Small Business Tax Tips

Small Business Tax Tips Felix Y. Cheng, CPA Wednesday, March 23, 2011

Changes in Filing Due Dates
Form 1040, Schedule C Filers (Sole Proprietors and Single-Member LLC ’ s) - April 18, 2011.
Massachusetts Form 1 - April 19, 2011.

What to file and When?
Partnerships – Form 1065 – April 15 th , 2011
S-Corporations – Form 1120S – March 15 th , 2011
C-Corporations – Form 1120 – March 15 th 2011
LLC ’ s – Depends if filing Form 1065, 1120S, 1120, or 1040 (Schedule C).

How to best work with a CPA if you’re self-employed?
Have a bookkeeper, provide a Quickbooks file.
No bookkeeper, provide bank statements for the tax year (January to December).
Depreciation of Equipment – To calculate, provide the following:
Type of equipment
The cost of the equipment
The percentage of business use
The date you started using it for business
The date you took it out of business

NEW FOR 2010 - Deduction for self-employed health insurance.
If you are a sole proprietor, single-member LLC, partnership, or LLC (Limited Liability Company) that is treated like a partnership,
Reduce your net self-employment income by the amount of your self-employed health insurance deduction in order to calculate self-employment tax.
Net self-employment income is $10,000
Subtract: Self-employed Health Insurance Deduction: $4,800
____________________________________________
Self-employment tax is calculated on 92.35% of $5,200 versus $10,000 in 2009.
Use worksheet on page 28 of the Form 1040 instructions to calculate the self-employed health insurance deduction.

NEW FOR 2010 – Depreciation - Increase in Section 179 expense
Deduct up to $500,000 of the cost of section 179 property placed in service in 2010 versus $250,000 in 2009.
Phased out if the cost of the property exceeds $2,000,000 versus $800,000 in 2009.
Example
Let ’ s say you buy $4,500 of equipment in 2010, assuming you meet the rules below, you may deduct the whole $4,500 in 2010 instead of only a portion of it.
General rules
Start deducting in the year you place the property in service meaning for business use
Property must be purchased and be used more than 50% for business
The deduction may not cause a loss from business.
If you deduct only part of the cost due to limitations, you can generally depreciate the cost remaining under MACRS and carry over for an unlimited number of years, the section 179 amounts remaining.

NEW FOR 2010 – Depreciation - Extension of special allowance
Extended to property placed in service in 2010.
General rules
Applies only for the first year you place the property in service.
Take an additional 50% (or 30%, if applicable) of cost after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service.
Example 1 – Without Section 179 deduction
Let ’ s say you buy $4,500 of equipment in 2010. You can deduct 50% of $4,500 being $2,250 as a special depreciation allowance. The $2,250 cost left over is then depreciated regularly under the MACRS system.
Example 2 – With Section 179 deduction
Let ’ s say you buy $4,500 of equipment in 2010. You end up taking $2,000 of Section 179 making the cost leftover at $2,500. Afterwards you can deduct 50% of $2,500 being $1,250 as a special depreciation allowance. The $1,250 cost left over is then depreciated regularly under the MACRS system.

NEW FOR 2010 – Depreciation on vehicles
Depreciation limits on vehicles.
For 2010, the first-year limit on depreciation, special depreciation allowance, and section 179 deduction for most vehicles is $11,060 versus $10,960 in 2009 ($3,060 versus $2,960 in 2009 if you elect not to claim the special depreciation allowance).
For trucks and vans, the first-year limit is $11,160 versus $11,060 in 2009 ($3,160 versus $3,060 if you elect not to claim the special depreciation allowance).
Special Depreciation Allowance.
If acquired new after September 8, 2010, and placed in service before the end of the year, deduct 100% of the depreciable basis of the vehicle instead of 50%.

NEW FOR 2010 - Increased deduction for start-up costs.
If your business began in 2010, deduct up to $5,000 of certain business start-up costs paid or incurred after October 22, 2004, in tax years before 2010, and
Up to $10,000 of certain business start-up costs paid or incurred in 2010.
The $5,000 limit is reduced (but not below zero) by the amount by which your total start-up costs exceed $50,000 and the $10,000 limit is reduced (but not below zero) by the amount by which your start-up costs exceed $60,000.
In addition, you can deduct up to $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total organizational costs exceed $50,000.
Any costs above the limit must be amortized starting with the month you began operating your active trade or business ratably over a 180 month period.
You elect to deduct the start-up or organizational costs by claiming the deduction on the income tax return (filed by the due date including extensions) for the tax year in which the active trade or business begins.

NEW FOR 2010 - Increased deduction for start-up costs.
Example
You paid $50,000 of start-up costs and $50,000 of organizational costs in tax years before 2010. If your business began in 2010, you may deduct $5,000 of start-up costs and $5,000 of organizational costs and the remaining $45,000 of each will be divided by 180 months at $250/month. For 2010, your deduction for start-up costs and organizational costs each will be $5,000 and assuming your business started in January 2010, you will deduct $3,000 each of amortization expense ($250/month X 12 months)
Where to Deduct the start-up costs, organizational costs, and amortization
For:
Sole proprietorships and single-member LLC ’ s. Schedule C, “ Part V. Other Expenses ” .
Partnerships and multi-member LLC ’ s. Form 1065, line 20, Other Deductions
S-Corporations, Form 1120S, line 19, Other Deductions
C-Corporations, Form 1120, line 26, Other Deductions
For the first year of amortization only, also file Form 4562.

Start-Up Costs
They include amounts paid for the following:
An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
Advertisements for the opening of the business.
Salaries and wages for employees who are being trained and their instructors.
Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
Salaries and fees for executives and consultants, or for similar professional services.

Organizational Costs - Corporations
Examples of organizational costs include:
The cost of temporary directors.
The cost of organizational meetings.
State incorporation fees.
The cost of legal services.

Organizational Costs - Partnerships
Examples of organizational costs include:
Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement.
Accounting fees for services incident to the organization of the partnership.
Filing fees.

NEW FOR 2010 - New credit for small employer health insurance premiums.
Use Form 8941 to figure the credit for small employer health insurance premiums for tax years 2010 and after.
The maximum credit is a percentage of premiums the employer paid during the tax year for certain health insurance coverage the employer provided to certain employees.
For tax-exempt small employers , the credit is generally 25% of premiums paid, and is claimed as a refundable credit on Form 990-T, Exempt Organization Business Income Tax Return.
For all other small employers , the credit is generally 35% of premiums paid, and is claimed as part of the general business credit on Form 3800, General Business Credit.

Eligible Small Employers
Paid 50% or more of health insurance premiums for employees
You had fewer than 25 full-time equivalent employees (FTEs) for the tax year.
You paid average annual wages for the tax year of less than $50,000 per FTE.

NEW FOR 2010 – HIRE retention credit
Encourage retention of new hires
Lesser of $1000 or 6.2 percent of wages during the 52 consecutive week period.
The qualified employees ’ wages during the last 26 weeks must equal at least 80% of wages for the first 26 weeks.
52 consecutive weeks starts on the date the employee begins employment with the employer.
Qualified employees
Begin employment after February 3, 2010, and before January 1, 2011,
Have been unemployed or employed for 40 hours or less during the 60-day period ending on the date such employment begins
Are not family members of or related in certain other ways to the employer.
Fill out Form 5884-B

NEW FOR 2010 – HIRE retention credit
For a calendar year taxpayer (January 1st to December 31 st ), if the employee is hired on February 4, 2010, the requirement won ’ t be met until February 3, 2011 so the credit will have to be taken on the 2011 income tax return.
A fiscal year taxpayer for example, April 1, 2010 to March 31, 2011, may claim on its 2010 income tax return if the requirements have been met by March 31, 2011. For example, if you hired someone on March 15, 2010, it will be met .

Home Office Expenses
To qualify to deduct expenses for business use of your home, you must use part of your home:
Exclusively and regularly as your principal place of business,
Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
In the case of a separate structure which is not attached to your home, in connection with your trade or business,
On a regular basis for certain storage use,
For rental use (see Publication 527), or
As a daycare facility.
For more information on home office expenses, read Publication 587:
If you are a sole proprietor or a single-member LLC, fill out Form 8829 which will go with your Form 1040.
If you are an employee, partner, shareholder, or member of an LLC taxed as a partnership or corporation:
Use the worksheet on page 26 of Publication 587
Once you figure out the deduction from the worksheet, report the amount on Form 2106, Employee Business Expenses on step 1, line 4 which goes with your Form 1040.

Continuing Education
The education maintains or improves skills needed in your present work.
Even if the education meets the above test, it is not qualifying work-related education if it:
 Is needed to meet the minimum educational requirements of your present trade or business, or
 Is part of a program of study that will qualify you for a new trade or business.
You can deduct the costs even if it could lead to a degree.
What expenses can be deducted?
Tuition, books, supplies, lab fees, and similar items.
Certain transportation and travel costs.
Other education expenses, such as costs of research and typing when writing a paper as part of an educational program.
Where to deduct
For:
Sole proprietors and single-member LLC ’ s who file Schedule C or C-EZ, you may deduct it on the Schedule C or C-EZ as a business expense under “ Part V ” on page 2.
Employees, partners, shareholders, members of LLC ’ s with more than one member, deduct it on Form 2106 or 2106-EZ
For more information on continuing education, please go to Publication 970 under “ Business Deduction for Work-Related Education ” starting on page 64

Deducting Volunteer Expenses
Drove to and from volunteer work. You can take on line 16 of Schedule A:
Actual cost of gas and oil or 14 cents a mile.
Add parking and tolls to the amount.
Do not deduct any amounts that were repaid to you.
Deduct on line 16, out-of-pocket expenses you paid to do volunteer work.
Page A-8 of the Schedule A instructions

Child & Dependent Care Expenses
A qualifying child is one who is under age 13 whom you can claim as a dependent. If the child turned 13 during the year, the child is a qualifying person for the part of the year he or she was under age 13.
What can you deduct (Assuming this is while you worked or looked for work)
The services of a cook, maid, babysitter, housekeeper, or cleaning person if the services were partly for the care of the qualifying person.
Dependent care center (Read instructions for Form 2441 for more details)
Food and schooling only if the items are incidental to the care of the child and cannot be separated from the total cost.
Cost of day camp, even if it specializes in a particular activity, such as soccer.
What can ’ t you deduct
Child support payments
Expenses reimbursed by a state social service agency unless you included the reimbursement in your income.
Services of a chauffeur or gardener.
The cost of clothing or entertainment.
Overnight camp, summer school, or a tutoring program.
K-12 Schooling
For more information, please visit the instructions for Form 2441

Thank you very much!!! Felix Y. Cheng, CPA Phone: 781-218-9278 E-mail: [email_address]

Small Business Tax Tips

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