5 New Tax Breaks

No one likes to file tax returns. This year, however, because of federal tax legislation, a number of tax law changes present money-saving opportunities on 2010 returns. Here are five brand-new breaks for small-business owners.

1. Self-Employment Tax Savings—Self-employed individuals pay their share of Social Security and Medicare taxes through self-employment tax. For 2010, if you are self-employed and paid health insurance premiums for yourself (and your spouse and dependents), you can reduce your net earnings—the amount on which the self-employment tax is figured—by your premium payments. Say you paid $12,000 for medical coverage in 2010; the reduction in your net earnings will save you about $1,800 in taxes.

2. Tax Credit for Providing Health Coverage for Employees—If your business paid at least 50 percent of the cost of premiums for your staff, you may be eligible for the new tax credit, which can be as much as 35 percent of your costs. This credit reduces your tax bill dollar for dollar; a $10,000 credit cuts your taxes by $10,000. To qualify for the full credit, you must have no more than the equivalent of 10 full-time employees with average wages of $25,000. A partial credit applies for as many as 25 employees and average wages of $50,000.

3. A Tax Refund from Business Tax Credits—The general business credit is an overall limitation on many business-related tax credits, such as the work opportunity credit, research credit and credit for small-employer pension plan startup costs. If the total of your credits exceeds this limitation, you can carry the excess back to offset taxes paid in those years. Usually, the carry-back is one year. However, for small-business credits arising in 2010, the carry-back period is five years. What’s more, the carryback can offset not only your regular tax, but also your alternative minimum tax (AMT).

4. Writing Off Certain Purchases—If you bought equipment, machinery or off-the-shelf software or made improvements to your space in 2010, you may be able to write off all of your costs on your 2010 return rather than having to depreciate the costs over a number of years. Two important tax breaks can help. Bonus depreciation for new equipment and leasehold improvements. The write-off is 50 percent of costs before September 9, 2010, and 100 percent for costs after September 8, 2010. First-year expensing for new or used equipment and leasehold, restaurant and retail improvements. The write-off is up to $500,000 ($250,000 for leasehold, restaurant and retail improvements).

5. Credit for Research Expenditures—According to the Small Business Administration, small businesses obtain 13 times more patents on a per-employee basis than large corporations. In order to pay for R&D, the tax law provides certain incentives, one of which is a credit for increasing research expenditures. This credit of up to 20 percent of certain costs expired at the end of 2009. Fortunately, it was extended for 2010. Important: As a small-business owner, you should meet as soon as possible with your tax advisor to discuss your 2010 return and explore these and other ways to save on your taxes.