Tax Update: Look at what Uncle Sam’s left under the tax tree
This year has brought a tremendous amount of changes in the economy as well as tax rules that may affect your wallet and the bottom line of your business, some for the good, some for the bad:
• You won’t receive all your 1099s by the end of January this year. New rules change the due dates for many types of 1099s from the end of January to the middle of February. Many of the brokerages and mutual fund companies can also request an additional extension so they don’t have to file so many corrected 1099s when they get revised information.
• Standard mileage rates increased mid-year, which means to claim mileage, you’ll need to break deductible mileage down between miles driven before and after July 1. This is due to a change in the rates increasing from 50.5 to 58.5 cents per mile for business miles and from 19 to 27 cents for medical and moving mile. Charitable mileage stays at 14 cents.
• Bonus depreciation is back. For 2008 you can expense 50 percent of the cost of any NEW assets in the year of purchase so long as their standard asset MACRS depreciation life is 20 years or less. Used property does not qualify. Any asset for which you deduct bonus depreciation is exempt from the dreaded alternative minimum tax for the life of the asset. If you elect not to take bonus depreciation you must elect out for all assets with the same class life.
However, New Hampshire still does not allow the deduction, and therefore you can have different depreciation schedules for state and federal tax purposes.
• Section 179 expense limit is $250,000 for 2008, and drops to $133,000 in 2009. Even if you decide to deduct the 50 percent bonus depreciation in the previous item you can still expense the remainder of any new or used asset purchase other than buildings up to the lesser of $250,000 or the amount of profit from the business. Be careful, because people often make the mistake of assuming a big purchase in one business will offset profits from another business. If those businesses are in separate entities the Section 179 limit is on a per entity/per return basis.
• Keep a watchful eye on your multi-level business’s accounting and tax payments. What do the IRS and court look at to determine if you are in business to make a profit for multi-level marketing, such as Reliv or Avon, etc.? In a recent tax court summary (Eder v. Commissioner) the court noted the taxpayer had never prepared a business plan, never calculated a break-even point showing how much future profit he would need to recoup past losses, maintained no organized record-keeping system, etc. As a result, the court determined he was not in the activity for a profit and was not entitled to claim any deductions beyond the amount of income reported from the operation.
• Premiums paid for mortgage insurance on home acquisition debt are deductible as interest expenses. You can only deduct the premium for one year’s worth of the insurance. Home equity loans are not covered. This deduction applies to primary residence and one secondary personal residence. The deduction started in 2007 and has been extended through 2010.
• The IRS gives a self-employed deduction for health insurance as a business expense. A sole proprietor can deduct health insurance for himself and family from the earned income of the business when the insurance policy is in the name of the sole proprietor and not in the name of the business. However, the deduction is limited to the amount of profit from the business.
• For 2008, those who don’t itemize can increase their standard deduction by the amount of their real estate tax up to $500 on an individual return and $1,000 on a joint return. Personal property tax does not qualify.
• Leasehold improvements for retail and restaurant buildings qualify for 15-year depreciation life. The shorter asset life for restaurant buildings from the 2007 law was extended to 2008 acquisitions. Now retail leasehold improvements also qualify for the 15-year life instead of 39.5 years.
• Employers who pay military personnel on active duty the difference between military pay rate and normal pay receive a 20 percent differential wage tax credit on the first $20,000 in differential wages paid.
• Lastly, remember that if you received a 2008 economic stimulus rebate check from Uncle Sam that it was based on your 2008 estimated tax return. Check with your tax adviser if you made adjustments that may qualify you for additional funds.
CPA Steven Feinberg, owner of Londonderry-based Appletree Business Services, can be reached at 603-434-APPLE (2775) or Appletreebusiness.com.