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Tax Changes for Small Businesses

Tax Changes for Small Businesses

Tax Changes for Small Businesses

In 2020, new laws, such as the Affordable Care Act and the Small Business Jobs Act of 2020, created or expanded deductions and credits that small businesses and self-employed individuals should consider when completing their tax returns and making business decisions in 2021.

Health Insurance Deduction Reduces Self Employment Tax

With the enactment of the Small Business Jobs Act, self-employed taxpayers who pay their health insurance costs can now reduce their net earnings from self-employment by these costs. Previously, the self-employed health insurance deduction was allowed only for income tax purposes. For the tax year 2020, self-employed taxpayers can also reduce their net earnings from self-employment subject to SE taxes on Schedule SE by the amount of self-employed health insurance deduction.

Taxpayers can claim the self-employed health insurance deduction if the insurance plan is established under their business and if any of the following are true:

  • They were self-employed and had a net profit for the year,
  • They used one of the optional methods to figure net earnings from self-employment on Schedule SE, or
  • They received wages from an S corporation in which the taxpayer was a more-than-2-percent shareholder.

During the tax year 2019, the most recent year for which data is available, the self-employed health insurance deduction was claimed on 3.6 million tax returns, reducing taxpayers’ adjusted gross incomes by $21 billion.

Small Business Health Care Tax Credit

In general, the Small Business Health Care Tax Credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

Small businesses can claim the credit for 2020 through 2013 and for any two years after that. For tax years 2020, the maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. Beginning in 2021, the maximum tax credit will increase to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible tax-exempt organizations.

The maximum credit goes to smaller employers –– those with 10 or fewer full-time equivalent (FTE) employees –– paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year. Because the eligibility rules are based in part on the number of FTEs, not the number of employees, employers that use part-time workers may qualify even if they employ more than 25 individuals.

Eligible small businesses will first use Form 8941 to figure the credit and then include the amount of the credit as part of the general business credit on its income tax return.

General Business Credit for Employers

The general business credits of eligible small businesses in 2020 are not subject to alternative minimum tax The new law allows general business credits to offset both regular income tax and alternative minimum tax of eligible small businesses as described in Section 2012 of the Small Business Jobs Act. The provision is effective for any general business credits determined in the first taxable year beginning after December 31, 2009, and to any carryback of such credits. For a list of the general business credits, see Form 3800.

Small Businesses Can Benefit from Higher Expensing / Depreciation Limits

For tax years beginning in 2020 and 2021, small businesses can expense up to $500,000 of the first $2 million of certain business property placed in service during the year.

In general, businesses can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property, after the relevant section in the Internal Revenue Code.

Section 179 property is a property that you acquire by purchase for use in the active conduct of your trade or business, including:

  • Tangible personal property.
  • Other tangible property (except buildings and their structural components) used as:
  1. An integral part of manufacturing, production, or extraction or furnishing transportation, communications, electricity, gas, water, or sewage disposal services;
  2. A research facility used in connection with any of the activities in (1) above; or
  3. A facility used in connection with any of the activities in (1) above for the bulk storage of fungible commodities.
  • Single purpose agricultural (livestock) or horticultural structures.
  • Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.
  • Off-the-shelf computer software.
    Section 179 property generally does not include land, investment property (section 212 property), property used mainly outside the United States, property used mainly to furnish lodging and air conditioning or heating units.

The Small Business Jobs Act (SBJA)  increases the section 179 limitations on expensing of depreciable business assets for tax years beginning in 2020 and 2021 and expands temporarily the definition of section 179 property, for tax years beginning in 2020 and 2021, to include certain qualified real property a taxpayer elects to treat as section 179 property. Qualified real property means qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.

The $500,000 amount provided under the new law is reduced, but not below zero if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2 million.

For tax years beginning in 2021, the maximum amount is $125,000; before the enactment of the 2020 tax relief legislation, it was set at $25,000.

Depreciation limits on business vehicles

The total depreciation deduction (including the section 179 expense deduction and the 50 or 100 percent bonus depreciation) you can take for a passenger automobile (that is not a truck or a van) you use in your business and first placed in service in 2020 is increased to $11,060. The maximum deduction you can take for a truck or van you use in your business and first placed in service in 2020 is increased to $11,160.  If you do not take any bonus depreciation for the passenger automobile, truck, or van you use in your business and first placed in service in 2020, the maximum deduction you can take for a passenger automobile is $3,060 and for a truck or van is $3,160.

50 or 100 Percent Bonus Depreciation

Generally, businesses can take a special depreciation allowance to recover part of the cost of qualified property placed in service during the tax year. The allowance applies only for the first year you place the property in service.

Businesses that acquire and place qualified property into service after Sept. 8, 2020, can now claim a depreciation allowance of 100 percent of the cost of the property. The property must be placed in service before Jan. 1, 2020.  Businesses that acquire qualified property during 2020 on or before Sept. 8, 2020, can claim a depreciation allowance of 50 percent of the cost of the property.  The property must be placed in service before Jan. 1, 2020 (Jan. 1, 2020 in the case of certain longer production period property and for certain aircraft.)

The allowance is an additional deduction you can take after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service. The types of property that can be depreciated are described in the instructions to Form 4562.

 

New Laws Could Impact Your Taxes

In 2020, new laws, such as the Affordable Care Act created or expanded deductions and credits that small businesses and self-employed individuals should consider when completing their tax returns and making business decisions in 2021.
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