Nov 21, 201909:33 AMOpen Mic
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8 tax considerations for small business owners
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As we approach the end of the year, tax planning often takes center stage — even if it should be center stage year round. If you’re a small business owner, there are many tax deductions and credits to be aware of. We are highlighting several here that have broad application. Be sure to speak with your tax advisor before you take action.
Tax breaks for small businesses fall into two categories: credits and deductions. Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. Tax deductions reduce how much of your income is subject to taxes, which may or may not reduce your actual tax bill. Below are some of the most common credits and deductions, although this is by no means an exhaustive list.
1. Research and development (including payroll tax credit)
This credit is available to companies in a variety of industries for increasing specified research and experimental expenses from year to year, including those for qualified software development. A qualified small business can elect to use the credit (up to $250,000) to offset the employer portion of Social Security tax liability on wages. Many small businesses (especially startups) operate at a loss or don’t throw off sufficient income to effectively utilize the income tax credit currently. The payroll tax credit election allows for current utilization — a real cash flow benefit.
In the past, small businesses had been limited in their ability to claim the R&D credit due to net operating losses or even alternative minimum tax (AMT) positions. However, the Protecting Americans from Tax Hikes (PATH) Act of 2015 included these valuable changes:
- Eligible businesses with less than $50 million in gross receipts can take the R&D credit against AMT liability.
- Certain small businesses with less than $5 million in gross receipts can take the R&D credit against payroll taxes.
2. Health care
The small business health care tax credit can benefit eligible employers who provide health coverage for their employees. Generally, to be eligible for the credit your business must have fewer than 25 full-time equivalent employees, pay an average salary of less than $54,200 a year (in 2019), and pay at least half of your employees’ health insurance premiums. In addition, you must use a SHOP Marketplace Plan for the health coverage.
If your business qualifies, the maximum credit is 50 percent of employer-paid premiums (35 percent for tax-exempt employers — this is a refundable credit). You can claim the credit for only two consecutive taxable years. Even if your business does not owe tax, you can carry the credit back or forward to other tax years. Keep in mind, even if your business does not qualify for the credit, you may still be able to deduct the cost of contributing to monthly employee premiums from your federal income as a business expense (and the premiums in excess of the credit amount should be deductible if you qualify). (See “health insurance premiums” below.)
3. Bonus depreciation/Section 179
Under IRC Sec. 168, business owners can write off the entire cost of qualifying purchases under the 100 percent bonus depreciation rules enacted with the Tax Cuts and Jobs Act (TCJA). That means your business can generally expense 100 percent of the cost of any property with a recovery period of 20 years or less and deduct it in the year the property is placed in service.
Under IRC Sec. 179, you may elect to expense all or part of the cost of any Sec. 179 property in the year it is placed in service. As of 2018, the maximum deduction is $1 million with a phase-out threshold between $2–2.5 million.
Section 179 property includes (new or used but new to you):
- Machinery, equipment, computers, furniture, and vehicles
- Qualified real property, which may include improvements made to nonresidential real property
The benefit to Sec. 179 over Sec. 168 is that it is easier to fine tune annually (elected property by property), doesn’t complicate UNICAP for those businesses subject to IRC Sec. 263A, and covers certain qualified real property not eligible for 100 percent bonus depreciation.
4. Business loan interest
The TCJA introduces some limitation for deduction business interest expense. However, if your business has average annual gross receipts of $25 million or less over a three-year period, you may be eligible to deduct the full amount of business loan interest from qualifying loans. (Large businesses can only deduct interest amounting to 30 percent of their adjusted taxable income.) In addition, if you take out a personal loan but use some of the money for business expenses, you may be able to deduct the interest on the business portion.
You’ll want to keep good records to make sure you comply with any IRS requirements. For example, keep your loan agreement handy and be sure to document that your lender is processing your payments.