When conducting year-end tax planning, organizations will need to be cognizant of changes resulting from recently enacted federal tax laws. Specifically, companies will be interested in changes related to tax credits and new compliance requirements.
With tax provisions about to expire and uncertainty remaining regarding further 2011 tax law changes, businesses are left with several what-if scenarios to consider during the planning process.
Smart Business spoke to Catherine Fox-Simpson of Crowe Horwath LLP about the federal tax law changes that businesses should consider when conducting year-end tax planning.
What positive changes should businesses take advantage of this tax year?
The HIRE Act was enacted on March 18, 2010, to jumpstart hiring and investment in the work force; it benefits all businesses, including nonprofits. The act provides two new tax benefits to employers who hire previously unemployed workers: payroll tax forgiveness and an employer income tax credit of up to $1,000 for retention of qualified new hires.
The HIRE Act also extends expired provisions from 2009, increasing the amount a business can expense under Section 179 for 2010.
What tax relief will the Small Business Jobs Act of 2011 provide?
Signed into law by President Obama on Sept. 27, 2010, the act impacts businesses eligible to claim Section 179 expenses and those that made capital expenditures in tax years beginning in 2010 or 2011. Small businesses receive an increase in their expensing limit to $500,000, with phase-out beginning at $2 million.
Additional benefits for small businesses include reduced recordkeeping requirements for the deduction of employer-provided cell phones and deductions for health insurance costs when calculating self-employment tax. In addition, the carry-back period for eligible small business credits will be extended from one to five years beginning with the 2010 tax year.
The act also eliminates capital gains taxes for those investing in small businesses.
Many of the relevant provisions in the act do not require action by a specific date in order to claim the benefits, although it’s still unknown if some provisions will extend beyond 2010.
What other changes can businesses expect in 2011?
Potential tax increases include:
- The two highest marginal tax rates will increase from 33 to 36 percent and from 35 to 39 percent.
- The tax rate on qualified dividends will rise from 15 percent to a maximum rate of 39.6 percent, meaning they will be taxed as ordinary income.
- The maximum tax rate on long-term capital gains will rise from 15 to 20 percent.
- The estate tax will be restored at a higher rate.
President Obama has also made the following proposals:
- Companies would be allowed to write off 100 percent of their new investment in plants and equipment through 2011 — retroactive to Sept. 8, 2010.
- The research credit would be expanded from 14 to 17 percent and made permanent.
- The EGTRRA tax cuts for the middle class (under $250,000 AGI) would be permanently expanded.
What tax planning strategies should businesses implement for the 2010 tax year?
With the dividend rate increasing in 2011, corporations may consider issuing a dividend to maximize shareholder value. Companies should evaluate dividend plans to ensure that the dividend qualifies for the reduced tax rate.
Domestic manufacturers, agricultural producers, energy producers and construction companies should look into any domestic production deduction opportunities and complete any planning before the end of the current year. The deduction is 9 percent of a business’s qualified production activities for income tax years beginning in 2010 and effectively reduces the corporate income tax rate on domestic manufacturing income by 3 percent.
Businesses may defer the recognition of certain cancellation of debt (COD) income realized in calendar years 2009 and 2010 until 2014, in which case they will begin recognizing the income ratably over a period of five years. The reacquisition of a debt instrument by the lender must occur between Dec. 31, 2008, and Jan. 1, 2011.
Are there new reporting requirements that businesses should know about?
Beginning in 2010, corporations with audited financial statements will be required to file Schedule UTP to report any uncertain tax positions recorded on their financial statements. Pass-through entities are not required to file this form for 2010, but that may change in the future. Reporting is phased in over the next five years, but for 2010 it is required for companies with assets greater than $100 million.
Catherine Fox-Simpson is a partner with Crowe Horwath LLP. Reach her at Catherine.Fox@crowehorwath.com or (214) 574-1013, or visit www.crowehorwath.com/sbndallas.