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The Changes to Tax Laws You Need to Know Find out about Internal Revenue Code updates affecting small businesses that take effect this year and the next.

By John Hewitt Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

It's no surprise to small business owners that every year brings change to the tax code. What may surprise them this year is the size of some of the changes and the effects they will have on their bottom line.

Take the change to Section 179, for example. Section 179 was created as an incentive for businesses to reinvest. It did this by allowing business owners to deduct as much as $500,000 in qualifying expenses for certain assets, such as equipment or furniture, in the year of purchase rather than over an extended period of time.

For small business owners, the deduction meant they could make those big purchases and quickly recoup the cost.

Related: 7 Deadly Sins of Financial Management (Infographic)

For the 2014 tax year, the deduction has been sharply reduced -- to $25,000 from $500,000. That steep drop has made some business owners think long and hard about equipment purchases. They have to more closely weigh those purchases against other expenses, such as hiring additional employees.

Some have put off purchases, hoping that Congress will restore the higher level of deduction. Earlier this year the House voted to permanently set the deduction at $500,000. But the full Senate has not acted on the increase. Small business owners are watching and hoping for movement on Section 179 that will perhaps arrive after the midterm elections in November.

With the bonus depreciation allowance, businesses had been able to claim a 50 percent deduction for qualified property first used in the tax year. That allowance ended with the 2013 tax year.

Related: 5 Tax Planning Tips for Your Small Business

Other smaller tax credits ended last year, such as the work-opportunity tax credit that aimed to stimulate employment of veterans and other workers in specific categories. The work-opportunity tax credit gave employers as much as $9,600 for hiring veterans, ex-felons and others. Also discontinued, an energy incentive encouraged employers to go green by allowing deductions for environmentally friendly features, such as lighting.

For the first time, in the 2014 tax year, the Affordable Care Act will be directly registered on tax returns in the following way and it may have the greatest impact on small business owners.

About 1 in 4 small business owners did not themselves have health insurance, according to a 2012 Kaiser Family Foundation study. Those who didn't sign up for health insurance for this year and who aren't eligible for an exemption will have to pay a penalty.

Savvy small business owners probably know this fact, but might be surprised to learn that the penalty will likely be higher than the $95 that's received the most attention. The penalty is 1 percent of taxable household income or $95 for each person in a household who is uninsured, whichever is greater.

Both equations have limits. If the penalty is $95 a person, the limit is $285. If the taxpayer is paying 1 percent of taxable household income, the limit will be the cost of the average national premium of the bronze health insurance plan. That could be about $2,500 for an individual and $12,000 for a family of five, according to the IRS. That's quite a bit more than $95.

The law requires businesses with 100 or more employees to offer workers health insurance in 2015 or pay a penalty. Businesses with 50 to 99 employees have until 2016 to comply.

Related: The 3 Most Common Mistakes Entrepreneurs Make on Their Taxes

John Hewitt

Founder and CEO of Liberty Tax Service

John Hewitt is founder and CEO of Virginia Beach, Va.-based Liberty Tax Service, a tax preparation franchise firm. He also founded Jackson Hewitt and is a former H&R Block regional director. 

 

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