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What’s a Small Business for Tax Rules?

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What’s a Small Business for Tax Rules?

By BarbaraWeltman, Guest Blogger
Published: February 28, 2013

The SBA uses a number of definitions for “small business,” depending on the industry. So, too, does the tax law, which has various definitions of “small business” for different tax breaks. These definitions are based on employees, revenues, expenditures and assets. Confusing? You bet! Here’s a list to help you.

Employee-based definitions

  • DbK retirement plan. This type of qualified retirement plan, which has yet to be utilized because of lack of IRS guidance, combines a pension with a contributory element (like a 401(k) plan). It is limited to companies with 500 or fewer employees.
  • Disabled access credit. A tax credit of 50% of costs between $250 and $10,250 (maximum credit of $5,000) can be claimed for the cost of making a company more accessible to the disabled. The company can have no more than 30 full-time employees during the preceding year; there is also a gross receipts (revenue) test explained later.
  • Employer wage differential credit for activated reservists. Employers with fewer than 50 employees can claim a tax credit for continuing to pay wages to employees called to active duty.
  • Retirement plan start-up credit. A tax credit of up to $500 for the administrative costs of starting a qualified retirement plan can be claimed by a company with no more than 100 employees who have compensation over $5,000 in the preceding year.
  • Savings incentive match plans for employees (SIMPLE) plans. These are retirement plans to which employees and employers both contribute. SIMPLE plans can be used by a business with 100 or fewer employees who received compensation over $5,000 in the preceding year.
  • Simple cafeteria plans. Cafeteria plans are used to offer a menu of fringe benefits to employees. A simple version, which avoids the need for testing for discrimination, can be used for a company with 100 or fewer employees on business days during either of the two preceding years.
  • Small employer health insurance credit. A credit of up to 35% of premiums paid in 2013 by employers can be claimed by a company with no more than 25 full-time equivalent employees (FTEs) with average wages of less than $50,000. The full credit applies for up to 10 FTEs; a reduced credit is allowed for 11 to 25 FTEs.

Revenue-based definitions

  • Accrual method exception for small inventory-based businesses. While, most firms with inventory must use the accrual method of accounting to report their income and expenses, “small” firms can use the cash method. Small firms are those with average annual gross receipts of no more than $10 million in the three prior years (fewer years if the company hasn’t been in business for three years).
  • Bad debts deduction. Small businesses performing services in certain fields (e.g., law, accounting) can write off bad debts on the non-accrual experience method, which means they don’t accrue service-related income expected to be uncollectible. This accounting rule applies only to companies with average annual gross receipts for the three prior years of no more than $5 million.
  • Corporate AMT exemption. Small C corporations are exempt from the alternative minimum tax. This exemption applies only to those with average annual gross receipts of no more than $7 million ($5 million for the first three-year period).
  • Disabled access credit. The credit described earlier can be claimed by a company with gross receipts of no more than $1 million in the preceding year (see the employee definition above).
  • Late filing penalties for certain information returns. Businesses must report certain payments to the IRS by set dates. Reduced penalties for the failure to meet this obligation apply to companies with average annual gross receipts of no more than $5 million for a three-year period.
  • UNICAP rules. These rules impact when expenses can be deducted. There is a small reseller exception for property acquired for resale; the exception applies to companies with average annual gross receipts of no more than $10 million for a three-year period. There is a simplified dollar value last-in, first out (LIFO) method for applying the UNICAP rules; the method applies only to companies with average annual gross receipts of no more than $5 million for a three-year period.

Expenditure-related definition

  • First-year expensing. The cost of machinery and equipment can be deducted upfront rather than depreciated over a number of years if total annual investments in these assets do not exceed a dollar limit. For 2013, the full expensing deduction of up to $500,000 can be claimed as long as purchases don’t exceed $2 million. This dollar limit is reduced for excess purchases; no deduction applies once purchases for the year exceed $2.5 million.

Asset-related definitions

  • Shifting the burden of proof to the IRS. Whether a worker is an employee or an independent contractor or whether compensation is “reasonable” can be shifted to the IRS for a business with a net worth not in excess of $7 million.
  • Small business stock. Gain on the sale of qualified small business stock in certain C corporations acquired after September 27, 2010, and before January 1, 2014, is not taxable if the stock is held more than five years (a partial break applies for stock acquired before or after these dates). The stock is “qualified” only if the corporation’s gross assets do not exceed $50 million when the stock is issued and immediately thereafter.

Conclusion

There are many tax breaks exclusively for small companies. Knowing whether you are eligible for a particular one depends on the tax law’s definition. If you’re unsure, talk with your tax advisor.

About the Author:

Barbara Weltman

Guest Blogger

Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser's Small Business Taxes, J.K. Lasser's Guide to Self-Employment, and Smooth Failing as well as a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for three years in a row. Follow her on Twitter: @BarbaraWeltman.

Comments:

"There are many tax breaks exclusively for small companies. Knowing whether you are eligible for a particular one depends on the tax law’s definition. If you’re unsure, talk with your tax advisor." But in my country, not so much small companies are exempted from tax. I hope the law will be change like USA
Small C corporations are exempt from the alternative minimum tax. This exemption applies only to those with average annual gross receipts of no more than $7 million ($5 million for the first three-year period).
The classification of a business as small is derived from a number of factors. It could be employee based, revenue based, expenditure related or asset related. In order to determine whether you can benefit from the many tax breaks for small businesses, it all comes down to the definition used in the tax rules.
Small businesses with an annual turnover less than $2 million may be able to access a range of tax concessions. This applies whether you operate your business as a sole trader, partnership, company or trust.
Minimum tax exemption for small companies is what we are interested in, so thank you for supporting small companies like us. This article is really very interesting
Are we being too small now infamous slot or not? No, I'm sure of that, the U.S. government is always umbrella to protect small businesses to help boost the world's No. 1 economy alone. Many thanks for sharing this post
we can learn a lot of knowledge from this blog, I did not know so complicated business previously.This is very useful for small business ownner .
I love the idea of shifting the burden of deciding what is reasonable compensation to the IRS. However, I don't know if I trust them to make the right decision based on the law. Either way though this is a great post regarding potential tax breaks for small businesses.
This is a very good article. It broadens the readers' horizon when it comes to small businesses. Thanks for posting.

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