This year's tax season is over, but the worst thing you can do is decide to put taxes out of your mind until next year. In a year when many businesses have experienced decreased income and investment returns, it becomes more important than ever to pay attention to the details of tax law and plan accordingly. You can't do much about the economy's ups and downs, but you can take control of your taxes, no matter which way the market moves. So, let's take some time to think about your taxes for 2010.
Estimated tax payments: As far as tax planning goes, knowing where you've been can help you get to where you want to go. This is especially true if you're self-employed. In other words, seeing how you came out on your last tax return can alert you to changes you need to make to minimize your tax burden next time. For example, if you underpaid your estimated taxes and were assessed a penalty, or if you overpaid your taxes and got a huge refund, you should adjust your estimated tax payments for this year accordingly. Get on the ball now. The second installment of your estimated payments is due this month--June 15. To figure out how much you should be paying, talk to your tax professional.
Equipment purchases: Start planning your Section 179 deduction now. The maximum Section 179 expense deduction for qualified property placed in service in 2009 is $250,000 ($285,000 for qualified enterprise zone property and qualified renewal community property). If a business has more than $800,000 in annual capital expenditures, it will not receive the full deduction. The amount by which your expenditures exceeded $800,000 is the amount by which your deduction is reduced. For example, in 2009, Mr. Jackson placed in service machinery costing $885,000. This cost is $85,000 more than $800,000; therefore, Mr. Jackson must reduce his deduction limit from $250,000 to $165,000 ($250,000 minus $85,000). Any capital expenses that exceed the $250,000 deduction can be depreciated over future tax years.
Small businesses might find it advantageous to use this tax incentive to increase their deductions for business expenses, thus reducing their taxable income and their tax liability. Necessary equipment purchases up to the limit can be timed at year end and still be fully deductible for the year. This tax incentive also applies to personal property put into service for business use, with the exception of automobiles and real estate.
Tax credits: Tax credits reduce your tax liability. And there are many to take advantage of this year. Here are a few you need to know about:
- Health-care reform: Small businesses that have fewer than 25 full-time-equivalent employees with average wages of less than $50,000, and that pay at least half of individual health-care coverage costs, will be eligible for credits of up to 35 percent of their share of health-care premiums. This credit is retroactive to the beginning of 2010 and is in effect through 2013. Businesses with 10 full-time-equivalent employees making an annual average of less than $25,000 will receive the maximum credit. Those with more staff members with higher salaries will receive progressively less. Exactly how this credit will play out is yet to be seen; look for the "how-to" in claiming this credit.
- Going green: Businesses that make changes in their energy systems can get sizable federal tax credits. Installing a solar water heater, for example, could qualify a business for a tax credit of 30 percent of the cost. But a more significant incentive is the Energy Efficient Commercial Buildings Deduction. Although it is a deduction and not a dollar-for-dollar credit, there is still potential for saving big bucks. By modifying things such as lighting, HVAC systems and other parts of a building to improve energy efficiency, companies could qualify for a deduction of up to $1.80 per square foot of commercial building space. So the owner of a 100,000-square-foot building could receive a one-time, $180,000 federal tax deduction. Check energystar.gov to make sure your renovations qualify. What's great about this credit is that you not only help the environment, but the government pays you to do so--win-win!
- Work Opportunity Tax Credit: Here's another win-win credit. With so many unemployed people out there, if your business is in a position to hire, do it. There may be a government reward. You can get the Work Opportunity Tax Credit for hiring people who typically have a hard time finding and keeping gainful work, such as low-income ex-felons, disadvantaged youths and veterans, or those who receive food stamps or supplemental Social Security income benefits. The credit equals 40 percent of the first $6,000 of an employee's wages for the first year of employment, as long as he or she has worked at least 180 days or at least 400 hours. The rate is 25 percent for fewer than 400 hours, but there's no credit for an employee who works fewer than 120 hours. To qualify for the credit, you have to file a special form with the state workforce agency, which will certify that the worker is eligible for the credit.
Tax planning does not have to be difficult, and the rewards of effective tax planning are priceless. Don't forget to stay organized, and keep receipts of all your expenses and charitable contributions. Start tax planning now, and you'll see the difference on your 2010 tax return.
Roni Lynn Deutch is known as The Tax Lady for a reason: She has two decades of practical experience resolving IRS tax problems and preparing taxes for taxpayers nationwide. Consequently, she has become a well-known media personality and one of the few go-to tax experts in the country.