Business Tax Strategies for 2011 and 2012

2 0 1 0 A m e r i c a n I n s ti t u t e o f

C P A s

SMALL BUSINESS TAX SAVINGS STRATEGIES

Presented by: Laura Gannon, CPA

SULLIVAN AND GANNON, LLC22 Central Square

Chelmsford, MA 01824

Expenses: Section 179 Deduction

• Expensing provision for certain business property

• Maximum $500,000 first-year write-off in 2011; $139,000 in 2012

• Most tangible personal property eligible

• Includes qualified restaurant, leasehold and retail properties in 2011

• Phaseout begins at $2 million in 2011; $560,000 in 2012

• Limits and exceptions

2

3

Expenses: Bonus Depreciation

• First-year bonus depreciation allowance for eligible new property

• 100% deduction for property placed in service in 2011; 50% in 2012

• Property eligibility requirements

• Benefits of using bonus depreciation:

- Immediate tax relief

- Improved cash flow

- Additional reinvestment capital

Employer Sponsored Plans

• Pre-tax contributions help reduce tax bill

• Employer matches and earned income – tax deferred

• $16,500 maximum contribution (younger than age 50)

• $5,500 additional catch-up contribution (age 50 or older)

4

Individual Retirement Accounts (IRAs)

Two types: Traditional and Roth

• $5,000 maximum annual contribution for either

• $1,000 additional catch-up contribution (age 50 or older)

• Contribution restrictions

• Traditional IRA: deductible contributions – modified AGI and employer-sponsored plan considerations & distribution requirements

• Roth IRA: nondeductible contributions and tax-free withdrawals

• Tax-free earnings until distribution

• Open/contribution deadline: April 17, 2012

5

6

Expenses: Start-up and Organizational Costs

• Start-up Costs

- Deduction in year business starts/succeeding years

- Can include full range of business investigatory costs

- First $5,000 in expenses deducted; the remaining is amortized over 180 months

- The deduction requires an election

- $50,000+ dollar-for-dollar phaseout

• Organizational Costs 

- Deduction for certain costsin creating C or S corporationor partnership

- $5,000 maximum

- $50,000+ dollar-for-dollar phaseout

- Same rules as businessstart-up costs

- Certain legal and accountingfees

Employee Related: Federal Unemployment Tax (FUTA)

• Employers pay FUTA tax on first $7,000 of each employee’s wages

• 6.2% tax rate through June 30, 2011

• Reduced to 6.0% tax rate starting July 1, 2011

• Credit against state unemployment taxes

7

Employment Related: Deduction for Health Insurance

• Self-employment tax rate reduced by 2% to 13.3% in 2011

• If you are self-employed, you may continue to deduct health insurance costs from your business income when determining your income tax liability

• Deduction for business owner, spouse and dependents (and children under age 27 in certain circumstances)

8

Employee Related: Worker Retention Credit

• Worker retention tax credit for each formerly unemployed worker

- Hired after 3/18/2010 and before 1/1/2011

- Minimum one-year employment period

- Claim credit on 2011 tax return

- $1,000 or percentage of wages paid

9

Employee Related: Credit for Hiring Unemployed Veterans

• Special credit for hiring unemployed veterans

- Component of work opportunity credit

- Hired after 11/11/2011 and before 1/1/2013

- Up to $5,600 for hiring a long-term unemployed veteran

- Up to $2,400 for hiring a short-term unemployed veteran

- Up to $9,600 for hiring an unemployed veteran with a service related disability

10

Reporting: 1099-MISC Reporting

• As in previous years, Form 1099-MISC is used to report payments for business services totaling $600 or more.

• Laws stricter every year:

- All rent payments

- All lawyers fees

- All partnerships and LLC’s

• Payments to corporations for business services do not require a 1099 – Congress repealed.

• All other reporting requirements remain

11

Reporting: Credit Card Transactions

• New reporting requirement for merchants accepting credit cards, debit cards, or gift cards

• Businesses will need to report income from credit card transactions separately andreconcile credits and returns

• Merchants will receive Form 1099-K by January 31 of each year, beginning 1/31/2012

• Businesses must provide card processing company with your TIN on a Form W-9

12

• Designed to make sure merchantsare properly reporting income

• All payments made in settlement of payment card transactions (e.g., credit card); 

• Payments in settlement of third party network transactions IF:-Gross payments to a participating payee exceed $20,000; AND-There are more than 200 transactions with the participating payee

Reporting: Information Return Penalties

• Failure to file a correct and timely information return

• Penalties significantly increased by Congress

- $30 per return if less than 30 days late

- $60 per return more than 30 days late, but filed by Aug. 1st

- $100 per return, otherwise

• Penalties may be waived for reasonable cause

• Increase penalty for intentional disregard

13

15

Planning for 2012 and Beyond

• Additional 0.9% Medicare tax on certain wages beginning January 1, 2013

• New Medicare tax (3.8%) on certain investment income beginning January 1, 2013

• If Bush-era tax cuts allowed to expire December 31, 2012:

- Tax rates increase on regular income, capital gains, dividends

- Number of taxpayers subject to Alternative Minimum Tax (AMT) rises

- Certain tax credits expire

18

Planning for Business Succession

• Critical to start now – need to have plan for unexpected events

• Significant impact if a principal owner/ partner suddenly leaves or dies

• Several strategies available to finance a smooth transition

• Sources of financing can include:

- Life insurance

- Buy-sell agreement

- Grantor trust

• Best plan should fit structure of company, personal preferences & needs

19

Stupid Things Business Owners do

• Don’t keep good books!

• Don’t look at their numbers! Budgets, Comparatives, Forecasts

• Drain the company of all the capital

• No plan for succession

Sullivan and Gannon, LLC22 Central Square

Chelmsford, MA 01824www.sullivangannoncpas.com