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The Clock Is Ticking on New Law Tax Breaks

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The Clock Is Ticking on New Law Tax Breaks

By BarbaraWeltman, Guest Blogger
Published: October 21, 2010

There have been a number of major pieces of federal legislation this yea;the HIRE Act, the Patient Protection and Affordable Care Act, and the Small Business Jobs Act--creating tax opportunities specifically for small businesses. However, you must act fast to benefit from many of these breaks. Here are some key provisions you may want to act upon by the end of this year before these breaks expire.

Start-up costs


If yo-re thinking of starting a business but have-t made a move yet, now is a good time to act. The tax law lets you deduct in your first year of business the start-up costs that you incurred before you opened your doors. These costs can include ads for the busines' opening, fees to consultants for professional services, and travel to secure prospective suppliers and distributors.

Usually, the first-year write-off is capped at $5,000, with additional amounts deducted ratably over 180 months (15 years). However, for costs in 2010 only, the dollar limit is doubled to $10,000 (additional amounts must still be deducted over 180 months).

Note: Significant start-up costs (over $60,000) can mean little or no upfront deductions.

Self-employed perso's health care costs


If yo're self-employed and pay for your health insurance, you can fully deduct the cost as a personal expense, but still pay self-employment tax (the tax that covers your Social Security and Medicare obligations) on these amounts. For 2010, however, your premiums are deductible for self-employment tax purposes. If you have't bought coverage yet, you might want to do s'to gain both the health coverage protection as well as the tax savings.

For example, if you pay premiums of $1,000 per month, yo'll save about $150 in self-employment tax each month on these premiums. It remains to be seen whether Congress extends this favorable tax treatment after 2010.

Hiring new workers


While the decision to hire a new employee is primarily a business decisio'you must have a need for the additional help and be able to afford the cos'you may be able to reduce your out-of-pocket costs for adding to your payroll with a tax break. Under the HIRE Act, you can enjoy a payroll tax holiday through the end of 2010. This means you won't pay the employer share of Social Security taxes (6.2% on wages up to $106,800).

To qualify, you must hire someone who has not worked more than 40 hours during the 60 days prior to the date they go on your payroll. (You must have the worker sign Form W-11, HIRE Act Employee Affidavit, to attest to this fact.) And the worker cannot be another owner or someone related to an owner.

Bonus. If you retain the worker on your payroll for 52 consecutive weeks, you'll be entitled to a tax credit of $1,000 on next year's return.

You can learn more about these tax rules from the IRS.

Note: If you hire workers from certain disadvantaged groups, such as ex-felons and long-term welfare recipients, you must choose between the payroll tax holiday and the work opportunity credit. The credit, which is usually up to $2,400, applies for the hiring of unemployed veterans and disconnected youth only through the end of 2010.

Buying equipment and machinery


If your company needs to upgrade equipment or acquire additional items, now is the time to act. Usually you have to spread deductions for the cost of these items over a number of years, but there are two breaks to help you write off some or all of the costs in the year you buy them:

  • First-year expensing allows you to deduct up to $500,000 of the cost of equipment (including off-the-shelf software) in the year you put the items to use (typically the same year you buy them). This rule applies for both 2010 and 2011.
  • Bonus depreciation allows you to deduct half the cost of the items. This is in addition to first-year expensing and a regular depreciation allowance. This rule only applies through the end of 2010 (unless Congress extends it again).

Details about these rules will be in IRS Publication 946, How to Depreciate Property, which has yet to be revised for 2010.

Buying cars, light trucks, or vans


If you need a business vehicle and buy it rather than lease it, your depreciation allowance is capped by a dollar limit (in 2010 the cap is $3,060 for passenger cars and $3,160 for light trucks and vans purchased this year). However, because of bonus depreciation, you can add another $8,000 to the dollar limit. This means you can write-off up to $11,060 for the cost of a new car used 100% for business. This rule applies only for 2010.

Leasehold improvements


If you make certain improvements to realty you lease, or to a restaurant or retail establishment, usually the costs must be depreciated over 39 years. However, now you can write off up to $250,000 of the costs as a first-year expensing deduction. This rule applies for both 2010 and 2011.

Bottom line


Tax impact should never be the determining factor in making business moves, but it could be an important tipping point. With only a short time until the end of the year, it's wise to meet with a tax advisor as soon as possible to discuss these and other short-lived tax breaks that could be helpful in your business.

Barbara Weltman is an attorney, author of several business books including J.K. Lasser's Small Business Taxes, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and her monthly e-newsletter Big Ideas for Small Business®; both are available at www.barbaraweltman.com, and host of Build Your Business Radio. Follow her on Twitter at twitter.com/BarbaraWeltman.

About the Author:

BarbaraWeltman
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.

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