The Tax Attic with Jerry Coon — October 7, 2010

Three new provisions to help small businesses

In a previous article, I stated that our present Congress is not a “do nothing” Congress. They have shown that they are not afraid to pass bills and make laws. Not everyone agrees with the bills they have passed and laws they have instituted, but they do keep trying.

Jerry Coon, Enrolled Agent

For example, just last Thursday Congress passed the Small Business Jobs and Credit Act of 2010. This bill has some provisions that will help many small businesses such as self-employed sole proprietors, partnerships and small corporations. Of course, it also has a myriad of provisions that seem to be written to affect about one person or entity in the entire United States. I will highlight the provisions that affect many of my tax clients.

First, and perhaps best, there is a provision that will allow self-employed taxpayers to deduct premiums paid for health insurance for the owner and owner’s family when calculating the taxpayers’ self-employment tax. In light of the cost of health insurance today and where those costs are heading, this is huge. This provision only affects the 2010 tax year, but one year is better than no years. Making this change is perceived as leveling the playing field between employees and self-employed taxpayers.

Currently, if a taxpayer works for a company and the company supplies health insurance for the taxpayer, this is a totally tax-free fringe benefit. The company deducts the premiums paid and the taxpayer does not have to claim the premium as a taxable benefit.

However, up until now that has not been the case for self-employed taxpayers. The self-employed taxpayer has always been allowed to deduct the premium as an adjustment to income so they don’t pay any regular tax on the premium. But they have never been able to deduct the premium when calculating the amount of Social Security tax due on their profit. Social Security tax is calculated at 15.3% of the taxpayer’s profit. So while the employees of the world don’t tax regular tax or Social Security tax on their tax-free fringe, the self-employed taxpayers of the world have been forced to pay a 15.3% tax on their almost tax-free fringe. That has always been perceived as not being fair and now, at least for one year, it is being corrected.

The field is now level for the self-employed and employees. If a self-employed taxpayer pays $10,000 for family health insurance coverage, this provision will potentially save them $1,530 ($10,000 times 15.3%) in taxes. I have a large number of clients that will benefit from this provision.

The second provision that will affect many small businesses is the extension and expansion of Section 179 Expensing. Section 179 Expensing allows small businesses to totally write off or expense the cost of qualifying capital purchases such as machinery and equipment.

Current law allowed up to $250,000 of qualifying purchases to be written off, but there was an upward limit of $800,000 of purchases at which the deduction began to be phased out. The Small Business Jobs and Credit Act increased the $250,000 up to $500,000 and increased the investment ceiling at which the phase-out begins to $2,000,000. It also extended these benefits through the 2011 tax year.

This is great news for 2011 especially. Originally, the Section 179 Expensing, as part of the Bush Tax Cuts, was slated to go back to the old rules of being able to deduct only $25,000 of purchases as of January 1, 2011. Now small businesses have the flexibility to choose to buy equipment this year or next year.

In addition, Congress expanded the definition of qualifying capital purchases to include up to $250,000 of certain leasehold improvements made to real property. The definition of what qualifies is narrow, but it does allow some taxpayers to expense leaseholds that under the previous law might have to be written off over a 39.5-year time span.

The third helping provision extends a provision called the 50% Bonus First-Year Depreciation provision. In 2008 and 2009, small businesses were allowed to write off 50% of qualifying property such as equipment and machinery. There are a few reasons why a taxpayer could not or would not use the Section 179 Expensing provision previously discussed. The 50% Bonus provision would then kick in and the taxpayer would be able to write off at least half of the cost of the property. The 2008/2009 provision did expire on December 31, 2009, so re-upping this for 2010 is a pleasant surprise.

I wonder how many more surprises this Congress has up their shirt sleeves. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service in Rockford. Contact Jerry

at www.actiontaxservice.com.

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