Business Provisions of the American Taxpayer Relief Act

While a good majority of the tax changes in the 11th hour Fiscal Cliff bill (American Taxpayer Relief Act of 2012) concern individual taxes, there are a few changes for small business owners, which are mostly centered around the extension of and retroactive change to depreciation limits and rules.

Section 179 Depreciation Limit

In 2011, we had a $500k limit on the amount that could be taken as Section 179 depreciation expense (provided the business purchased less than $2 million in qualifying property in the year).  This limit was very generous and few small businesses had to worry about getting close to this limit.  However, in 2012 the limit was scheduled to be reduced to $139k (after inflation adjustments), and then even further reduction to $25k in 2013.  For small businesses that acquire a lot of equipment each year, such large limit reductions would have a big impact.

All of 2012, we were unsure if Congress would increase the Section 179 limit, and finally after the ball dropped in Times Square and many of us had resigned ourselves to the 139k limit, our bickering government representatives finally get it together and decided to make a retroactive change to the 2012 limit.  Now, it is as if the the treat of the $139k limit never existed, and we now have a $500k limit for 2012 and 2013.

Now, correct me if I am wrong, but I thought the purpose the Section 179 depreciation benefit was to encourage business owners to buy more business equipment and help spur economic growth?  How are we suppose buy equipment when our government does not decide on the depreciation limit until after the year is over?  I had several clients that typically buy more than $139k in equipment that were trying to make purchase decisions at year-end, and the delay caused by partisan politics in Washington on this limit was extremely frustrating.

Bonus Depreciation Kept Alive

Is bonus depreciation ever going to truly go away?  It seems it is always brought back by 11th hour legislation.  Unfortunately, this time around we only have 50% bonus depreciation that is extended through 2013.  While businesses with net taxable income will use Section 179 depreciation, bonus could be useful for those with losses.

In 2011, we were spoiled with 100% bonus depreciation, and we pretty much wrote off everything in the first year that qualified.  Now we are going to be a little more limited, but it is still a good benefit if you remember back to years before bonus was available.  At best, it provides a great first year deduction for those of you who purchased new vehicles weighing less than 6,000 GVW.  Even with 50% bonus depreciation, you are still going to get $11,160 in depreciation in the first year ($11,360 if a light van or truck) given that most new vehicles are well over $22,320 these days.  Remember, it has to be a brand new.  Certified new does not qualify.

Qualified Leasehold Improvement Retroactive Change

Even though this one will greatly benefit my calendar year filing businesses, it frustrates me to no end that Congress would make this change retroactive to 2012.  Not only did it make one paragraph from my book obsolete, but we are going to have to file several amendments for our fiscal year corporations that have already filed tax returns with qualified leasehold improvements put into use after 1/1/12.

To fully understand my frustration, you need the background history on this tax deduction:

  • In 2011 (and several years prior) you could depreciate qualifying leasehold improvements over 15 years and then use Section 179 or bonus depreciation on the improvements.
  • Before this rule, we had to depreciate them over 39 years, so this was a BIG benefit.
  • Due to the patchwork of tax code in the last few years, the special treatment expired as of 1/1/12, and qualified leasehold improvements could no longer be depreciated over 15 years.
  • Even worse, if you had any 179 carryover originating from qualified leasehold improvements at that point, you had to reclassify the amount (according to steps in Sec 179(f)(4)) and depreciate it under the 2012 rules over 39 years.  Reporting this adjustment was a bit complicated since the IRS did really anticipate the expiration of the tax rules, so not only was it a lost benefit, but it cost fiscal year small businesses more in tax prep fees.
  • Fortunately, there was some saving grace in that the qualifying improvements still qualified for bonus depreciation (since the availability of bonus treatment was not based on the 15 year life), so we were able to take 50% bonus depreciation, but the rest went over 39 years.

Now, fast forward a few months after these fiscal year returns have been filed to when we are all enjoying New Years and watching football (or soccer in my case).  Our government officials, in all their wisdom, decide to retroactively change the 2012 rules and make the 15 year special treatment available again.  In addition, they extend it to 2013 as well, so it is as if the rules we used during 2012 for fiscal year filers never existed.

Again, if you are a calender year filer and you made or are looking to make some leasehold improvements that qualify for the 15 year treatment, this is very welcome news.  However, if you are a fiscal year filing corporation, your CPA may need to file amendments for you once the tax preparation software companies update their software for all the Fiscal Cliff bill changes.

By the way, if you bought my book and would like more information on this change, please feel free to email me at  Again, it only changes one paragraph in the Fixed Assets chapter, but I would be happy to provide additional details on this change for my readers.

Other Extenders

In addition to the depreciation changes and the retroactive change that has me all riled up (much like the Cascadian supporter groups are at Don Garber), there were also some minor extensions that will benefit a select group of small businesses.  The Research and Work Opportunity Tax Credits were both extended through 2013.  The enhanced charitable deduction for contributions of food inventory is also extend through 2013, as is the special treatment of qualified small business stock.

All in all, there was not much change for businesses; however, we will likely see more substantial changes later in the year.  You may say I am a dreamer, but I am thinking we may actually see some comprehensive tax reform this year.

Obama vs. Romney Tax Policy Outline

The first 2012 Presidential debate will take place on Wednesday, and this time it will be focused on domestic policy.  One of the most important domestic issues right now is the “Fiscal Cliff” and tax reform that is long overdue.  I highly recommend you read through CCH’s outline of the tax policies of each candidate before Wednesday’s big event.  It was released back on 9/11/12 and provides great analysis that is easy to follow even if you are not a tax professional.

While actual tax reform will likely require a lot of compromise from both parties, it is good to have an understanding of both platforms, as ideas from each could end of shaping eventual reform in 2013 and beyond.

My guess is that most small business owners are a bit apathetic this election cycle, as we all know that some form of tax increase is just around the corner regardless of who wins the election.  After all, it is very likely that the 2% payroll tax holiday will be left to expire at the end of the year, and many high income taxpayers will have to starting paying the additional Medicare taxes resulting from the Health Care reform that the Supreme Court upheld in June.

Personally, I am a bit of a skeptic, as politicians have avoided substantial tax reform for years.  In fact, right now I am more interested in what Caleb Porter will bring to the Portland Timbers in 2013.  Tax increases will be a little easier to take if we make it to the playoffs next year. #RCTID

Accounting for Health Insurance Premiums

At this point in the year, many of you are now familiar with the Small Business Health Care Tax Credit.  If you qualified for the credit for 2010, you likely witnessed first hand all the extra information that is required for the credit calculation.  Below is an except from our recent newsletter on the tax credit.

Health Insurance Premium Bookkeeping
Much of the tax credit calculation revolves around eligible employee hours and wages; however, once an employer is determined to be eligible for the credit, much more information is needed with regards to the employer’s health insurance premiums.  Fortunately, a few simple procedural bookkeeping changes can greatly simplify this portion of the calculation:

  • Classification of owner and family member insurance – when posting health and dental insurance premium payments, make sure premiums for owners and their family members are posted to a separate sub-account of employee benefits.  These premiums are not included in the calculation, so it is important that they be separated.
  • Premiums for seasonal workers – even though it is important to classify seasonal worker wages and hours separately from eligible employees, their premiums are actually included in the calculation, so make sure their premiums are included with those for eligible employees.
  • Record coverage information in books – in order to finish the calculation, you have to report the type of coverage (single or family) and the number of employees with each coverage type.  To simplify this final step, be sure to note this information in the “memo” field in your books when recording the premium payment.  Typically, this information is provided on the bill from the insurance company, and it is much easier to record this each month than pull all the bills at year end.

For general information on the Small Business Health Care Tax Credit, refer to our post from last year.

1099 Requirements & Increased IRS Penalties

The Small Business Jobs Act of 2010 has substantially increased the penalties for failing to timely file 1099 information returns for payments made in 2010.  If you intentionally disregard sending these forms to vendors and the IRS, the penalty can be $500 per form.  If you make an attempt by sending 1099’s and you miss some, the penalty goes down to $200 per form.   Therefore, we strongly urge you to go through your vendor list and issue 1099s to the following types of vendors:

1.       Vendors who provide you business professional services such as but not limited to accounting, bookkeeping, janitorial, IT consulting and who are not incorporated.  Vendors in this category will include most businesses who are LLCs and LLPs as most of these entities are taxed as partnerships.
2.       All payments to attorneys both incorporated and those not incorporated.

The due date for providing the payee Form 1099 is January 31, 2011.
The due date for providing the IRS Form 1099 is February 28, 2011.

Here is the link to the IRS From W-9 , Request for Taxpayer Identification Number and Certification, to aid you in gathering the required information from your vendors.

Self-Employed Health Insurance Deduction Enhanced

When the Small Business Jobs Act (SBJA) came out in late September, I posted about this deduction on Twitter; however, I never had time to post a full summary because of the tax deadline.  Well, the tax deadline is history and it is time to start looking at some of the new tax changes passed this year and get ready to year-end tax planning.

This was my favorite tax change so far this year – especially since I recently joined the ranks of the self-employed – and it basically allows a self-employed individual to get the same type of pre-tax treatment for health insurance that is available to employees under 125 plans.  Under the SBJA, the self-employed health insurance deduction now reduces self-employment tax in addition to ordinary tax.  This is a great extra tax reduction for sole proprietors and active partnership and LLC/LLP owners.

What would this look like?  Let’s take an active member in a profitable LLC that pays family health insurance premiums of $1,200/month.  Under old rules, the total health insurance premiums for the year of $14,400 would be a deduction on the front of the 1040 on line 29; however, this would only be a deduction against ordinary tax.  Under the new rule, the LLC member would save approximately $2,000 in self-employment tax.  This is a great benefit as long as there is net income and some self-employment tax to offset, and it is definitely needed as small business owners usually pay fairly large monthly premiums for health insurance.

Even better – the new tax rule applies to the self-employed taxpayer’s first tax year beginning after December 31, 2009.  This means that when you are doing your year-end tax planning for 2010, you may find that you have an extra tax deduction this time around.

Read more about this deduction and the SBJA

Small Business Health Care Tax Credit

With all the new incentives out there for employers and recent tax law changes, most small business owners are likely feeling a little overwhelmed.  Between the COBRA subsidy, the HIRE act, and the new incentives & changes from the Health Care Reform Act – being an employer has become much more complicated.  In fact, if you are not keeping up on the changes and planning ahead – you could be missing out some credits and incentives that are available to your business.

One of the specific credits from the Health Care Reform Act that requires some current planning in 2010 is the Small Business Health Care Tax Credit, which is a 35% tax credit based on premiums paid to cover employees.  As the name suggests, you have to be a small business – one with fewer than 25 full-time employee equivalents (FTEs).  In addition, you have to pay average annual wages below $50,000 per FTE.  Lastly, as the employer, you have to pay health insurance premiums under a “qualifying arrangement”, which in simple terms means you pay a uniform percentage of not less than 50% of the premium cost of coverage for each enrolled employee.

I probably lost many business owners right there; however, after reading the fine print in the law you may find that you qualify after all.  The most important fine print: wages paid to business owners or their family members are not included in calculating the average wages or the number of employees.  This is very good news for corporations as the shareholder wages would have likely made most ineligible for the credit right off the bat.  This could work out well for small, family-owned businesses that provides health insurance and employs a number of non-family employees.

Then we hit the final hurdle – as an employer, do you pay at least 50% of the premium cost of coverage for all your employees?  Even if you do not pay a full 50% or even provide this employee benefit at all, you should at least run the calculation to see what your potential benefit would be.  It may be worth looking into.  Not only do you get a tax credit, but in this economy, such an employee benefit could be given in lieu of pay increases.

To calculate you potential tax credit, check out the calculator at

More detailed information on the tax credit:
IRS Q&A Page on the Small Business Health Care Tax Credit
White House Summary & Fact Sheet

Hiring Incentives to Restore Employment (HIRE) Act Update

On March 18, 2010, the President signed the Hiring Incentives to Restore Employment (HIRE) Act.  This new jobs bill is intended to encourage employers to hire the unemployed.  The HIRE Act creates two new incentives for hiring and retaining unemployed workers:

  1. The employer gets a holiday from paying the business’s share of the OASDI (Social Security 6.2%) tax on the new employee for the rest of 2010, and
  2. The employer gets up to a $1,000 tax credit for keeping the new hire on the payroll for at least one year (52 weeks).

Some additional details about the incentives in the new hiring act include:

  • The 6.2% payroll tax holiday is immediate and increases your business cash flow.  While the business is not required to pay its ½ of the OASDI on the new hire’s wages, it must still pay the Medicare tax on the wages paid to the new employees and all FICA taxes for old employees.
  • To qualify, the employee must have NOT worked for anyone for more than 40 hours in the prior 60 days ending with the day the employee starts work for you, and he must have been hired by you after February 3, 2010.  The employee must sign an affidavit form (New Form W-11) confirming his unemployment status.
  • The business can’t simply replace another employee and qualify for the credit unless the replaced employee separated from employment voluntarily or for cause.  An exception may apply if the business had a lay off due to lack of work, and then later rehired due to an increase in work.  You do not need to rehire the laid off individuals, but be careful, there must have been a valid work load reduction.
  • To encourage businesses to retain the new hires for at least 52 consecutive weeks, the HIRE Act also provides a credit up to the lesser of $1,000 or 6.2% of the first $16,129.03 of wages paid for each qualified employee.  This credit will be claimed on the 2011 return.
  • There is no minimum weekly number of hours of work required of the new employee.
  • The maximum payroll tax credit that may be forgiven per employee is $6,622.  The business saves 6.2% on both a $40,000 worker and a $90,000 worker.  There is no maximum dollar amount of forgiveness per business; if you hire 5 qualified employees, your credit could be over $33,000!
  • If a worker is eligible for both the HIRE credit and the “Work Opportunity Tax Credit,” the business can choose one benefit or the other for 2010—no double dipping.
  • There are no HIRE tax breaks if the business hires family members (except spouses).
  • The business can’t simply replace another employee and qualify for the credit unless the replaced employee separated from employment voluntarily or for cause.

Worker, Homeownership, and Business Assistance Act of 2009

The CCH summary of the new tax bill signed by the President today is now available.

For small businesses (with gross receipts <15 million), the most important news is that the 5 year NOL carryback is now extended to 2009.  For those businesses over $15 million, the 5 year NOL carryback is available for 2008 OR 2009, but there are limitations.

For individuals, the $8,000 first-time homebuyer credit is extended, and for non-first time homebuyers who have lived in their residence for 5 out of the last 8 years – there is now a reduced credit of $6,500.

Oregon Income Tax Increases – Sales Tax in Disguise?

Recent articles in The Oregonian laid accolades on the Oregon legislature for all they have done for us during this last session–really important things like banning puppy mills, making it illegal to “top off gas tanks when filling,” requiring calorie counts on chain restaurant menus, and raising the cost of higher education, which, by the way, has increased tenfold in the last 15 years.  Don’t get me wrong, I have always been against the way pet stores have bred the poor puppies in rotten conditions, but I take exception to giving accolades to our government officials during a time of economic stress for spending so much time on trivial pursuits and for not delving into the real reasons behind our budget problems.

I won’t elaborate on the fact that raising taxes historically has produced less income to the government than when tax rates were lowered.  The fact is when more income is generated, more tax is paid.  When the incentive and ability to make money are lowered by raising taxes, less revenue is generated.  Instead I will explain with an actual example how the changes this legislature made during this economy will, in fact, make many businesses think harder about closing their doors and relocating across the river. I will also point out that many businesses this year with between two and twenty  million dollars in sales will possibly have losses, not income.  I will of course acknowledge that my view is somewhat skewed to an observation of only the 120 corporate clients I have firsthand experience with, but this is most likely a reasonable sample of small business in Oregon.

Currently in Oregon, all business entities established as C-corporations filing federal Form 1120, or set up as pass-thru entities such as multi-member LLCs filing federal Form 1065, and S-Corporations filing federal Form 1120S pay a minimum tax of $10 per year.  If the entity was a C-corporation, it would pay tax on its net taxable income at 6.6% but not less than $10, whereas the pass-thru entities only pay the $10, as their net taxable income is “passed through to the individual owners,” and the owners ADD it to their personal income tax returns and pay personal taxes on the combined amount.

Effective for tax years beginning on or after January 1, 2009, the minimum tax on  pass-thru entities goes to $150; however, for taxable C-corporation entities, the minimum tax will be based on the gross Oregon sales, regardless if the corporation has a net taxable income or not. I have long felt the $10 minimum was way too low. It takes much more than $10 to administrate the filing of these returns. I even feel that $150 is low. California, which has one of the nation’s highest minimums, is $800. However, to base the minimum on gross sales for a taxable C-corporation entity is nothing more than a disguised attempt to charge the entities a sales tax.

What the legislature and our governor do not understand is that small businesses provide much more in terms of long-term revenue to our State, regardless of whether they end up with a net taxable income. Let me give you the following example from an actual business that has operated in this state since 1971, employing between 50 and 100 people per year.

This company has an average of $19 million in sales per year and averages 60 employees, so the payroll is an average of $3.2 million per year. The company is a wholesale operation and purchases $12 million worth of products per year. The company provides health insurance and retirement benefits to its employees. It also pays rent to another Oregonian for $350,000. Sometimes we believe that the owner is taking a majority of the $3.2 million in wages.  However, in this example, the owner averages $200,000 or less. Now here is the kicker:  Because this company is generous to its work force, hiring, paying health insurance, retirement, and other expenses, its average annual net income is less than $200,000. And due to economic conditions, last year and this coming year, it will actually have zero net income.

Here is the problem with the current change to the C-corporation minimum tax:  This corporation, and many others like it, will provide jobs to Oregonians, will provide health insurance to Oregonians, will provide revenue to other entities from purchasing products, both in Oregon and across the country, will provide revenue to another entity for rent, will provide retirement to people who might not otherwise save, and for its efforts will pay Oregon $7,500 in minimum tax. In addition, Oregon will pick up revenue from the $3.2 million in wages, both in employment-related taxes and income taxes from those individuals, and from the $350,000 in rent. If you do the math, here is how it looks:  When the corporation makes a net of $113,636, it would pay 6.6%, or $7,500. But if it has a loss of, say, $100,000 and makes nothing, it would still pay $7,500.

Now, let’s examine this same company if it were a pass-thru entity meaning, again, that the net income or loss would be added to the individual’s return and taxed with the personal income. Let us further assume the owner received a salary of $200,000, owned a home with a mortgage and property taxes and, being generous, gave to various charities so that the owner had itemized deductions of $35,000, including a state income tax of $10,000. His state tax under these conditions would be approximately $15,000. Now, if the company had a loss of $100,000, which will be likely during these economic times, his Oregon tax, which would include the company, would go down to $6,000, plus the company’s minimum Oregon tax on a pass-thru entity of $150.

Here is the comparison:  Nothing else in the company is different other than whether it is a pass-thru entity or a C-corp. The owner’s salary is the same, the company expenses and operations are the same. But in one case, the loss saves the taxpayer $9,000 in Oregon taxes, and in the other case, because it is a C-Corporation, not only does the individual still pay $15,000 but the corporation is out another $7,350, for a total difference of $16,350. Even if there isn’t a loss and the company just breaks even, the difference is the minimum tax of $7,350. All this is only because of the type of entity the business chose years ago.

I do not believe the Oregon legislature understands the tax system, or they are more concerned with just showing they did something rather than developing a well thought out change that does not penalize the only source of revenue that they need to correct their budget problems. That source is the working America.

Oregon 2009 Individual Income Tax Increases

In our previous post, we discussed the Oregon business tax increases resulting from House Bill 3405, which passed the Oregon Senate last Thursday.  Coupled with HB3405 is the sister bill regarding individual tax increases – House Bill 2649.  This bill is also headed for Governor Kulongoski, who has already made a statement of support for the bill, so now is the time to start looking at the details and adjusting your estimated tax payments if needed.

Individual Tax Rate Increases

For tax years beginning on or after January 1, 2009, the Oregon income tax rate increases for individuals with taxable income of more than $125k is as follows (previous tax rate was a flat 9% at these income levels):

  • 10.8% on excess taxable income over $125k but under $250k
  • 11% on excess taxable income over $250k

For tax years beginning on or after January 1, 2012, the 10.8% rate is reduced to 9.9% for excess taxable income over $125k but under $250k; however, the 11% rate for excess taxable income over $250k remains the same.

The tax rate on taxable income under $125k remains unchanged at 9%, so we are just talking about the income above $125k here.  For a more detailed breakdown of the rates at different income levels, see page 2 of HB2649.

Phase-Out of Federal Income Tax Subtraction

HB2649 also creates a new phase-out of the Federal income tax subtraction that starts at $125k for single taxpayers and $250k for married filing joint.  Under current law, there is no phase-out of the subtraction and as of 2008, the maximum deduction was $5,600 MFJ or $2,800 single/MFS.  Below are the phase-out windows for the subtraction under HB2649 beginning January 1, 2009:

  • Single/MFS – phase-out starts at $125k with complete phase-0ut at $145k.
  • MFJ –  phase-out starts at $250k with complete phase-0ut at $290k.

Not All About Tax Increases

There are some small “benefits” they threw into HB2649:

  • Oregon will exempt the first $2,400 of unemployment income received.
  • They will not charge penalty and interest to taxpayers that underpay as a result of the tax increases (how gracious of them).

I am sure they will be releasing more detailed information after the Governor signs this into law, but hopefully this helps give you an basic understanding of the new changes.  To get an idea of the impact of the tax increase, review these 2006 Oregon tax statistics.

If you will be affected by these tax increases, be sure to call your CPA or tax professional as you may want to revise your remaining Oregon estimated tax payments for 2009 – or at least get an estimate of the additional tax that will be due.