Taxes are the number-one issue facing small businesses, according to December’s Small Business Optimism survey. As we're now in tax season, small-business owners face the additional headache of understanding how new changes to the tax code affect their businesses.
To relieve that burden, here are some of the key changes every small-business owner should know, along with a few key tax breaks, credits and deductions. Check out the list below to make sure you’re up to date on the latest:
1. Claim small business health care credit
While certain provisions of the Affordable Care Act don’t take effect until 2015, small businesses -- including tax-exempt employers -- that offer health insurance (Form 8941) to employees could qualify for a tax credit to help with the cost of providing coverage for low- and moderate-income workers.
From 2010-2013, the maximum credit was equal to 35 percent of premiums paid, or 25 percent for tax-exempt employers. In 2014, that maximum increases to 50 percent, or 35 percent for tax-exempt employers. So a business owner who paid $5,000 toward an employee’s health insurance plan now qualifies for savings of up to $2,500 rather than last year’s maximum of $1,750.
There are two caveats here: The credit can only be claimed for two consecutive years, and the business is required to purchase coverage through the SHOP Marketplace for small businesses. To qualify for the credit, the employer must also cover at least 50 percent of the premium and the business must have no more than 25 employees with an average salary of less than or equal to $50,000.
2. Capitalize on latest tax extenders
In December, Congress passed the “Tax Increase Prevention Act of 2014,” which extended more than 50 tax breaks for individuals and small businesses. These include two important tax breaks for small businesses:
Sec. 179 expensing: This applies to those who made capital purchases in 2014. For 2014, dollar limits for Sec. 179 expensing are at $500,000, with an investment ceiling of $2 million. This means small-business owners can deduct the full cost of up to $500,000 on most depreciable assets that have less than a 20-year life, such as new or used computer equipment, vehicles, furniture and more.
Bonus depreciation: With 50 percent bonus depreciation, a company can deduct half the cost of new capital purchases in the first year. While the Sec. 179 deduction allows a business to deduct the small capital purchase immediately, the bonus depreciation could be more valuable because Sec. 179 is limited to business taxable income with any excess carried forward.
3. Understand deductible expenses
The tax code allows a small business to deduct the costs of running a business, as long as the expenses are ordinary and necessary. If you have an item that is used for personal and business purposes, you can allocate the expense and deduct the business portion.
If an asset’s useful life extends beyond one year, you must depreciate, or deduct, over the term of the asset. Just be sure to document everything and retain any receipts.
Running a home office? The IRS now provides a simple way to calculate the deduction associated with using your home for business. However, it does not change the criteria for who may claim the deduction.
Running a startup? The government encourages starting a new business by allowing a $5,000 write-off for startup expenses. This could include advertising costs, employee training, a market survey and more.
4. Properly classify your workers
It could be tempting to classify an employee as an independent contractor because of the cost savings, but take caution. There are strict rules surrounding the proper classification of a worker, and steep penalties for failing to apply the law correctly. Refer to this infographic to help you distinguish between the two.