What the New Tax Law Means to Online Sellers
By Barbara Weltman
Just before the Congress adjourned, the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 was signed into law. In addition to providing federal funding for the extension of unemployment benefits for 13 more months (through the end of 2011), numerous tax rules that had expired or were about to expire have been extended. In addition, some new breaks have been introduced. In total, the new law provides more than $850 billion in tax breaks with no revenue-raising or adverse tax rules.
If you have a business, you're in for some tax-saving opportunities. Here are some important highlights that may affect you.
Payroll Tax Holiday
The employee share of the Social Security portion of FICA, which is normally 6.2%, is reduced to 4.2% for all of 2011. This means more take-home pay. If you have a corporation, then you'll save 2% on your salary up to $106,800. The employee share of the Medicare portion of FICA is not reduced; the employer share of Social Security and Medicare taxes is not reduced.
If you are self-employed, you, too, receive the benefit of this tax holiday. The so-called "employee" portion of the Social Security portion of self-employment tax is reduced by 2%. Since self-employed individuals are not on a payroll, they receive the benefit of this tax cut when they pay their quarterly estimated taxes.
For example, say you net about $100,000 from your sole proprietorship in 2011. In round numbers, your tax savings from the payroll tax holiday is $2,000. You can reduce your quarterly estimated tax payments by $500 each time.
The payroll tax holiday applies on a per-worker basis, so if you are married, you and your spouse can benefit from the tax cut. If you have a teenager or other dependent who works, the dependent will also receive the tax cut in any wages he or she earns.
Note: The above-the-line deduction for one-half of self-employment tax that is claimed on page 1 of Form 1040 by self-employed individuals does not change because this deduction covers the "employer" share of the tax, which is not reduced.
While there continues to be a Section 179 (expensing) deduction of up to $500,000 in 2010 and 2011 for the cost of equipment purchases, this tax break does not help all businesses; only those that are profitable. However, for property placed in service after September 8, 2010, through December 31, 2011, there is 100% bonus depreciation. This means the full cost of eligible property can be deducted in the current year.
"Eligible property" includes new (not pre-owned):
- Equipment and machinery (such as a computer, an iPad, office furniture, or a cell phone);
- Off-the-shelf software;
- Improvements to leased realty and certain other real property.
Note: Financing the purchase in whole or in part does not impact your ability to claim the full write-off.
Favorable Tax Rates
The current tax rates on ordinary income, long-term capital gains, and dividends are maintained for two more years (2011 and 2012). So the tax rates you've become accustomed to will continue to apply for this period. Retention of these rates is particularly helpful to business owners who do very well since the top tax rate remains at 35%.
The alternative minimum tax (AMT), a shadow tax system that applies to some individuals who successfully (and legally) reduce their regular tax, has been temporarily fixed to keep more than 20 million taxpayers from owing the tax. The AMT exemption amount has been "patched" for 2010 and 2011 as follows:
- Married filing jointly: $72,450 ($74,450);
- Singles: $47,450 ($48,450);
- Married filing separately: $36,225 ($37,225).
What's more, you can offset both the regular tax and the alternative minimum tax by nonrefundable personal credits, including the dependent care credit, education credits, the credit for alternative fuel vehicles, and home energy credits. Bottom line: If you haven't owed AMT in the past and your income and deductions remain fairly constant, it's likely that you won't owe it in 2010 and 2011.
Enhanced Charitable Contribution Deductions for Businesses
If you donate certain types of inventory (specifically food inventory or books donated to schools or libraries), you may be eligible for an enhanced charitable contribution deduction. The enhancement is the lesser of two times basis (cost) or basis plus one-half of the item's appreciation.
Regardless of what type of property you donate, or even if you donate cash, you won't lose any part of the contribution deduction if you are a high-income taxpayer. In the past, itemized deductions for such taxpayers were reduced when income exceeded set thresholds. However, for 2010, 2011, and 2012, there is no reduction, so sole proprietors and owners of pass-through entities (e.g., S corporations; limited liability companies) whose businesses make donations are not subject to any phase-out.
About the Author
Barbara Weltman is a prolific author and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day(sm) and monthly e-newsletter Big Ideas for Small Business(R) at BarbaraWeltman.com and host of Build Your Business radio.
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About the author:
Barbara Weltman is an attorney, prolific author with such titles as "J.K. Lasser's Small Business Taxes and The Complete Idiot's Guide to Starting a Home-Based Business," and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of "Idea of the Day(R)" and monthly e-newsletter "Big Ideas for Small Business(R)" at http://www.barbaraweltman.com and host of "Build Your Business" radio. Follow her on Twitter: @BarbaraWeltman.
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