January 5th, 2011 : Featured Tax Cuts of 2010 - Great News for Businesses
Do you own a business? Are you wondering how your company is affected by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 - aka the Obama Tax Cuts?
If so, read on. We explain how your business can benefit from the new tax cuts. We also tell you about your responsibility to enact the payroll tax cut for your employees.
Paying Less Tax Under the New Legislation
The Bonus Depreciation Doubled in Size
Under the Obama Tax Cuts, the bonus depreciation amount jumped from 50% to 100%. This means businesses can write off 100% of eligible purchases (e.g., equipment and off-the-shelf computer software) bought and put in service between September 9, 2010 and December 31, 2011.
Note: In 2012, business owners can still take a bonus depreciation, but it will be back at the 50% level.
Section 179 Deductions Also Got a Boost
Section 179 deductions allow businesses to deduct the full purchase price of property from their gross income.
Section 179 deductions differ from standard depreciations because they allow you to write off your expenses in the same year you bought property, rather than spreading it out over time.
Section 179 was bolstered under the Small Business Jobs Act of 2010 (signed September 27, 2010), with the allowable deduction set at $500,000 for 2010 and 2011. Now, under the Obama Tax Cuts, the maximum deduction will fall only to $125,000 in 2012, rather than to $25,000, as it would have without the recent tax cut package.
This should inject confidence in the business owner that she can continue to invest in her business for the next few years - which is beneficial not just for her, but for the U.S. economy as a whole.
Caution: Estates and trusts cannot take a section 179 deduction.
Section 179 Vs. Bonus Depreciations - Which Is Better?
Section 179 deductions are available on all new and used equipment, whereas the bonus depreciation (set now at 100%, with no limit) is for new equipment only.
Think of the bonus depreciation as an extra deduction you can take - but you must take it in the first year only.
To figure out which type of deduction is right for your business for tax year 2010, give us a call.
Complying with the New Payroll Tax Cut
The Obama Tax Cuts instituted a one-year reduction in the Social Security tax for employees, from 6.2% to 4.2%. This means the single taxpayer making $50,000 will save $1,000 on taxes in 2011.
Note: This reduction in Social Security tax will not impact the employee's future Social Security benefits.
But it's up to business owners to adjust their employees' withholdings. They must do so as soon as possible in January 2011, but no later than January 31, 2011. Notice 136 lists the new amounts you should withhold from employees' paychecks.
Caution: If you withhold too much Social Security tax during January, you will need to make an offsetting adjustment in your employees' pay as soon as possible and no later than March 31, 2011. Ask us for more details.
Self-Employed Folks See a Reduction, Too. Those who own businesses with no other employees should also be aware of their new Social Security withholding amount, which fell from 12.4% to 10.4%. This combined with the 2.9% Medicare rate brings the total of the 2011 self-employment tax rate to 13.3%.
Confused? We're Here to Help
The Obama Tax Cuts are designed to bolster the economy by putting more money back in the pockets of business owners, thus allowing them up to hire more workers.
But to take advantage of the new rules for deductions and depreciations, you have to understand the new law.
That's where we come in. To find out more about how to improve your business with certain investments now and in 2012, give us a call.