Small Business Health Insurance Credit

If you saw President Obama give last week's State of the Union speech, you would have heard him mention how Jim Houser, Co-owner of Hawthorne Auto Clinic, would be getting a $5,000 tax credit to help his small business provide health insurance to his employees under the new Patient Protection and Affordable Care Act.

Jim and the Hawthorne Auto Clinic are customers of ours and we computed the tax savings for him that the President used in his speech. Jim was in the balcony for the speech and I'm both proud of him for his activism and leadership that got him there, and I'm proud of TriLibrium for being just one step removed from the White House.

The tax credit is available to certain small business with tax years beginning in 2010, for those that provide health insurance coverage to their employees. It is also available to certain non-profits and even household employers.

The rules are too complex to go into here but the IRS has a frequently asked questions page that should answer many of your questions. I suggest you start their and then speak with your CPA to find out how you can benefit from this legislation.

Small Business Jobs and Tax Relief Bill

President Obama signed the Small Business Jobs Act of 2010 (HR 5297) yesterday.

The Act expands loan programs through the SBA, strengthens small business preference programs for federal government projects, provides export incentives, and offers a variety of small business tax breaks. Many of the provisions are effective immediately.

These changes are in effect for 2010 and provide some great tax planning opportunities:

• Increased section 179 expensing
• Extension of 50% first-year bonus depreciation
• Zero capital gain tax rate from IRC Sec. 1202 small business stock
• Increased IRC Sec. 195 deduction for business startup expenses
• Five-year carryback of general business credits
• New deduction for self employed health insurance costs on the Schedule C
• Removal of cell phones from the definition of listed property

You can read more details in this Journal of Accountancy article on the House Bill.

Small Business Incentives in the Recovery Act

The $787 billion American Recovery and Reinvestment Act of 2009 provides nearly $300 billion in tax relief.  As a stimulus package, over $280 billion in tax relief is targeted for 2009 and 2010.  Keeping with the Obama administration view that small business is the principal engine for job growth, the act has some nice benefits for small to medium size businesses.  Please note that this is a high-level overview and you should probably see a CPA or qualified tax accountant for more information about your specific situation.

CAPITAL  EXPENDITURES

One benefit for small business is the ability to immediately expense major capital purchases through the use of Code Sec. 179 and bonus depreciation (Code Sec. 168(k)).  Code Sec. 179 is limited to small business as it begins to phase out when a company spends more than $800,000 on eligible purchases.

First-year expensing was once limited to $25,000 per year and then increased to $100,000.  In 2008, the limit was increased to $250,000, and the act extended this limit through 2009.    Businesses that qualify should take advantage of this opportunity because the limit reverts to around $125,000 in 2010 with a $500,000 phase-out and could go even lower in 2011.

NOL CARRYBACKS

The act allows corporations, partnerships and sole proprietors to carryback 2008 losses for five years rather than the two years allowed in the previous law.  NOLs can provide an immediate and significant cash infusion for a cash-starved business running at a current loss if they had income in any of the previous five years.

I was consulting with a business last week who was struggling with cash flow in this current economic environment and was able to identify over $40,000 of cash sitting in his 2008 loss.  His current CPA firm had been sitting on their S-Corp return for over 6 weeks (crappy service but that is a blog entry for another day).  I recommended he light a fire under them or bring it to TriLibrium to tap into this tax refund ASAP.

The five year carryback only applies to companies with average sales of less than  $15 million over a three year period.  It should also be noted that if a business has already filed their 2008 return and elected to forgo the carryback, there is a provision in the act that allows taxpayers to revoke that election by making a new election before April 18, 2009.

QUALIFIED SMALL BUSINESS STOCK

Owners of qualified small-business stock could previously exclude 50 percent of the realized gain on the stock if the stock was acquired when issued and held for five years.  The act increased the exclusion to 75 percent of the gain, for stock issued after February 17, 2009 through the end of 2010. 

I should also point out that start-ups should consider the benefits of Code Sec. 1244.  I see far too many lay people choose the LLC model without understanding the options and benefits of other forms of business.

S CORPS

I don’t want to go into all the details but will say that the act has some special rules that would apply to C corporations that converted to an S corporation in 2001 or 2002 and are facing downsizing and need to unload assets.

ESTIMATED TAXES

The safe harbor for estimated taxes was reduced from 100 percent to 90 percent of prior year’s tax, or 90 percent of the current year’s tax.  This safe harbor is limited to taxpayers with less than $500,000 of adjusted gross income, where more than 50 percent of income is derived from a business with an average of less than 500 employees in 2008.  This benefit applies only to 2009 but should lower estimated tax payments for many people.

How important are good records?

I was reading a story from the New York Times this morning regarding the declining value of small businesses during this economic downturn. Not surprisingly, there are a lot more sellers than buyers which is driving down prices.


While it did not surprise me that small business valuations were falling, what I found most interesting and valuable was this little bit of information from the end of the story:


"... an unpleasant truth is that many, if not most, businesses do not sell. For decades, the conventional wisdom was that brokers sold about one out of five businesses they listed. But a new study by Louis O. Vescio, owner of Sunbelt Business Brokers in Melbourne, Fla., found that the percentage was only 10.5 percent.


The main reason, Mr. Vescio and others said, was that 'most small business owners keep bad records,' so buyers cannot get an accurate financial picture."


As I wrote in my blog last week, a good accounting system is extremely valuable to a small business. I see too many business owners who fail to adequately invest in their accounting and information systems because they don't see the value and they don't have the knowledge or expertise. This approach is ultimately costly when the entrepreneur creates a potentially valuable asset that can't be sold.

Accordingly, I recommend that business owners make adequate investments in their accounting and record keeping systems. This aspect of a successful business is no less important than HR, marketing, sales, operations, banking, etc.

A good accounting system is efficient, fairly easy to maintain and provides a number of key functions like reporting, analysis, security and operational control.