The tax reform proposed by President Obama during the State of the Union Address hinted towards additional business tax credits and the possibility of a lower corporate tax rate in the upcoming years. This reform would be in addition to the 2010 tax credits and deductions already available to businesses.
Apply Tax Credits to Previous Year Returns
A new law allows corporations with less than $50M in average annual revenue the last 3 yrs to apply 2010 general tax credits to the previous years’ tax returns, going back as much as 5 years. This means credits for energy efficient vehicles that weren’t available in 2006 but are in 2010 can now be applied to a 2006 tax return. These tax credits are also not subject to alternative minimum tax (AMT) for 2010 as they have been in the past. The downside to this new tax law is that small corporations are the only beneficiaries. It doesn’t apply to partnerships and sole proprietor-ships.
Section 179 Expense Limitations Increased Again
In layman’s terms this means that up to $500,000 of qualified property (equipment, off-the shelf software, & vehicles) can be treated as a deductible expense in the 1st year. In addition, a bonus depreciation of 50% of the costs that exceed $500,000 can also be treated as an expense in the first year (IRC 168-K). This means that $750,000 of equipment purchased this year would have $227,500 in after tax cash savings (assuming 35% tax rate). See the interactive table below.
Enter Property Amount Purchased in the Table to Calculate Savings
Self Employed Can Deduct Health Insurance Costs
That’s right. The self employed can now deduct the health insurance costs for themselves AND their families when calculating their self employment tax. The catch is that the tax benefit doesn’t apply to those with a secondary business and a full-time job in which their employer provides for a subsidized health plan. Those with spouses that have an employer subsidized health plan are also disqualified from the tax deduction.
Deduction Limit Increased to $10,000 For Startups
While partnerships and sole proprietor-ships do not benefit from the general tax credit provision, they can deduct up to $10,000 of startup expenses which is up from $5,000 in previous years. If expenses exceed $60,000, the $10,000 deduction is decreased dollar for dollar. This means that $65,000 in first year expenses would allow a partnership to deduct $5,000 on their tax return. The remaining amount is deductible ratably over 180 months or 15 years.
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