2010 was a crazy, tumultuous for tax law complete with a white knuckle final law that passed at the last-minute. For a super-nerdy accountant guy like me this was more drama then Super Bowl and the finale of my wife’s favorite soap opera combined. Now that the dust has settled, and you’re doing end-of-year tax planning or preparing to file 2010 tax numbers, the question is “Tyler, what really changed with all these laws and how does it affect me as an entrepreneur.” Great question, let’s investigate.Basically, there were three big tax acts in 2010: the HIRE Act, the Patient Protection and Affordable Care Act, and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The last of these, we’ll call it the Tax Relief Act, basically kept in place all of the so-called Bush Tax Cuts through 2012. The second, we’ll call it Patient Protection, will primarily promise higher taxes for some taxpayers in future years, and the first, the HIRE Act has some sweet short-term discounts to encourage hiring.The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 in briefThis act was passed primarily to continue most of the tax cuts put in place during the Bush Administration until 2012, an election year.Income Tax Rates – 2009 individual income tax rates will be continued for 2010 and through 2012 for all taxpayers.
Capital Gains Tax Rates – 2009 rates on capital gains and qualified dividends will be extended through 2012.
Payroll rebate – 2% Social Security rebate for employees – The employee’s share of Social Security taxes will reduce from 6.2% of wages to 4.2% for 2011. Self-employment tax will decrease to 10.4%. The best part of the deal is that social security benefits will not be affected by discount, although, at some point in time some taxpayers will have to foot the bill for it.
What employers have to do – employers “must implement the new rules as soon as possible but no later than January 31,” in the words of the IRS. If you don’t catch this by the first payroll then you can make an adjustment to the second to compensate.
What employees have to do – absolutely nothing. It is your employer’s responsibility to comply.
AMT Patch – the exemption amount for the Alternative Minimum Tax is increased to $47,450 for individuals, $72,450 for married taxpayers filing a return jointly and $36,225 for married but filing separately couples.
Estate Tax – Among the biggest dramas of 2010 has been whether George Steinbrenner’s heirs would inherit his estate without owing any estate tax (“death tax” to you tea party types). Well, thanks to this bill I can confidently tell you maybe, but probably not. For 2010 estate managers will have the option of selecting the new regime of a $5 million dollar exclusion with a 35% rate thereafter or of opting under the system that would have a 0% rate but would have denied the “step-up” in basis that inheritors have received under the previous rules. It gets complicated and few of my readers are passing on >$5 million estates in 2010 (unless you plan on dying tomorrow).
Bonus Depreciation – what’s sexier than 50% bonus depreciation? Try 100% bonus depreciation! For select fixed assets placed in service from September 9, 2010 through the end of 2011, 100% of the purchase price of the asset may be depreciated in the year of purchase. For the entrepreneurs with smaller businesses this is important because you can take bonus depreciation even in a loss situation whereas Section 179 cannot put you into a loss. Also, bonus depreciation could be advantageous with the purchase of a vehicle used for business purposes.HIRE ActThe HIRE Act was only in effect for 2010 and provided employers with an incentive to hire previously unemployed persons by giving them a 100% reduction on the employer portion of the payroll tax of the qualified hiree. Furthermore, if the employee remained hired for 52 consecutive weeks then the employer could be eligible for a credit of up to $1,000 per employee. While it is too late to hire a new employee if you hired someone eligible for the credit don’t forget to apply for the $1,000 credit when they hit 52 weeks!Tax Planning in 2011The oldest trick in the book for tax planning is for cash-basis (as opposed to accrual basis) taxpayers, like most of you, to accelerate expenses into the current year through a number of tactics, including accelerated depreciation (like Section 179 or the 100% bonus depreciation available in 2011) or through the purchase of goods and services in the current year that won’t be needed or utilized until the subsequent year. Alternatively, the taxpayer could delay the receipt of revenue by not sending out billings until the subsequent year. This is the “kick the can down the road” strategy for taxes; the income will eventually have to be recognized (nerdy accountant speak for saying that taxes will be owed on it) but we would rather that day came later instead of sooner. Well, the problem with this strategy comes in times of increasing taxes, such as we are likely to enter soon. All of the above mentioned laws that provide or extend tax benefits are temporary measures that will expire in 2012, an election year. Most of the political junkies who follow these things would guess that taxes will have to rise in order to keep pace with the gigantic debt the United States is ratcheting up. If this is the case then in 2011 you could actually find yourself in the position of wanting to prepay your taxes by accelerating revenue or deferring expenses.An additional tax bill that has already been passed into law, as part of the Patient Protection and Affordable Care Act, and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, will tack on an additional 0.9% Medicare tax for married filing joint taxpayers earning greater than $250,000 and for single taxpayers earning greater than $200,000 for the 2013 tax year by 0.9%. In addition, those same taxpayers will be charged a 3.8% Medicare tax on earnings on investments; which were previously not subject to employment taxes.In conclusion, 2010 was a year of great uncertainty and apprehension regarding taxes for the productive class. In the end, most tax hikes and any tax reform was pushed further down the road; leaving us with something rather like 2009. Certain tax hikes are already in the books, albeit not taking effect until further down the road, and taxpayers can expect additional uncertainty in 2012 when the current tax rates expire.