2010 Tax Relief Act: Small Business

The following summarizes changes for Small Business Owners contained in the 2010 tax Relief Act:

Estimated Tax Relief for Owners of Small Businesses

If an individual’s Adjusted Gross Income for 2009 was less than $500,000 and more than half of the gross income was from a business with fewer than 500 workers, the estimated income taxes for 2010 estimated tax payments can be based on the lesser of 90 percent of tax liability for 2009 or 2010. The usual estimated tax benchmarks of 100 percent or 110 percent of tax liability do not apply.

Payroll Tax Credit

For 2009 and 2010, Congress gave workers a credit of 6.2 percent of their earned income, capped at $400 for single filers and $800 for joint filers. For single filers, the credit starts phasing out at $75,000 of Adjusted Gross Income and dries up at $95,000. The phaseout zone for couples is $150,000-$190,000. Employees will get the credit in advance via lower income tax withholding in each paycheck, not as a rebate check.

Self-employed taxpayers can reduce their quarterly estimated payments to get an advance benefit from the credit. The exact amount of the payroll tax credit for the year will be calculated on the filers’ tax returns.

Section 179 Expense Deduction

The maximum amount of equipment placed in service in 2010 and 2011 that businesses can expense was increased to $500,000. And the annual investment limit was raised to $2,000,000. Thus, you won’t begin to lose the benefit of expensing until you place more than $2,000,000 of assets in service in 2010 and 2011. The allowance drops to $125,000 for tax years beginning in 2012.

Tax-Free Parking for Employees

Companies can pay for $230 a month of parking tax-free for employees. The cap on tax-free transit passes is now $230 a month as well, the same as for parking.

Higher Income Limits for Deductible IRAs and for Roth IRAs

If you are covered by a retirement plan at work, you can take a full IRA deduction in 2010 if your modified Adjusted Gross Income is $89,000 or less (married filing jointly) or $56,000 or less (single or head of household). A partial deduction is allowed until your Adjusted Gross Income reaches $109,000 if you are married filing jointly, or $66,000 if you are single or a head of household. Also, the opportunity to contribute to a Roth IRA is now phased out as your modified Adjusted Gross Income rises between $167,000 and $177,000 if you are married filing jointly, or $105,000 to $120,000 if you are single or a head of household.

Roth IRA Conversions

Starting in 2010, individuals with any amount of modified Adjusted Gross Income are free to convert a traditional IRA to a Roth IRA. Conversions are fully taxable at your regular tax rate. For conversions in 2010, taxpayers can spread the tax due over two years. Half of the conversion will be taxed in 2011, and the remainder will be taxed in 2012. Removing the limit on conversions effectively eliminates the income limit on contributions to Roth IRAs. A taxpayer with income too high to use a Roth will be able to contribute to a traditional IRA (which does not have income limits for contributions) and immediately convert to a Roth.

Contribution Limit for 401(k) Plans

The maximum employee contribution is $16,500 in 2010 for 401(k) and similar workplace retirement plans, including 403(b)s and the federal Thrift Savings Plan. Workers age 50 and older in 2010 can put in an additional $5,500, making their maximum $22,000.

Domestic Production Activities Deduction

In 2010, this deduction increases to nine percent of qualifying business net income. This deduction applies to businesses engaged in construction, engineering or architectural services, film production, or the lease, rental or sale of equipment you manufactured. However, the rate remains six percent for oil and gas companies.

Partial Exclusion for Unemployment Benefits

For 2010, the first $2,400 of unemployment benefits you receive is no longer tax-free.

Payroll Tax Credit

Starting in 2011, the partial credit for payroll taxes paid by employers is no longer available. Employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800.

Temporary Employee Payroll Tax Cut

Provides a payroll tax holiday during 2011 of two percentage points. Employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800.