Tax time is always a challenge, especially if you are filing both individual and business tax returns. Planning all year for utilizing proper tax deductions and setting aside funds to pay taxes is important in any business, regardless of your choice of entity. It is important to make certain you did not miss any opportunities for 2011 and also plan for 2012.
Laws passed back in 2010, such as the Affordable Care Act and the Small Business Jobs Act of 2010, created or expanded deductions and credits that small businesses and self-employed individuals should consider when completing their tax returns for 2011 and making business decisions in 2012.
Fortunately, the marginal individual income tax rates were extended for 2011 and 2012. So what does that mean for your small business? Well, for those who pay the individual rate, the maximum marginal rate will remain at 35 percent. That comes as a relief to small business owners who feared the rate could jump as high as 40 percent.
Small business owners should be aware of the requirement to track W-9 information and issue the 1099s to report any payment over $600 to another business unless that business is a corporation or the payment was made with a credit card. The much discussed 1099K to report all revenue from all credit, debit, gift and third-party transactions including contractors and PayPal has been postponed. Taxpayers should follow the form instructions for reporting their gross receipts or sales. Report items that qualify as a trade or business expense on the appropriate line item of Schedules C, E and F.
The health insurance deduction is a carryover from 2010. Taxpayers can claim the self-employed health insurance deduction if the insurance plan is established under their business and if: They were self-employed and had a net profit for the year, or they received wages from an S corporation in which the taxpayer was a more-than-2-percent shareholder.
There is a Small Business Health Care Tax Credit available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.
Section 179 Expense deduction: In 2011, small businesses can expense up to $500,000 of the first $2 million of certain business property placed in service during the year.
In general, businesses can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property, after the relevant section in the Internal Revenue Code.
For 2012 the maximum Section 179 expense deduction for equipment purchases is $139,000 (down from $500,000 in 2011) of the first $560,000 (down from $2 million in 2011) of business property placed in service during the year. (Barmache & Alford, LLP). You will want to check on the depreciation limits for business vehicles as well, including the section 179 expense deduction and the 50 percent or 100 percent bonus depreciation.
Mileage Rates: The rate for business miles driven is 55.5 cents per mile for 2012, unchanged from the mid-year adjustment that became effective on July 1, 2011.
Work Opportunity Credithas been expanded to provide employers with new incentives to hire certain unemployed veterans. Businesses claim the credit as part of the general business credit and tax-exempt organizations claim it against their payroll tax liability. The credit is available for eligible unemployed veterans who begin work on or after Nov. 22, 2011, and before Jan. 1, 2013 (Barmache & Alford, LLP).
Retirement Plan contribution increases: Employee deferral limits increase for 2012 to $17,000 with a $5,500 catch up provision for any one turning age 50 during the year. For employers with Defined Contribution plans including profit sharing, the maximum contribution limit is $56,000. IRA limits for individuals have not changed. SIMPLE plan limits are unchanged at $11,500.
Estate Tax Relief: It was speculated that the maximum estate tax rate could spike to 55 percent this year. Thankfully, that’s not the case. The top tax rate is 35 percent.
- $5.12 million exemption per individual in 2012.
- The new law will include portability between spouses for the maximum exemption (combined $10.24 million benefit).
According to payroll processor Paychex, there are also some regulatory issues facings small business owners this year.
401(k) disclosures/target date funds: For employers offering 401(k) plans to their workers, regulations requiring disclosures pertaining to fees of the plan will be required; additionally, plans fees for all plan costs including recording keeping and administration will see further disclosure requirements July 1, 2012.
For more information regarding the 2011 and 2012 tax changes, please visit www.IRS.gov/businesses.