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Small Business Update: Depreciation and IRC Section 179 Deductions

The Small Business Jobs Act of 2010, signed into law September 27, 2010, extends "bonus" depreciation rules that had expired at the end of 2009, and makes big--but temporary--changes to the Internal Revenue Code (IRC) Section 179 deduction rules. If you're a small business owner, you need to be aware of these changes. Keep in mind that you have just a few short months to take advantage of the increased 2010 limits.

Additional first-year depreciation
If you're a business owner, you probably know that you're allowed to deduct the cost of capital assets that you purchase for your business. Typically, part of the cost is deducted each year based on the useful life of the property, according to a depreciation schedule. The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 allowed an additional "bonus" 50% first-year depreciation deduction for qualifying property placed in service during 2008 and 2009. This additional depreciation deduction was allowed for purposes of the alternative minimum tax (AMT) calculation, as well as for calculating regular tax. Effectively, this additional first-year depreciation enabled business owners to significantly accelerate the deductions that resulted from capital expenditures.

The good news is that the Small Business Jobs Act extends the additional first-year depreciation deduction for one year to apply to qualified property acquired and placed in service during 2010. The bad news is that you only have through the end of the year to purchase this equipment and place it in service to qualify for the "bonus" 2010 depreciation.

IRC Section 179 rules
IRC Section 179 allows you to elect to deduct (or "expense") the cost of depreciable tangible personal property that you acquired for use in your business in the year that you purchase it, rather than over time through depreciation deductions.

Since 2003, several pieces of legislation have temporarily expanded the limits that apply to Section 179. Most recently, the Economic Stimulus Act of 2008, the American Recovery and Reinvestment Act of 2009, and the Hiring Incentives to Restore Employment (HIRE) Act of 2010 increased the maximum amount that can be expensed to $250,000 for tax years beginning in 2008, 2009, and 2010. The $250,000 cap was reduced if the total cost of qualifying property placed in service during the year exceeded $800,000 (the cap is phased out dollar-for-dollar to the extent that total costs exceed the limit). For 2011, the dollar limit amount and threshold at which the limit would be reduced were scheduled to drop to $25,000 and $200,000, respectively.

Effective for 2010 and 2011, however, the Small Business Jobs Act increases the maximum amount that may be expensed under IRC Section 179 to $500,000, which is reduced when the total cost of qualifying property placed in service during the year exceeds $2 million. Additionally, the Act also temporarily expands the definition of property that qualifies for a deduction under IRC Section 179 to include some real property, including certain improvements made to nonresidential buildings and retail property, as well as qualified restaurant property. However, the maximum Section 179 expense limit that applies to real property is $250,000.

This article was provided by Forefield and distributed by Lawrence Sprung.

The Small Business Jobs Act of 2010

On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (H.R. 5297). The legislation contains several provisions designed to ensure that small businesses have access to adequate credit. The Act also contains targeted short-term tax relief for small businesses.

Specific tax changes include:

Increased IRC Section 179 expense limits-- Effective for 2010 and 2011, the maximum amount that a business is able to expense under IRC Section 179 is increased to $500,000 (without the legislation, the expense limit would have been $250,000 for 2010 and $25,000 for 2011). The $500,000 limit is reduced if capital expenditures exceed $2 million. The Act also temporarily expands the application of Section 179 to up to $250,000 of certain real property (for example, qualified restaurant property).

First-year "bonus" depreciation extended-- The Act extends the additional 50% first-year depreciation deduction that was in effect for 2008 and 2009 for one year, to qualified property acquired and placed in service during 2010.

Small business stock exclusion increased-- The Act temporarily increases the exclusion percentage for qualified small business stock purchased by individuals to 100%, and does not treat the excluded gain as an alternative minimum tax preference item. Therefore, subject to certain limits, you'll pay no regular tax or alternative minimum tax on the sale of qualified small business stock acquired at original issue after September 27, 2010, and before January 1, 2011, provided you hold the stock for at least five years.

Small businesses get enhanced general business credit-- Eligible small businesses (generally, non-publicly traded corporations, partnerships, or sole proprietorships with gross receipts averaging $50 million or less) will be able to carry back excess general business credits up to 5 years (instead of 1) in 2010, and will be able to use the general business credit to offset both regular and alternative minimum tax liability.

Health insurance costs will reduce self-employment tax-- If you're self-employed and pay health insurance premiums for you or your family, you get a break on your 2010 self-employment tax (the tax that you calculate on Form 1040, Schedule SE). That's because, for 2010 only, the deduction you get for the cost of health insurance for yourself and your family will apply in calculating your earnings for purposes of self-employment tax as well as in reducing your income for income tax purposes.

Cell phones no longer listed property-- Effective 2010, cell phones are not considered listed property, significantly reducing the substantiation rules and depreciation limits that apply when cell phones are used for business purposes.

New reporting requirements for rental property expenses-- With some exceptions, starting in 2011, if you receive rental income from real property, you'll be required to file an information return (Form 1099) when you make payments totaling $600 or more to a service provider (such as a plumber, painter, or accountant) for rental property expenses.

Portion of nonqualified annuity can be annuitized-- Beginning in 2011, if you have a nonqualified annuity (an annuity that is held outside of a qualified retirement plan or IRA), you can annuitize only a portion of the annuity, provided the annuitization period is for 10 years or more, or is for the lives of one or more individuals. The portion of the annuity or contract that is annuitized will be treated as a separate contract, and the investment in the annuity will be allocated on a pro-rata basis.

This article was provided by Forefield and distributed by Lawrence Sprung.

Simple Cafeteria Plans for Small Businesses

Background
A cafeteria plan can enable employees of a business to choose from an array of benefits and, potentially, to customize a benefits package that is based on their individual needs. However, cafeteria plans are subject to a number of nondiscrimination rules, and separate nondiscrimination rules may apply to the individual benefits offered through a cafeteria plan as well. These nondiscrimination rules are generally difficult for small businesses to satisfy; that's because in companies with few employees, it's much more likely that benefits paid to highly compensated and key employees will be too high as a percentage of total benefits paid. As a result, there has historically been little incentive for small businesses to set up cafeteria plans for their employees.

Health-care reform legislation signed into law in 2010 (the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010) established a new "simple cafeteria plan" for small businesses beginning in 2011. An eligible small employer who establishes and maintains a simple cafeteria plan will be treated as automatically meeting the nondiscrimination rules that would otherwise apply if the plan satisfies minimum eligibility, participation, and minimum contribution requirements. If all conditions are met under this safe harbor, not only are the discrimination rules related to the cafeteria plan itself considered satisfied, but also the separate discrimination rules that apply for individual qualified benefits available under the plan including group term life insurance, group health insurance, and benefits under a dependent care assistance program.

Eligible employers
To be eligible for the safe harbor provision, a business cannot have employed an average of more than 100 employees on business days during either of the two preceding years. If an eligible employer establishes a simple cafeteria plan for employees, and maintains the plan without interruption, the employer will continue to qualify for the simple cafeteria plan until the employer employs an average of 200 or more employees on business days in a preceding year.

Caution: For purposes of determining employer eligibility a year may only be taken into account if the employer was in existence throughout the year. If an employer was not in existence throughout the preceding year, the determination is based on the average number of employees that the employer reasonably expects to be employed on business days in the current year.

Employee eligibility requirements
All employees (including the small business owners themselves) generally must be eligible to participate in the cafeteria plan, and each eligible employee must be able to elect any benefit available under the plan (subject to the terms and conditions that apply to all participants).

A plan can exclude:

  • Employees who have not attained the age of 21 (or a younger age provided in the plan) before the close of a plan year,
  • Employees who have fewer than 1,000 hours of service for the previous plan year,
  • Employees who have not completed one year of service with the employer as of any day during the plan year,
  • Employees who are covered under a collective bargaining agreement if the benefits covered under the cafeteria plan were the subject of good faith bargaining between employee representatives and the employer, or
  • Employees described in IRC Section 410(b)(3)(C) relating to nonresident aliens working outside the United States.

An employer may select a younger age and shorter service requirement, but only if such younger age or shorter service requirement applies to all employees.

Minimum contribution requirement
The employer must provide a minimum contribution for each employee that can be applied toward the cost of any qualified benefit (other than a taxable benefit) offered under the plan. There are two methods to meet the minimum contribution requirement:

Nonelective contribution method: An amount equal to at least 2 percent (a uniform percentage must be used) of each employee's compensation for the plan year, determined without regard to whether an employee makes a salary reduction contribution under the cafeteria plan.
Minimum matching contribution: The lesser of (1) 200 percent of the amount an employee elects to contribute via salary reduction for the plan year or (2) 6 percent of the employee's compensation for the plan year.

Tip: A simple cafeteria plan is permitted to provide for matching contributions in addition to the minimum required but only if matching contributions with respect to salary reduction contributions for any highly compensated employee or key employee are not made at a greater rate than the matching contributions for any nonhighly compensated employee.

This article was provided by Forefield and distributed by Lawrence Sprung.

Interest Rates Drop Slightly on Some Federal Student Loans

Loans issued on or after July 1, 1998 through June 30, 2006
If you have a federal Stafford or PLUS Loan issued July 1, 1998 through June 30, 2006, the interest rates on these loans reset every July 1. Beginning July 1, 2010, the new interest rates are 2.47% for Stafford Loans in repayment status (down from 2.48%); 1.87% for Stafford Loans in school, grace period, or deferment status (down from 1.88%); and 3.27% for PLUS Loans in repayment status (down from 3.28%). These new rates will be in effect through June 30, 2011, when they will reset again.

Federal loan consolidation
If you have more than one of these variable rate federal student loans, you can convert your variable interest rate to a fixed interest rate by consolidating your loans under the federal government's loan consolidation program.

The interest rate on a consolidation loan is a fixed rate that's equal to the weighted average of the current applicable interest rates on the loans being consolidated, rounded up to the nearest 1/8th of a point (and capped at 8.25%). For example, suppose you have three separate variable rate Stafford Loans that you're currently repaying. If you consolidate them, your new fixed interest rate for the life of the loan would be 2.5% (2.47% rounded up to the nearest 1/8th of a point). Lowering your interest rate can potentially save you hundreds or thousands of dollars over the life of the loan.

There are some things to keep in mind about loan consolidation:

You can only consolidate your loans once, so if you did so previously, you can't do it again
You can't add private student loans into a federal consolidation loan
If you're still in school, you can't consolidate your loans--you must wait until you graduate
If you are eligible to consolidate your loans, you'll need to go through the Federal Direct Loan Consolidation program. For more information, visit www.loanconsolidation.ed.gov.

Loans issued on or after July 1, 2006
If you have an unsubsidized Stafford Loan or PLUS Loan issued on or after July 1, 2006, your loan will have a fixed interest rate for the life of the loan. For unsubsidized Stafford Loans ("unsubsidized" means the federal government does not pay the interest while you are in school or during grace and deferment periods; these loans are not based on financial need), the interest rate is 6.8%. For PLUS Loans, the interest rate is 7.9%.

However, for subsidized Stafford Loans ("subsidized" means the federal government pays the interest while the borrower is in school and during grace and deferment periods; subsidized loans are based on financial need), the interest rate for the period July 1, 2010 through June 30, 2011 is 4.5% (the rate will decrease to 3.4% for the period July 1, 2011 through June 30, 2012).

Summary
The following table highlights the interest rates on different types of federal student loans.

Issued July 1, 1998 through June 30, 2006

Stafford Loan: Subsidized:
2.47% for loans in repayment (down from 2.48%)
1.87% for in-school, grace period, and deferment status loans (down from 1.88%)

Stafford Loan: Unsubsidized:
Same as subsidized Stafford Loan

PLUS Loan:
3.27% (down from 3.28%)

Issued on or after July 1, 2006

Stafford Loan: Subsidized:
4.5% for loans disbursed on or after July 1, 2010 through June 30, 2011
3.4% for loans disbursed on or after July 1, 2011 through June 30, 2012

Stafford Loan: Unsubsidized:
6.8% fixed

PLUS Loan:
7.9% fixed

This article was provided by Forefield and distributed by Lawrence Sprung.

Health-Care Reform--Fact vs. Fiction

The claim: Beginning in 2011, you'll be taxed on the value of your employer-provided health insurance
There are several e-mail campaigns making their way around right now claiming that, beginning in 2011, taxable income on Forms W-2 will be increased to reflect the value of employer-provided health insurance. A typical e-mail warns: "You will be required to pay taxes on a large sum of money that you have never seen. Take your last tax form and see what $15,000 or $20,000 additional gross does to your tax debt. That's what you'll pay next year. For many it also puts you into a new higher bracket so it's even worse. This is how the government is going to buy insurance for the 15% who don't have insurance and it's only part of the tax increases."

The facts:
While it's true that, beginning in 2011, the health-care reform legislation requires employers to begin reporting the cost of employer-provided health-care coverage on an employee's Form W-2, the cost is included for informational purposes only, to show employees the value of their health-care benefits. The amount reported is not included in income, and will not affect your tax liability.

The claim: Beginning in 2013, a new federal sales tax will apply to the sale of a home
The claim is that, beginning in 2013, all real estate sales will be subject to a new 3.8% federal sales tax. The e-mails making this claim generally contain some variation of the following text: "Under the new health-care bill--did you know that all real estate transactions are now subject to a 3.8% sales tax? The bulk of these new taxes don't kick in until 2013 … If you sell your $400,000 home, there will be a $15,200 tax."

The facts:
This claim, though inaccurate, has a basis in fact. There's no federal sales tax being imposed on the sale of homes. But, beginning in 2013, the health-care reform legislation does impose a new 3.8% Medicare contribution tax on the net investment income of high-income taxpayers (individuals with adjusted gross income (AGI) exceeding $200,000, and married couples filing joint returns with AGI exceeding $250,000). Net investment income will include gain on the sale of a home. However, the tax will not apply to any gain from the sale of a principal residence that is excluded from income (individuals, if they qualify, can generally exclude the first $250,000 in gain from the sale of a principal residence; married couples filing joint returns can generally exclude up to $500,000). That means that in most cases, at least where a principal residence is concerned, the 3.8% tax would kick in only if your AGI exceeds the threshold above, and only if profit on the sale of the home exceeds $250,000 ($500,000 for married couples filing jointly).

This article was provided by Forefield and distributed by Lawrence Sprung.

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