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|The New Tax Regime|
|Published Thursday, December 2, 2010 7:00 am|
Taxation is one of the chief battlefronts for politicians running in the mid-term elections, and while there are certainly changes in tax law that will cause businesses some financial pain, there are also tax advantages that savvy businesses can use.
The Small Business Jobs Act passed in September is expected to help small businesses, including sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.
Companies can take advantage of the many lending incentives included in the Act, including increases in SBA loan size limits, the elimination of SBA loan fees, grants to States to support small business lending, and authorization of the Treasury department to purchase preferred stock and other debt instruments from eligible small financial institutions.
Businesses can benefit from the Hiring Incentives to Restore Employment (HIRE) Act that passed earlier this year. A business that hires a new employee who was unemployed for at least the previous 60 days is exempted from paying payroll taxes for that employee from the date of hire through the end of 2010.
Several existing incentives may also be extended to help ease cash flow, spur corporate spending and speed the recovery. Congress recently passed the Small Business Act of 2010, which is expected to generate $42 billion in tax incentives in an effort to boost the economy.
Under the act, businesses would be able to immediately write off the cost of equipment and certain property up to $500,000 given their qualified purchases do not exceed $2 million.
The carryback and carryforward provisions for net operating losses (NOLs) were scheduled to roll back from five years to two years in 2011. However, the Small Business Act of 2010 keeps the time period for carrybacks at five years and carryforwards at 20 years.
While Congress usually votes to extend research and development tax credits each year, President Barack Obama has proposed creating a permanent $100 billion tax credit for R&D. The bill's fate, however, remains uncertain.
Now the Bad News
Not all changes are for the better. Buried in the Healthcare Reform Act is a stipulation that beginning in 2012, companies will be required to fill out a 1099 form for every purchase of goods and services above $600–a significant change from the previous practice of filling out a 1099 form for contract workers only. That could prove to be an enormous adjustment, especially for small to mid-sized businesses without large accounting staffs.
The measure is designed to cut down on tax avoidance by capturing more unreported income, but it will produce a mountain of paperwork. There may be hope, however, that this hardship will disappear: small business groups are up in arms, and bills have already been filed to repeal the provision.
Changes under the Small Business Act of 2010 will also affect the way business owners approach their individual taxes. Conversions from a C corporation to an S corporation will be less attractive due to an increase in self-employment taxes for owners of small S Corps (fewer than three owners). The move is designed to discourage owners from routing income through the corporation to avoid Social Security and Medicare taxes.
The American Institute of CPAs is lobbying against the change.
The IRS has signaled it will be taking a hard line on collections and enforcement. As of March 2010 the IRS announced an initial plan to add more than 16,000 agents to enforce and manage implementation of the Healthcare Reform Act. The IRS has been recruiting heavily among CPAs and hiring an army of new agents to scrutinize returns. To offset the decrease in revenues, fines and penalties have been increasing while waivers and forgiveness are on the decline. States and local governments are even more cash strapped and are doing all they can to find and collect every penny due to them as well.
With the myriad tax changes made, proposed, expected, and defeated this year, trying to chart a financial course is made that much more challenging. For businesses, understanding existing laws is the first step, but being ready for changes under discussion will give corporate leaders an edge as the new tax regime takes shape. n
Craig Eaton is a partner at MFA-Moody, Famiglietti & Andronico, a CPA and business-consulting firm in Tewksbury, Mass. He can be contacted by calling 978-557-5300 or by visiting www.mfa-cpa.com.
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