2013 Business Tax Changes and Credits in Fiscal Cliff Deal Extend Small Business Jobs Act Tax Changes

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[2013 Small Business Tax Breaks Extensions] Congress and the Obama administration have reached an agreement that will extend a number of small business tax breaks through 2013 following the fiscal cliff deal which was legislated through the Taxpayer Relief Act of 2012. This includes:

R&D credit extended: The Research and Development (R&D) tax credit was extended for another year and reinstated retroactively for 2012 (as it had expired at the end of 2011), though lawmakers stopped short of making it permanent. Employers can now continue to get tax breaks for between roughly 6 percent and 14 percent of their R&D expenditures in 2012 and 2013.

Section 179 continued: Congress renewed for another year the maximum deduction levels for bonus depreciation and Section 179, which give tax breaks to businesses that purchase or lease software and equipment — both provide a boost for small employers planning to invest back into their firms in 2013. The new law extends the maximum deduction to $500,000 for the 2012 and 2013 tax years for companies with under $2 million in qualifying capital expenditures.

Bonus Depreciation. The bonus depreciation provision enables small businesses to recover the costs of qualified new equipment faster than the ordinary schedule, by permitting the depreciation of 50 percent of the cost in the first year. The provision was set to expire at the end of 2012, but has been extended through the end of 2013 (and 2014 for certain types of property).

Employment tax breaks continued: The Work Opportunity Tax Credit (WOTC), a tax incentive for firms that hire widely underemployed groups like youths and veterans, as well as breaks for renewable energy technologies and retail/restaurant improvements were extended through 2013.

Other Small Business Tax Credits. There are a handful of other targeted tax credits that were extended for 2012 and 2013, including: the new markets tax credit for businesses that invest in certain community development entities and other qualified investments; a reduction in the recognition period for S-corporation built-in gains tax; and a reduction in the time from 39 years to 15 over which a business can recover the cost of certain leasehold improvements and restaurant and retail property; among other targeted provision

Source : Washington Post, Small Business Administration

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With the passing of the Bush-era tax cuts and small business jobs act tax provisions, a number of tax laws will come into effect this year. Here is a summary of the key tax changes and how your business and personal income taxes could be affected.

Corporate Tax Rates 

The 2011 corporate tax rates are the same as the last few years as shown in the table below. While the tax rate structure may not look uniform, it does produce an effective flat tax rate of 34% for incomes from $335,000 to $10,000,000, gradually increasing to a rate of 35% on higher taxable incomes. Different corporations and business’ are subject to special tax provisions for which the IRS website should be consulted. Further, corporations are subject to state and local taxes based on the area in which they are incorporated and/or operate.

2011 Corporate Tax and Business Tax Rates and Brackets

You can find the 2011 personal income taxes here, which are important for small businesses incorporated as sole proprietors, partnerships and S-corps.

Temporary exclusion of 100% of gain on certain small business stock

Business’ now have an additional incentive for investment in qualified small businesses, whereby  investors in qualified small business stock can exclude 100% of the capital gain upon sale of the stock. The exclusion under this provision is not an item of tax preference for purposes of the alternative minimum tax. In order to claim the capital gain exclusion, the qualified small business stock must be:

1. Acquired after September 27, 2010, and before Jan. 1, 2011, and

2. Held for at least five years before the stock is sold.

Under current law, the earliest tax year for which this 100% capital gain exclusion can be claimed is 2015. Additional limitations, qualifications and requirements may apply.

General business credits of eligible small businesses for 2010 carried back 5 years

New provisions now allow an eligible small business to carry back general business credits five years. Previously, the credits could only be carried back one year. The carry back is for credits determined in the first taxable year beginning after December 31, 2009. An “eligible small business” in general is defined as follows:

1. A corporation whose stock is not publicly traded, a partnership, or a sole proprietorship, and

2. The taxpayer must have $50,000,000 or less in average annual gross receipts over the three preceding tax years.

General business credits of eligible small businesses in 2010 not subject to alternative minimum tax

The new laws allow general business credits to offset both regular income tax and alternative minimum tax of eligible small businesses (defined above). The provision is effective for any general business credits determined in the first taxable year beginning after December 31, 2009, and to any carry back of such credits.

Temporary reduction in S-Corporation built-in gain recognition period

Under the Small Business Jobs Act, if the fifth year of an S Corporation’s recognition period ends before their 2011 taxable year begins, then no tax is imposed on the net recognized built-in gain for the 2011 tax year. Built-in Gains are recognized on Form 1120S Schedule D, Capital Gains and Losses and Built-in Gains. The 2011 Instructions for Schedule D, Form 1120S, will be revised and made available shortly.

Increased expensing limitations for 2010 and 2011; certain real property treated as Code section 179 property.

An expense deduction is allowed for businesses which choose to treat the cost of certain qualified property, called section 179 property, as an expense rather than a capital expenditure. For qualifying property placed in service during the taxable years 2010 and 2011, the new law increases both the maximum amount of the deductible expense, as well as the statutory phase-out amount. The provision also allows an election by a taxpayer to exclude qualified real property from the definition of IRC Section 179 property.

Additional first-year depreciation for 50% of the basis of certain qualified property

QuickBooks Online  - Try it Free for 30 daysGenerally, businesses are allowed to recover the cost of capital expenditures over time through depreciation expense. IRC Section 168(k) allows for additional first-year depreciation, for 50% of the basis, of certain qualified property placed in service after December 31, 2009. The new law extends the additional first-year depreciation deduction to qualified property acquired and placed in service during 2010. A taxpayer must use Form 4562, Depreciation and Amortization, to report depreciation on a tax return.

Increase in amount allowed as deduction for start-up expenditures in 2010

For taxpayers starting an active trade or business, the new law increases the amount the taxpayer is allowed to elect as a deduction for start-up expenditures under section 195(b) for taxable years beginning after December 31, 2009. Section 2031 allows up to $10,000 as a deduction for start-up expenditures and provides for a dollar-for-dollar reduction of the $10,000 deduction if start-up expenditures exceed $60,000. This expense should be claimed as an “Other Deduction” on business returns, such as the Form 1120, 1120S or Form 1065, or as an “Other Expense” on the related Form 1040 Schedules C or F, beginning with the 2010 tax year. The remaining balance of start-up expenditures is deducted on a prorated basis over 180 months on Form 4562, Depreciation and Amortization.

Deduction for health insurance costs in computing self-employment taxes in 2010

Generally, small business owners may not deduct the cost of health insurance when calculating self-employment tax. Under the Small Business Jobs Act, and subject to specific statutory limitations (i.e. deduction is not available if self-employed individual is eligible to participate in an employer-subsidized health plan maintained by the employer of the taxpayer or the taxpayer’s spouse), business owners can deduct the cost of health insurance for themselves and their family in the calculation of their 2010 self-employment tax.

Source and more information : IRS

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{ 3 comments… read them below or add one }

andys2i September 25, 2011 at 11:05 am

From the tax Foundation Special Report No. 195 – here are their key findings which confirm the US corporate tax code is in need of major reform:

• The U.S. has the second-highest statutory corporate income tax rate in the developed world. Despite anecdotes regarding a few companies that exploit the dubious carve-outs in the tax code to minimize their tax liabilities, the results of 13 unique studies of the effective tax rate on corporate investment across the globe show that the average U.S. effective corporate tax rate, like the statutory rate, is nearly the highest in the world.

• By every available measure, the U.S. imposes a very high tax burden on its corporate sector, in comparison to other nations, even after credits and deductions are considered.

• The most recent studies show that the average effective corporate tax rate for corporations headquartered in the U.S. is roughly 27 percent, while the average of other nations is about 20 percent. The effective average rate for new investment in the U.S. is roughly 29.8 percent, 7.4 point above worldwide competition.

• The U.S. effective corporate tax rate consistently ranks among the five highest of nations considered. The only nation with a higher effective tax rate in each study is Japan, which not by coincidence is the only developed nation with a higher statu­tory rate than the U.S.

• The literature shows that high corporate taxes and high effective tax rates are detrimental to attracting investment, and subsequently detrimental to economic growth.

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Miriam January 14, 2011 at 12:49 pm

I am a small business owner in IL and thanks to the new democratic government the state corporate taxes are going up from the current 4.8 percent to 7 percent until 2015 (only returning, which I doubt, in 2025). Its frustrating that the government is taxing us for it’s budget incompetence. How do they expect business’ to survive in this country. Canada or Mexico (even with the cartels) may be a better idea.

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Frank January 9, 2011 at 8:28 pm

One word for business to avoid taxes : Transfer pricing. This is how super profitable companies like Google have a 2.4% on $11 billion of revenue. Thanks to globalization many corporations with foreign subsidiaries and shell companies can minimize their tax by using transfer pricing. For example a company located in the US may sell its product to its distributor in Ireland (a low corporate income tax country) at a lower price, thereby lowering its profit in the US and increasing profit of its subsidiary by selling the product at a higher price in different countries.

This practice is very common in companies which deal with intellectual property because it is easily transportable across countries. Companies like Google, Microsoft and others use transfer pricing effectively to reduce their tax liability. It seems that in this age of outsourcing and Internet, businesses will find loopholes to reduce their tax liability no matter how we design the corporate tax system. It should also be noted that businesses also pass their tax burden forward to consumers by increasing prices. Time for a big change in our tax system.

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