Tax Savings for Your Business

Changes made to tax business rules for 2010 were numerous.  So numerous, in fact, that many tax-saving opportunities may be overlooked by business owners when preparing their 2010 business returns.  Today, I’ll review four changes may help reduce your business’s 2010 taxable income and your tax liability.

Small Employer Health Insurance Credit:  This credit was included in the Patient Protection and Affordability Act passed in March, 2010 and will reimburse many employers for up to 35% (25% for nonprofits) of the health insurance premiums paid for their employees.

To qualify, businesses and tax-exempt organizations must meet three criteria: Pay at least 50 percent of their employees’ single-rate health care premiums, employ less than 25 “full-time equivalent (FTE’s)” employees, and pay these FTEs an average of less than $50,000 per year.  Salaries, wages, and insurance premiums of owners and their relatives are not used when calculating the credit.

Businesses that employee 10 FTEs or less who earn an average of $25,000 or less will qualify for the full credit of 35% of employer-paid premiums.  The available credit is then reduced for employers with more than 10 FTEs or whose average wage exceeds $25,000.  The credit reaches zero when either the number of FTE’s equal 25 or average FTE wage reach $50,000.
The rules governing the Small Employer Health Insurance Credit are complex and the calculations necessary to determine the credit involve a cumbersome, multistep process.  The payoff for businesses that qualify, however, can be substantial - making the effort a worthwhile, tax-saving endeavor.

One Year Health Insurance Deduction from Self Employment Tax:  A long-standing inequity in the tax code allows employees to receive health insurance benefits completely free from income and FICA taxes.  The employers who pay for this benefit, however, must pay FICA (“self employment”) tax on health premiums paid to cover themselves and their families.  The Small Business Jobs Act of 2010 made a one year fix to this inequity by allowing self-employed taxpayers to deduct health insurance premiums paid for themselves and families when calculating their 2010 self-employment tax.

If you qualify for the health insurance deduction on line 29 of form 1040 and are subject to self-employment tax, make sure your health insurance premiums are deducted on line 3 of schedule SE. 
Bonus Depreciation Increased to a Full 100%: A major change in the Tax Hike Prevention Act allows businesses to deduct the full cost of certain property placed in service from September 8, 2010 to December 31, 2011.  For property placed in service between January 1 and September 7, 2010, Bonus Depreciation is 50% of its total cost.

Property that qualifies for bonus depreciation includes “original use” (meaning “new”) property having a depreciable recovery period of 20 years or less.  This includes most property and equipment used in business – although vehicles may be subject to special limits.

Section 179 Expense Limit Extended:  Section 179 of the US Tax Code allows businesses to expense certain property rather than depreciate it over a number of years.  The tax rules for 2010 allowed businesses to utilize the “179 election” and expense up to $500,000 of property placed in service during the year.  The Tax Hike Reduction Act of 2010 extends this $500,000 limit through 2011.

Property that qualifies for the 179 Expense includes most “non-rental” personal property used at least 50% in a trade or business.  The full $500,000 deduction is available to businesses that place less than $2,000,000 of qualifying property in service during each tax year.  The allowable deduction is reduced dollar for dollar if the total value of qualifying property placed in service exceeds $2,000,000 during the year.

This article outlines some tax changes to keep in mind as you prepare your 2010 business return and begin planning for 2011.  The rules governing these deductions and credits are more complex than this summary may suggest and several have been discussed in previous articles (available at hbsbusiness.com).  If you should have any questions regarding your business or personal income tax returns, please feel free to contact our office to speak with a tax professional.

Brett Hersh's avatar
  • Author: Brett Hersh
  • Bio: Brett Hersh, EA, MBA, is the owner of HBS TAX & Small Business Experts. He is an Enrolled Agent (EA) with the IRS and licensed by the US Treasury Department to prepare all tax returns and represent taxpayers before the IRS for audits, collections and appeals. He is also Dave Ramsey’s ELP for Tax and Accounting, a continuing education instructor for tax professionals through Lorman Education, and a local speaker/presenter on the topics of tax and business growth. He can be reached at (304) 267-2594.