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Tip of the Month for November, 2010

Tip: Take Full Advantage of Tax Breaks in Small Business Jobs Act

The Small Business Jobs Act of 2010 is intended to provide some welcome tax relief to businesses, with the hope of spurring growth and job creation. Many of these provisions are set to expire after 2011. It is important for business owners not to overlook any of these newly minted tax breaks because most will not be around for the taking for very long. A broad overview of the eight new tax cuts President Obama signed into law in September 2010 follows. For details on how these measures might affect your business and your tax bills for 2011, consult your professional tax advisor.

  • Investors who put money into small businesses will be exempt from capital gains taxes on their individual investments as long as they hold them for at least five years. The 100 percent capital gains tax break is an extension of tax relief provisions that have been in place since last year’s stimulus package and will expire at the end of 2010. As of January 1, 2011, the tax break will decrease to 50 percent. Additionally, this latest tax break will not be subject to the Alternative Minimum Tax. The President has indicated that more than 1 million small businesses could benefit from such investments this year.
  • The amount of investment that a business can immediately write off for 2010 and 2011 has increased from $250,000 to $500,000. The level at which the write-off begins to be phased out has been raised to $2 million.
  • The 50 percent bonus first-year depreciation has been extended for qualified real property through 2010.
  • The bill also gives self-employed business owners a new deduction for health insurance costs for themselves and their family members when calculating their self-employment tax. This new provision is expected to provide more than $1.9 billion in tax cuts to entrepreneurs.
  • The bill also provides tax relief and simplifies the process of claiming deductions for cell phones and similar hand-held communications devices.  
  • A temporary increase in the amount of start-up expenses that entrepreneurs can deduct from their taxes for 2010 has been increased from $5,000 to $10,000 (with a phased-out threshold of $60,000 in expenditures).
  • Certain small businesses will be allowed to “carry back” general business credits to offset five years of taxes (instead of one year), and these credits will be allowed to offset the Alternative Minimum Tax.
  • Penalties imposed on small business owners for errors in tax reporting will be eased. Beginning this year, the bill will change the rate penalties are calculated for failing to report certain tax transactions. Instead of a fixed dollar amount, a method that was criticized for putting disproportionately high penalties on small businesses in certain circumstances, penalties will now reflect the percentage of the tax benefit from a specific transaction. However, penalties for failing to file information returns will increase.

While you are thinking about the tax breaks listed above, don’t forget to consider the possibility of major hikes on estate gift, and capital gains tax rates if the expiration of the 2001 tax breaks proceed as planned. Consult your tax and investment professionals to ensure your personal and business tax strategies are in line with projected changes.

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