The tax laws change every year. The IRS has made headway by providing plain-English explanations on its website, but understanding these changes is no easy task for the small business owner who doesn't routinely read up on tax law. Many of the changes are routine. The IRS annually reviews and adjusts deduction and tax credit limits based on inflation rates and other economic data. Other changes result from legislation often passed many years prior. Here are a few of the changes to tax laws that may affect small business owners when they file in early 2013.
Lower 179 Deduction
According to the IRS, Section 179 of the IRS code allows small businesses to deduct the cost of machinery, vehicles, equipment, furniture and other property. This was part of the American Recovery and Reinvestment Act of 2009. At that time, the maximum amount that a business could deduct was $250,000. In 2011, the maximum deduction that a small business could make was $500,000, but in 2012, the amount drops to $139,000. As of 2012, real estate no longer qualifies for the Section 179 deduction.
Bonus Depreciation Deduction Shrinks
The bonus depreciation deduction kicks in once your business maxes out the Section 179 deduction. In 2011, a business could deduct 100% of certain equipment purchases when both Section 179 and bonuses were calculated. In 2012, the deduction decreases to 50%, up to a maximum of $2 million.
The amount that an employee can contribute to a 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan will increase from the 2011 amount of $16,500 to $17,000. Companies can contribute up to $50,000 to profit-sharing plans or SEPs. That is up from the 2011 maximum of $49,000.
Social Security Wage Base Increase
Social Security limits the amount of employee earnings subject to taxation. The limit is adjusted based on the national average wage index. In 2012, the base will increase by 3.6%, making it $110,100 instead of $106,800. The same wage base increase applies to self-employed business owners. This will result in an increase to the self-employment tax of approximately $400.
In 2008, Congress passed the Housing Assistance Tax Act of 2008. Along with housing assistance, the bill also contains a mandate requiring third-party payment processors to report payments in excess of $20,000 and to report more than 200 payments per year. This provision is not new, but for the 2012 tax year, small businesses have to break out the earnings they receive on their 1099-K from their other earnings declarations. This has implications for you as the business owner as well. For payments that are paid for, or received by, third-party payments systems, such as PayPal, a form 1099-Misc will not be required in most cases. You should be on guard against duplicate reporting of earnings.
Reduction in Adoption Assistance
The IRS allows an employer that assists an employee who is adopting children to exclude those funds from its income. In 2011, the maximum allowable amount was $13,360 per eligible child. In 2012, that amount decreases to $12,650. The adoption credit for children without special needs will expire at the end of 2012, unless Congress extends it.
The Bottom Line
You should consider getting assistance from a tax professional if you are a small business owner Although retail tax software continues to improve, you can still make mistakes on your taxes, and even the smallest mistake can be costly. This is especially true with the addition of interest and penalties. Having your business taxes prepared by a tax professional is often money well spent.
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