Making The Most At Tax Time

The business of America is small business. More than 99 percent of companies in this country are categorized as “small,” but their impact on the U.S. economy is huge. These businesses employ half the private workforce and have generated as many as 80 percent of new jobs annually in the course of the past 10 years.

As the IRS finally begins to accept itemized 1040 tax returns for last year, it’s worth taking a look back at the Small Business Jobs Act of 2010, passed by Congress and signed by President Barack Obama in September 2010.

The new law is the most significant tax break in years for entrepreneurs and small-business owners. For these critical, still-struggling players in the U.S. economy, the Act couldn’t be more timely, and smart small businesses should make sure to take advantage of some of the $12 billion in new tax benefits it put on the table.

Increased Section 179 expensing limits on machinery, equipment, software, and, for the first time, real estate, are among the most dramatic changes. The dollar limit on the expense deduction for 2010 and 2011 is $500,000, which is double what it otherwise would have been for 2010, and 20 times what it otherwise would have been for 2011 (although the deduction starts to phase out if investment exceeds $2 million, and phases out completely at $2.5 million). A company that had planned to deduct expenses at the previous limit of $250,000 for 2010 now can, within certain restrictions, deduct up to a quarter of a million dollars more.

It’s a big enough tax break that business owners should think carefully about how to maximize deductions for both 2010 and 2011. The new provisions for expensing up to $250,000 of “qualified real property” (within the overall $500,000 expense deduction limit) are more complicated than the rules for equipment expensing, but with the expertise of a tax pro, the savings can also be impressive. And remember that while the Section 179 expense deduction for any given year is limited to taxable income, any excess can be carried forward to succeeding tax years.

The Act is a multivitamin for startups. It continues 50 percent bonus depreciation, which was supposed to end in 2009, through September 8, 2010. (Under later legislation, new equipment, like computers or software, can be expensed at 100 percent of the cost if acquired and placed in service after September 8, 2010 and before 2012.) There’s also an $8,000 increase in the amount of first-year depreciation that can be deducted for new vehicles acquired and placed in service in a trade or business in 2010 (extended by later legislation through 2012). These are ways, as with the new expensing limits, to boost tax savings.

It’s also important to realize there is no capital gains tax on certain investments in qualified small-business stock held for more than five years. Additionally, entrepreneurs can deduct $10,000 of their startup costs (up from $5,000) when computing their 2010 taxes, including expenses for training, advertising, travel, and even market research. General business credits for eligible small businesses that previously could be carried back just one year to offset the previous year’s tax now can be carried back five years. And there’s more—like a deduction for health insurance costs when computing self-employment tax. Documentation for cell phone deductions has also been simplified. It can all add up very nicely for anyone trying to get a new business off the ground.

If you’ve been discouraged trying to get a small-business loan in the past several quarters, consider taking another shot at it. A $30 billion fund has been set up to encourage smaller banks (those with less than $10 billion in assets) to make loans to small businesses. Initially, banks could pay the government back as little as a 1 percent dividend on the money from the fund if they increase loans to small businesses by 10 percent.

There are some aspects of the Act not only to be aware of, but also to be wary of, especially in the area of accurate and timely filing of taxes. For information returns, failing to file, filing late, and “intentional disregard” will all be more heavily fined. Also, new Form 1099 reporting requirements resulting from the 2010 Health Care Act will mean major changes in how businesses report spending.

The U.S. economy cannot recover fully without small business. The 2010 Small Business Jobs Act is a recognition of that. The law put real money on the table. Smart businesses will be sure not to leave any of it behind when filing 2010 tax returns.

This article was written by Lesli S. Laffie and published by Portfolio.com.