs, and first placed in service in 2010 is increased to $3,160.
There are many things business owners can do to lower their tax bill in 2010. Here are a few ideas you may want to consider:
Net operating Losses: If 2010 was not a good year for your business and you incurred a loss for the year, you may be able to take advantage of net operating loss carryback provision in the tax code. This provision allows you to carryback between 2 and 5 years or forward upto 20 years, a loss from the current year. This can allow you to get back some of those taxes you previously paid to the IRS in the last few years or e that tax bill in the future. A great option when cash flow is tight!
Contribute to a Retirement Benefit Plan - Your contributions as an owner or employee are tax deductible from your current income, thus reducing your present taxes. A contribution to a tax advantaged retirement plan must come from earned income, meaning compensation for active work. An investor in a business, who isn't active, cannot deduct contributions to the retirement plan. Income generated by your investments accumulates tax free until withdrawn. Types of plans include: IRA, Simple IRA, SEP, 401(k), Simple 401(k), Defined Benefit Plan, Profit Sharing Plan. In some plans, such as a SEP plan, a participant can contribute up to 25% of their compensation, with a maximum contribution of $49,000. That's a pretty good contribution to your retirement!
Contribute to a Health Plan
- Tax rules for health benefits vary, depending on whether or not a business is incorporated. For C-
Corporations medical costs, including insurance premiums paid for by owners and employees are entirely tax deductible to the corporation and tax free to the recipients.
Purchase in 2010, Those Items Needed for the New Year - This will allow you to realize the tax savings from the purchase in 2010 versus 12 months from now. These deductions can really add up, especially if you take advantage of the IRS Section 179 mentioned above. Provided the listed property is used 50% or more of the time for business. This produces an immediate write-off of capital assets. Some typical assets that qualify for Section 179 include: manufacturing and R&D equipment, some vehicles, cell phones, computers, off-the shelf software. For example, if you buy a $1,000 computer and use it for your business, you could deduct the full cost from your taxes. If you were in the 28% federal income tax bracket, this would save you $280 in income tax. In effect, you'd be getting a 28% discount on the computer.
Purchase a Hybrid or Alternate Fuel Vehicle - You are allowed a limited tax credit for the purchase of a hybrid or alternate fuel vehicle. The credit can range from a few hundred dollars for vehicles like the 2011 BMW Active hybrid 750i, to $2,350 for the Nissan Altima hybrid. All hybrid vehicles manufactured by Honda, Toyota, or Lexus no longer qualify for the credit as of January 1, 2009. Please note that if your vehicle is a depreciable business asset, you must reduce the cost of the vehicle by any section 179 deduction before figuring the credit. Consumers seeking the credit may want to buy early since the full credit is only available for a limited time. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th hybrid passenger automobile or light truck or advance lean burn technology motor vehicle. For each subsequent quarter after the 60,000 mark is achieved, the credit decreases approximately 50%.
Domestic Production Activities Deduction - A business owner may claim a deduction against gross income for its qualified production activities. This deduction can be as high as 6% of its domestic production activities. Some examples of domestic production activities include: construction, engineering and architectural services, sale of computer software produced in the United States, food and beverage production, film production and electricity production and distribution.
Work Opportunity Credit
- This credit provides businesses with an incentive to hire individuals from targeted groups that have a particularly high unemployment rate or other special employment needs. An employee is a member of a targeted group if he or she is a: Long-term family assistance recipient, qualified recipient of temporary assistance for needy families (TANF), qualified veteran, qualified ex-felon, designated community resident, vocational rehabilitation referral, summer youth employee, food stamp recipient, or SSI recipient. In 2009, the credit was extended to cover unemployed veterans and disconnected youth. This credit ranges from 25% to 50% of the wages paid during the first two years of employment. The percentage deduction is based on the number of hours worked by those certified groups listed above.
Overlooked Deductions - Many business owners fail to take advantage of all the tax deductions available to their business. Here are a few of the more commonly overlooked tax deductions you should be aware of:
- Business travel expense
- Inventory shrinkage
- Accounting fees for tax preparation services
- Bank service charges
- Bad debt expense
- Business related books, magazines, seminars, association dues
- 50% of self employment tax
- Appreciation on property donated to charity
- Trade or business tools with life of one year or less
As a business owner, it's in your best interest to plan for your 2010 tax filing. There are some changes in the tax law that could impact your business. Taking the time now to understand these tax law changes, taking advantage of some of the tax saving ideas above, and ensuring that you do not overlook any tax deductions for your business can have a positive impact on your bottom line! If you would like more information on these tax planning ideas or any others please give us a call!
Note: The information contained in this material represents a general overview of tax regulations and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.
Paul J. Beckert MBA, CPA
Pinnacle Business Solutions
Key Points of Interest
The maximum section 179 deduction you can elect for property you placed in service in 2010 was increased to $500,000.
The domestic production activities deduction allows businesses to deduct upto 6% of qualified production activities income.
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