Your Guide to the New Tax Credits

Due to recent changes in legislation, small business owners are in for some bigger refunds.

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Like it or not, it’s that time of year again, when the IRS comes looking for its piece of the pie. But for all you small business owners, listen up. Your 2010 tax refund could be a lot bigger this year.

Why? Well, thanks to The Small Business Jobs Act from last September, and Obama’s controversial health care reform law, passed in March, small businesses will get to enjoy some substantial credits and deductions for things like capital investments and health insurance. And that means good news for you!

There are six tax credits that cover everything from business vehicle deductions to health care. I know what you’re thinking, “It’s about time!” We feel you. Here are the tax credits important for all of you small business owners. Hope it was worth waiting for!

Health care tax credits

If you are a small business owner that offers health insurance to your employees, bravo to you! The government wants to reward your good behavior and to encourage more employers to do the same by giving tax credits to those who pay at least half of their employee’s health coverage.

On the IRS.gov website, IRS Commissioner Doug Shulman says, “This credit provides a real boost to eligible small businesses by helping them afford health coverage for their employees.” The website also explains that, “The maximum credit is 35 percent of premiums paid in 2010 by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations.”

Eligible businesses are those that have fewer than 25 full-time employees making less than $50,000 a year. To get the maximum credit, your business needs to be made up of 10 or less full-time employees with an average income of $25,000 or less.

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Health insurance for the self-employed

Isn’t it great being your own boss? But what might not be so great is paying for your own health insurance. It can get very expensive to do so, but the government is offering some help in tax deductions.

First of all to be considered self-employed, you need to fulfill certain requirements. The IRS website specifies, “you were self-employed if you were a general partner (or a limited partner receiving guaranteed payments) or you received wages from an S corporation in which you were more than a 2 percent shareholder.” If that’s you, there’s good news. Steven Elliott, CPA, says, “the business owner can now deduct (health insurance) costs from their business profits which not only saves regular income taxes, but self-employment taxes as well.”

Section 179 Extension

This new break is geared towards the brick-and-mortar crowd with real physical investment needs. What is it exactly? The extension of Section 179 basically speeds up the process of depreciation for tax years 2010 and 2011. Instead of waiting for your purchased assets to depreciate over the course of time, it allows you to deduct the purchase price in full and get greater tax breaks from your assets immediately.

Senior Tax Analyst at Intuit, Mike D’Avolio explains that the increase in depreciation expense is the government’s way of “encouraging the purchase of assets by expanding several incentives.” That’s great if you are running up your business credit cards buying things like computer software and equipment at up to $500,000 a year.

There are some stipulations, however. You can’t use it for buildings or real estate. Also, if your business is spending more than $2 million a year, it’s not considered a small business in the eyes of the government and you won’t be able to take advantage of the write-off. And of course if your business did not make a profit, you won’t be able to use it because the section specifically mentions that the write off cannot be carried forward as a new loss, or increase a loss already on your books.

Depreciation for a car or truck

If you purchased a new car, van or truck for your business last year, be glad you did. The government is allowing small business owners to depreciate business vehicles up to $11,060 for a car and $11,160 for a “light duty truck or van.” This is an extra $8,000 bonus depreciation beyond what’s typically deductible.

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Bonus depreciation

The main point of this extension is to quicken depreciation for new assets. This includes qualified property (check out IRS.gov for more specific definitions) and new equipment. And unlike section 179, you can still claim the expense even if your business did not make a profit, and it can be claimed on top of section 179 for items that meet the criteria.

Businesses can claim 50 percent of the cost of items bought before September 8, 2010, and in addition Elliott says, “starting September 8th of 2010 through December 31, 2011—the 50 percent is increased to 100 percent if elected by the business owner.” This is an excellent way for the government to increase available cash flow for small businesses in as short a period of time as possible.

General business credit

If your business typically gets hit by the mysterious Alternative Minimum Tax (AMT), then this one’s for you. Basically, business credits, which were not previously allowed to be taken under AMT before 2010. There are a number of business credits that apply such as qualified hybrid motor vehicle credit, credit for employer-provided childcare facilities and services and credit for small employer health insurance premiums. There are different forms you need to fill out for each. But as usual, the IRS website has all the pertinent information.

All in all, these are six new ways that the government is hoping to put short-term cash in the hands of your small business. So make sure you take advantage! 

Tim Chen is the founder of NerdWallet.com, a site that helps consumers find the best low apr credit cards.