The 2011 tax filing season is upon us! However, there is still some time to do that tax planning to lower that corporate tax bill. Although congress could still act before the year is out to make additional tax law changes, here are a few of the changes for 2011 that are currently in effect.
Standard Mileage Rates: Beginning January 1, 2011, the standard mileage rates for the use of a car will be: 51 cents a mile for all business miles driven before 7/1/11 and 55 cents a mile after.
Depreciation and Section 179 Expense:
The maximum section 179 deduction you can elect for property you placed in service in 2011 is $500,000, which is the same as 2010. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,000,000. So when your purchases reach $2,500,000 and above you no longer get the deduction. The definition of qualified section 179 property will include qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for tax years beginning in 2011.
Under the American Jobs Creation Act of 2004, businesses cannot take a first year Section 179 expenses deduction of more than $25,000 for an SUV weighing over 6000lbs. The business would depreciate the remaining cost. The new limit does not affect other types of property where the taxpayer decides to expense the cost instead of depreciating the property.
The total depreciation deduction (including the section 179 expense deduction) you can take for a passenger automobile (that is not a truck or a van) you use in your business and first placed in service in 2011 was held flat at $3,060. The maximum deduction you can take for a truck or van you use in your business, that weighs less than 6000lbs, and first placed in service in 2011 was increased from $3,160 to $3,260.
Bonus depreciation has increased from 50% in 2010 to 100% in 2011 and is allowed for new property (original use begins with taxpayer) placed in service before 12/31/11. For automobiles, this bonus depreciation is limited to $8000. However, even with this limit, the first year depreciation on a business use vehicle still increases from $3,060 to $11,060, not a bad deal!
Net Operating Losses:
If 2011 was not a good year for your business and you incurred a loss for the year, you may be able to take advantage of net operating loss carry-back provision in the tax code. This provision allows you to carry-back between 2 and 5 years or forward up to 20 years, a loss from the current year. This can allow you to get back some of those taxes you previously paid to the IRS in the last few years or reduce that tax bill in the future. A great option when cash flow is tight!
If you are a business owner with an IRA account, you may want to consider converting that IRA account to a Roth IRA account. In a conversion, the taxable amount converted is typically included in the current year's taxable income and thus subject to ordinary income tax. However, if you have had business losses in the same year, these losses could be used to offset the conversion income and lower your tax liability. The other advantage of the Roth IRA is that Roth IRA owners are not subject to required minimum distributions (which typically start at age 701/2) during their life (but the after-death required minimum distribution rules still apply). There is no limit on the conversion amount in 2011.
Contribute to a Retirement Benefit Plan:
Your contributions as an owner or employee are tax deductible from your current income, thus reducing your present taxes. A contribution to a tax advantaged retirement plan must come from earned income, meaning compensation for active work. An investor in a business, who isn't active, cannot deduct contributions to the retirement plan. Income generated by your investments accumulates tax free until withdrawn. Types of plans include: IRA, Simple IRA, SEP, 401(k), Simple 401(k), Defined Benefit Plan, Profit Sharing Plan. In some plans, such as a SEP plan, a participant can contribute up to 25% of their compensation, with a maximum contribution of $49,000. That's a pretty good contribution to your retirement!
Contribute to a Health Plan:
Tax rules for health benefits vary, depending on whether or not a business is incorporated. For C-Corporations medical costs, including insurance premiums paid for by owners and employees are entirely tax deductible to the corporation and tax free to the recipients.
Small Business Health Insurance Credit:
Small businesses with no more than 25 full time equivalent employees, whose employees have annual wages of no more than $50,000 may be eligible for a tax credit equal to 35% of the cost of the contributions the employer made on behalf of the employee for the health coverage. This credit does have a phase out provision which begins to reduce the credit when the number of employees exceeds 10. This is a good benefit you can provide your employees!
Purchase a Hybrid or Alternate Fuel Vehicle:
You are allowed a limited tax credit for the purchase of a hybrid or alternate fuel vehicle. The credit can range from a few hundred dollars for vehicles like the 2011 BMW Active hybrid 750i, to $2,350 for the Nissan Altima hybrid. All hybrid vehicles manufactured by Honda, Toyota, or Lexus no longer qualify for the credit as of January 1, 2009. Please note that if your vehicle is a depreciable business asset, you must reduce the cost of the vehicle by any section 179 deduction before figuring the credit. Consumers seeking the credit may want to buy early since the full credit is only available for a limited time. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th hybrid passenger automobile or light truck or advance lean burn technology motor vehicle. For each subsequent quarter after the 60,000 mark is achieved, the credit decreases approximately 50%. Please note that the credit is only available to the original purchaser of a new, qualifying vehicle. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit.
Domestic Production Activities Deduction:
A business owner may claim a deduction against gross income for its qualified production activities. This deduction can be as high as 6% of its domestic production activities. Some examples of domestic production activities include: construction, engineering and architectural services, sale of computer software produced in the United States, food and beverage production, film production and electricity production and distribution.
Work Opportunity Credit:
This credit provides businesses with an incentive to hire individuals from targeted groups that have a particularly high unemployment rate or other special employment needs. An employee is a member of a targeted group if he or she is a: Long-term family assistance recipient, qualified recipient of temporary assistance for needy families (TANF), qualified veteran, qualified ex-felon, designated community resident, vocational rehabilitation referral, summer youth employee, food stamp recipient, or SSI recipient. In 2009, the credit was extended to cover unemployed veterans and disconnected youth. This credit ranges from 25% to 50% of the first $6000 in wages paid to each qualified employee. The percentage deduction is based on the number of hours worked by those certified groups listed above.
Enhanced Charitable Contribution:
Charitable contributions of inventory are usually deductible to a business at cost, or if less, at fair market value ("FMV"), up to 10% of the corporation's taxable income. However, some businesses may qualify for an enhanced charitable contribution which could be the lesser of basis (cost) plus one half of the items FMV or two times its basis (cost). This enhanced charitable contribution applies to the following inventories: food, books, computer, a great deal if you have excess inventory you need to move!
Employer Provided Educational Assistance:
Businesses may qualify for an income and wage exclusion (excluded from the employee's wages) up to $5,250 annually for educational assistance provided by an employer to an employee for both undergraduate and graduate programs. This educational assistance can be used for tuition, fees, books, supplies and equipment. In order to qualify for the fringe benefit, the education must maintain or improve a skill required by the business or meet the express requirements of the business, applicable law or regulations imposed as a condition of employment. That being said, this is another great tax free benefit you can provide your employees!
Employer Provided Mass Transit or Parking Benefits:
Businesses may qualify for and income exclusion for qualified transportation fringe benefits such as: parking, transit passes, vanpool benefits, bicycle commuting. These benefits can be as much a $120 per month in vanpooling and transit passes and $230 per month for qualified parking. This is a good benefit you can provide your employees which also helps our environment!
Purchase in 2011, Those Items Needed for the New Year:
This will allow you to realize the tax savings from the purchase in 2011 versus 12 months from now. These deductions can really add up, especially if you take advantage of the IRS Section 179 mentioned above. Provided the listed property is used 50% or more of the time for business. This produces an immediate write-off of capital assets. Some typical assets that qualify for Section 179 include: manufacturing and R&D equipment, some vehicles, cell phones, computers, off-the shelf software. For example, if you buy a $1,000 computer and use it for your business, you could deduct the full cost from your taxes. If you were in the 28% federal income tax bracket, this would save you $280 in income tax. At a 12% cost of capital, this translates into a 4% discount on your computer purchase!
Many business owners fail to take advantage of all the tax deductions available to their business. Here are a few of the more commonly overlooked tax deductions you should be aware of:
- Business travel expense
- Inventory shrinkage
- Accounting fees for tax preparation services
- Bank service charges
- Bad debt expense
- Business related books, magazines, seminars, association dues
- 50% of self employment tax
- Appreciation on property donated to charity
- Trade or business tools with life of one year or less