Lexington, KY - For businesses operating on a calendar year, December marks the end of FY10. What can small-business owners do in the next few days to get all of your taxable ducks in a row?
On Sept. 27, 2010, President Barack Obama signed into law the 2010 Small Business Jobs Act.
"The two major components within this act that could affect small businesses reporting on Schedule C are the extension of bonus depreciation and the expansion of Section 179 expensing," said Melissa Hicks, CPA and tax manager/shareholder with Dean Dorton Ford, PSC (www.ddfky.com).
Bonus depreciation had expired at the end of 2009, but with this act, it has been extended through Dec. 31, 2010.
"Bonus depreciation allows businesses to deduct 50 percent of the cost of qualifying property purchased in 2010," Hicks said. "To qualify, the original use of the property must begin with the acquirer."
The property should be placed in service by Dec. 31, 2010, and generally must be one of the following: property with a cost recovery period of not more than 20 years; certain computer software; or certain leasehold improvements.
The 2010 Small Business Jobs Act also expanded Section 179. For 2010 and 2011, a maximum Section 179 deduction of $500,000 is available.
Taxpayers who acquire qualifying property by purchase (as opposed to receiving it as a gift) may be eligible to elect to deduct the cost of the property under Code Section 179 in the year the property is placed in service.
"Qualified property includes all tangible personal property and certain qualified real property improvements," Hicks said. "However, there are certain limitations to this deduction."
The investment limitation means the $500,000 maximum deduction begins phasing out, dollar for dollar, when more than $2 million of qualifying property is placed in service during the year.
The Section 179 deduction is not allowed when $2.5 million of qualifying property is placed in service. For the taxable income limitation, the Section 179 deduction cannot reduce net trade or business income below zero.
"If a taxpayer has a trade or business loss before the Section 179 deduction, then this deduction cannot be utilized," Hicks said.
Another major change for those who file a Schedule C is the deduction of health insurance for the purpose of calculating self-employment taxes. This is applicable for tax years beginning after Dec. 31, 2009.
"Small businesses that cover part of the cost of employee health insurance may be able to deduct a percentage as a general business credit," said Diana L. Hughes, CPA and partner with Hisle & Company (www.hisle-cpa.com).
To qualify, businesses must meet the following requirements: employ fewer than 25 full-time employees or the equivalent; pay average wages less than $50,000; and cover all or part of the cost of the employee health insurance.
"Filers will file form 8941 to calculate the credit and form 3800 to take the credit," Hughes said.
For new businesses that started in 2010, a deduction for startup expenses up to $10,000 is allowed, as long as total startup expenses do not exceed $60,000.
"In prior years, this deduction was capped at $5,000," Hughes said.
There are no major changes for small businesses for Kentucky taxes for fiscal year 2010.
"However, there are a few differences in allowable deductions for Kentucky purposes versus federal purposes to note," Hicks said. For one, Kentucky does not allow bonus depreciation. Also, Section 179 expensing is limited to $25,000 and begins phasing out at $200,000 of investments. If a small business utilizes the Section 199 deduction (Domestic Production Activities Deduction or DPAD), Kentucky has frozen the deduction to 6 percent for 2010 and beyond.
If your small business operates on a cash basis, you may make contributions to certain retirement plans after Dec. 31, 2010, and still deduct the contributions on the 2010 return.
"Cash basis individual taxpayers have until April 15, 2011, to make contributions to traditional IRAs," Hicks said.
If your small business uses the accrual method of accounting, certain income and deductions can be included for 2010 but not received or paid until 2011.
Consult your tax professional for advice on what is includible and deductible.
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