Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses and dependents as an above-the-line deduction, without regard to the 7.5% of AGI floor. New for 2010, the deduction can be taken into account in computing self-employment taxes.
Equipment Purchases: If you are in business and purchase equipment, you may make a "Section 179 Election," which allows you to expense (i.e., currently deduct) otherwise depreciable business property. For 2010 and 2011, under a new law just enacted, you may elect to expense up to $500,000 of equipment costs (with a phase-out for purchases in excess of $2,000,000) if the asset was placed in service during 2010. Former law had the numbers at $250,000 for 2010 and $25,000 for 2011. Therefore, between now and the end of the year, if you previously maxed out the old $250,000 amount for 2010, you now have an additional $250,000 you can invest in your business and deduct. Also, new for 2010 and 2011, certain real property can qualify for the expense deduction, but of the $500,000 limitation, only $250,000 can be attributed to qualified real property.
Under another piece of legislation, enacted in December, for purchases after September 8, 2010, and through December 31, 2011, taxpayers can expense all of their business equipment purchases under a provision giving taxpayers 100% bonus depreciation.
In addition, careful timing of equipment purchases can result in favorable depreciation deductions in 2010. In general, under the "half-year convention," you may deduct six months worth of depreciation for equipment that is placed in service on or before the last day of the tax year. (If more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year, however, a "mid-quarter convention" applies, which lowers your depreciation deduction.)
A popular strategy in recent years is to purchase a vehicle for business purposes that exceeds the depreciation limits set by statute (i.e., a vehicle rated over 6,000 pounds). Doing so would not subject the purchase to the statutory dollar limit, $3,060 for 2010; $3,160 in the case of vans and trucks. Therefore, the vehicle would qualify for the full equipment expensing dollar amount. However, for SUVs (rated between 6,000 and 14,000 pounds gross vehicle weight) the expensing amount is limited to $25,000. Note that new legislation enacted in September, revives the additional $8,000 depreciation amount for qualified 50% bonus depreciation property. Such amount is added to the dollar amounts stated above.
NOL Carryback Period: If your business suffers net operating losses for 2010, you generally apply those losses against taxable income going back two tax years. Thus, for example, the loss could be used to reduce taxable income—and thus generate tax refunds—for tax years as far back as 2008. Certain "eligible losses" can be carried back three years; farming losses and qualified disaster losses (for losses arising in taxable years beginning after 2007 in connection with disasters declared after December 31, 2007) can be carried back five years.
Bonus Depreciation: Although originally not in effect for 2010, new legislation enacted in September, for 2010, taxpayers meeting certain criteria can claim a 50% bonus depreciation allowance. This law was made more favorable in December as taxpayers can claim 100% bonus depreciation for assets placed in service after September 8, 2010, and before January 1, 2012. Bonus depreciation is also allowed for machinery and equipment used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials and qualified disaster assistance property. Because bonus depreciation was just extended into 2010 by the new laws, you can take advantage of this for the remainder of 2010.
Electronic funds transfer (EFT) rules now in place. Beginning Jan. 1, 2011, employers must use EFT to make all federal tax deposits (such as deposits of employment tax, excise tax, and corporate income tax). Forms 8109 and 8109-B, Federal Tax Deposit Coupon, cannot be used after Dec. 31, 2010. Payments sent via mail will not qualify as valid payments for payroll tax deposits. This is very important as now the IRS will be assessing many penalties and interest fees where companies do not use an outside payroll service to report the payroll taxes and pay them. Our experience is that Quickbooks when used as an outside payroll service is that often they do not back up their work by paying interest and penalties where things go wrong. Good payroll services will provide this guarantee.
Standard mileage rates up. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 51¢ per each business mile traveled after 2010. That's 1¢ more than the 50¢ allowance for business mileage during 2010. Further, the 2011 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 19¢ per mile, 2.5¢ more per mile than the 16.5¢ for 2010.
Basis overstatement can trigger 6-year limitations period under new regulations. The IRS has issued final regulations under which an understated amount of gross income reported on a return resulting from an overstatement of unrecovered cost or other basis is an omission of gross income for purposes of the 6-year period for assessing tax and the minimum period for assessment of tax attributable to partnership items. The 6-year limitations period applies when a taxpayer omits from gross income an amount that's greater than 25% of the amount of gross income stated in the return. Several courts had held that a basis overstatement is not an omission of gross income for this purpose. In response to these decisions, the IRS issued the new regulations to clarify that an omission can arise in tha t fashion. After it initially issued these regulations as temporary ones, the Tax Court found them to be invalid. How other courts will react to the clarification remains to be seen.
Withholding on government payments delayed. For payments made after Dec. 31, 2011, governments at the federal, state and local levels will have to deduct and withhold tax in an amount equal to 3% of any payments they, the government, make to a person providing property or services. However, the IRS has announced that withholding and reporting requirements will not apply to any payment made by payment card, including credit cards, debit cards, and stored value cards, for any calendar year beginning earlier than at least 18 months from the date further guidance on this subject is finalized. Thus, the new requirements will not apply to payment card payments for the 2012 calendar year.
A district court has concluded that an S corporation shareholder-employee's $24,000 salary in 2002 and 2003 was unreasonably low, and allowed IRS to reclassify as salary over $67,000 in dividend payments to the officer during each of those years. The corporation will also owe employment taxes on the reclassified dividend payments.
This is a long standing compliance issue with IRS, which feels that many service professionals try to minimize Medicare and Social Security taxes by routing what would otherwise be self-employment income through an S corporation and then paying themselves a nominal salary. Since the amount of compensation that an S corporation pays its employee-shareholder is within the employee-shareholder's discretion, he may have an incentive to claim less than a reasonable salary and take from the S corporation other payments (e.g., dividends) that aren't subject to employment taxes.
Unusual opportunity for businesses
tax-related economic stimulus incentives in the 2010 Tax Relief Act. These incentives consist of extended bonus first-year depreciation, a 100% first-year depreciation deduction for qualifying property placed in service after Sept. 8, 2010 and before Jan. 1, 2012, liberalized Code Sec. 179 expensing for 2012, and a one-year "payroll tax holiday" for 2012—a two-percentage-point reduction in payroll/self-employment tax for employees and self-employed individuals.
Bonus Depreciation Extended; Temporary 100% Deduction in Placed-in-Service Year
Under pre-Act law, the Code Sec. 168(k) additional first-year depreciation deduction (also called bonus first-year depreciation) is allowed equal to 50% of the adjusted basis of qualified property acquired and placed in service before Jan. 1, 2011 (before Jan. 1, 2012 for certain longer-lived and transportation property). The additional first-year depreciation deduction is allowed for both regular tax and alternative minimum tax purposes (AMT), but is not allowed for purposes of computing earnings and profits. The basis of the property and the depreciation allowances in the year of purchase and later years are appropriately adjusted to reflect the additional first-year depreciation deduction. A taxpayer may elect out of additional first-year depreciation for any class of property for any taxable year.
In general, an asset qualifies for the bonus depreciation allowance if: • It falls into one of the following categories: property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less; computer software other than computer software covered by Code Sec. 197 ; qualified leasehold improvement property; or certain water utility property.
• It is placed in service before Jan. 1, 2011. (Certain long-production-period property and certain transportation property may be placed in service before Jan. 1, 2012.)
• Its original use commences with the taxpayer. Original use is the first use to which the property is put, whether or not that use corresponds to the taxpayer's use of the property. observation: In other words, the property must be new property in the hands of the taxpayer.
New law. The 2010 Tax Relief Act extends and expands additional first-year depreciation to equal:
• 100% of the cost of qualified property placed in service after Sept. 8, 2010 and before Jan. 1, 2012 (before Jan. 1, 2013 for certain longer-lived and transportation property); and
• 50% of the cost of qualified property placed in service after Dec. 31, 2011 and before Jan. 1, 2013 (after Dec. 31, 2012 and before Jan. 1, 2014 for certain longer-lived and transportation property). (Code Sec. 168(k)(5), as amended by Act Sec. 401(a)) observation: Thus, for example, under the temporary 100% first-year write off, a calendar-year business that buys $1 million-worth of new bonus-depreciation-eligible property this month will be able to claim a $1 million depreciation deduction for it—that is, completely write it off—on its 2010 return.
Observation: Those businesses that bought qualifying property after Sept. 8, 2010, and before the enactment date of the 2010 Tax Relief Act have been handed what is in effect a windfall tax break.
observation: The 2010 Tax Relief Act also extends through 2011 the Code Sec. 168(e)(3)(E)(iv) rule treating qualified leasehold improvement property as 15-year property. Thus, such property is eligible for a 100% first-year write off if placed in service after Sept. 8, 2010 and before Jan. 1, 2012.
caution: The 2010 Tax Relief Act also extends through 2011 the Code Sec. 168(e)(3)(E)(v) rule treating qualified restaurant property as 15-year property and the Code Sec. 168(e)(3)(E)(ix) rule treating qualified retail improvement property as 15-year property. However, under Code Sec. 168(e)(7)(B) and Code Sec. 168(e)(8)(D), these types of property are not treated as qualified property for purposes of the bonus depreciation rules in Code Sec. 168(k) and thus aren't eligible for the new 100% first-year write off.
caution: The 2010 Tax Relief Act refers to the new 100% depreciation deduction in the placed-in-service year as "100% expensing," but the tax break is not to be confused with expensing under Code Sec. 179 , which is subject to entirely separate rules (see below).
observation: Property may be expensed under Code Sec. 179 whether bought new or used. By contrast, property is eligible for the new 100% first-year write off only if it's new.
Rules similar to those in Code Sec. 168(k)(2)(A)(ii) and Code Sec. 168(k)(2)(A)(iii), which provide that qualified property does not include property acquired under to a written binding contract that was in effect prior to Jan. 1, 2008, apply for purposes of determining whether property is eligible for the 100% additional first-year depreciation deduction. Thus under the provision, property acquired under a written binding contract entered into after Dec. 31, 2007 is qualified property for purposes of the 100% additional first-year depreciation deduction assuming all other requirements of Code Sec. 168(k)(2) are met.
First-Year Depreciation Cap for 2011/2012 Autos and Trucks Boosted by $8,000
Under the luxury auto dollar limits of Code Sec. 280F, depreciation deductions (including Code Sec. 179 expensing) that can be claimed for passenger autos are subject to dollar limits that are annually adjusted for inflation. For passenger automobiles placed in service in 2010, the adjusted first-year limit is $3,060. For light trucks or vans, the adjusted first year limit is $3,160 to 11,160. Light trucks or vans are passenger automobiles built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis that are subject to the Code Sec. 280F limits because they are rated at 6,000 points gross (loaded) vehicle weight or less. The applicable first-year depreciation limit is increased by $8,000 (not indexed for inflation) for any passenger automobile that is "qualified property" under the bonus depreciation rules of Code Sec. 168(k) and which isn't subject to a taxpayer election to decline bonus depreciation. Under pre-Act law, qualified property didn't include property placed in service after Dec. 31, 2010 (except for certain aircraft and certain long-production-period property that had, instead, a Dec. 31, 2011 placed-in-service deadline).
New law. The 2010 Tax Relief Act provides that the placed-in-service deadline for "qualified property" is Dec. 31, 2013 (Dec. 31, 2014 for the aircraft and long-production-period property). (Code Sec. 168(k)(2)(A)(iv), as amended by Act Sec. 401(a))
observation: Thus, for a passenger auto that is qualified property under Code Sec. 168(k), (and isn't subject to the election to decline bonus depreciation and AMT depreciation relief), the Act extends the placed-in-service deadline for the $8,000 increase in the first-year depreciation limit from Dec, 31, 2010 to Dec. 31, 2012. illustration: T, a calendar year taxpayer, places a new $40,000 vehicle into service in his business on Jan. 5, 2011. Assume that: (1) the vehicle is an auto that is "qualified property" (and an election to decline bonus depreciation and AMT depreciation relief doesn't apply to the vehicle); and (2) the passenger auto first year allowances remain unchanged for 2011. T is allowed first-year depreciation for 2011 of $11,060 ($3,060 general first year allowance for 2011 plus $8,000). If the vehicle were instead a light truck or van, T is allowed first-year depreciation for 2011 of $11,160 (the $3,160 general first year allowance for 2011 plus $8,000).
Boosted Expensing Amounts for 2012
Under Code Sec. 179, a taxpayer, other than an estate, trust, and certain noncorporate lessors, can elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer's trade or business. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of Code Sec. 179 property placed in service during the tax year in excess of a specified investment ceiling. The amount eligible to be expensed for a tax year can't exceed the taxable income derived from the taxpayer's active conduct of a trade or business. And any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years.
For tax years beginning in 2010 or 2011: (1) the dollar limitation on the expense deduction is $500,000; and (2) the investment-based reduction in the dollar limitation starts to take effect when property placed in service in a tax year exceeds $2,000,000 (beginning-of-phaseout amount). Amounts ineligible for expensing due to excess investments in expensing-eligible property can't be carried forward and expensed in a subsequent year. Rather, they can only be recovered through depreciation. Under pre-Act law, for tax years beginning after 2011, there's a $25,000 dollar limit on expensing and a $200,000 beginning-of-phaseout amount. In general, property is eligible for Code Sec. 179 expensing if it is:
• tangible property that's Code Sec. 1245 property (generally, machinery and equipment), depreciated under the MACRS rules of Code Sec. 168 , regardless of its depreciation recovery period;
• for any tax year beginning in 2010 or 2011, up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property); and
• off-the-shelf computer software, but under pre-Act law, only if placed in service in a tax year beginning before 2012. (Code Sec. 179(d)(1)) Under pre-Act law, for tax years beginning before 2012, an expensing election or specification of property to be expensed may be revoked without IRS's consent, but, if revoked, can't be re-elected.
New law. For tax years beginning in 2012, the 2010 Tax Relief Act increases the maximum expensing amount under Code Sec. 179 from $25,000 to $125,000 and increases the investment-based phaseout amount from $200,000 to $500,000. The $125,000/$500,000 amounts will be indexed for inflation. However, for tax years beginning after 2012, the maximum expensing amount drops to $25,000 and the investment-based phaseout amount drops to $200,000. (Code Sec. 179(b), as amended by Act Sec. 402)
The Act also provides that off-the-shelf computer software is expensing eligible property if placed in service in a tax year beginning before 2013 (a one-year extension). (Code Sec. 179(d)(1)(A)(ii) Finally, it provides that for tax years beginning before 2013 (also a one-year extension), an expensing election or specification of property to be expensed may be revoked without IRS's consent, but, if revoked, can't be re-elected. (Code Sec. 179(c)(2))