Several recent changes in tax law are providing businesses with opportunities if they get creative. Warren E. Hennagin, a director of Glenn M. Gelman & Associates, says businesses should stay informed on the latest tax reforms in order to be poised to take advantage.
For instance, tax incentives are available for hiring unemployed workers, contributing toward employees’ health care, or even creating a loss on your year-end statement.
“They should leave no stone unturned,” Hennagin says. “Take a hard look at your options.”
Smart Business spoke with Hennagin about how these tax reforms will affect your business, and how you should prepare to make the most of them.
How will recent changes in tax law affect business owners?
The Worker, Homeownership and Business Assistance Act of 2009 (WHBAA) allowed taxpayers to carryback losses five years, which can have a major impact. The net operating loss carryback is applied to a previous year to get a refund of previously paid taxes.
Previously there was an act that allowed the 2008 net operating losses to be carried back five years as well. This is basically how the homebuilders received large tax refunds. They took their losses from 2008, carried them back to large tax years and got a nice check from Uncle Sam. Now it has been extended through 2009, which makes it still available for companies that have completed their 2009 fiscal year.
Any year-ends through November 2010 are technically still in tax year 2009. So there is still planning that can be done for a company that just closed, or is about to close, its year. It’s a chance for them to run up their losses. Sometimes a company is better served by loss planning. If our clients are going to have a small loss and we can’t make them profitable, we may decide to make the loss as big as possible. Some clients of ours have received up to $1.5 million in refunds. Creating a loss could be as simple as giving the owner a reasonable bonus.
What other tax aspects are significant for business owners?
The Domestic Production Activity Deduction (DPAD) is a tax deduction that is available to certain businesses. A business can receive up to a 9 percent deduction based on the lower of 50 percent of W-2 wages or company profits. You should ask your tax preparer if your business qualifies for this deduction. It was put into effect to help the U.S. compete with foreign companies.
How will the Hiring Incentives to Restore Employment Act affect businesses?
There are a few components of the HIRE Act that are good for businesses. The centerpiece of the act is $13 billion in tax incentives for businesses to hire unemployed workers. It exempts employers from paying the 6.2 percent of social security tax on wages to qualified new hires. The hire has to have been unemployed for at least 60 days prior to the start date, which must be between February 3, 2010 and January 1, 2011.
Also, the Section 179 expense deduction for the purchase of new equipment was set to expire at the end of 2009 and go back to the old lower limit. In 2009, if you purchased less than $800,000 in equipment, you could expense the first $250,000. This tax bill extended it through 2010.
How will the Health Care and Education Reconciliation Act of 2010 affect businesses?
The health care reform package does not require employers to provide health insurance coverage. However, large employers with 50 or more full-time employees will be subject to ‘play or pay’ rules after 2013.
The new law (combined with the previous act it amended) includes more than $400 billion in revenue raisers and new taxes on employers and individuals. This is basically a large part of how we are paying for all the stimulus funds. Eventually, in the 2014 realm the government is saying ‘you have to provide insurance or there are even more taxes that kick in.’ The effects start in 2010 and go all the way to 2018. Each year, more and more come into effect, with the major taxing portions set to hit our wallets in 2013.
For small businesses, there are some good things happening in 2010. First, the smaller employer tax credit. If you are a small employer with no more than 25 employees, with average annual wages of no more than $50,000 per worker, you could receive a tax credit for up to 35 percent of the contribution the company makes toward employees’ health care premiums. The credit goes up to 50 percent in 2013.
What will happen further down the line?
Two major tax provisions are slated for 2011: Right now, under flexible savings accounts (FSA) or health savings accounts (HSA), you can deduct the cost of over-the-counter medicine. In 2011, you will only be able to deduct medicines obtained with a doctor’s prescription.
Second, employers will have to list the value of health benefits on employees’ W-2 forms. This is for informational purposes only until 2013. By showing employees the value of their health benefits, they will have an idea of what is going to be taxed.
Also, 2013 is when the Medicare tax increases. There is a new 3.8 percent tax on net investment income. The itemized medical expenses go from 7.5 percent to 10 percent of adjusted gross income. Your company’s FSAs, which are $5,000 currently, will be reduced to $2,500.
There is much to plan for in the near future. Find a good tax planner and do it right!
Warren E. Hennagin, C.P.A. M.S.-Tax, CCIFP, is a director with Glenn M. Gelman & Associates. Reach him at (714) 667-2602 or firstname.lastname@example.org.