By Richard Finafrock, CPA, CHAE
The recent passage of the Small Business Jobs Act of 2010 has provided a few opportunities for reducing your federal income taxes for 2010. However, with various changes coming for 2011, new challenges exist in considering what steps to take by the end of 2010. With less than three weeks left until the end of 2010, consideration should be given to both 2010 and 2011 when deciding what tax-saving decisions to make by year end.
- If you are considering purchasing new furniture, fixtures and equipment (FF&E) or performing an upgrade or remodel to your restaurant, doing so before year-end could significantly reduce your 2010 income taxes. With some limitations, the cost of FF&E can be expensed in the year purchased, even if you purchase them on credit. In addition, 50% of the cost of any building improvements or remodeling made by year end can be expensed in 2010. This is true whether you own or lease your restaurant location. Also, if you’re limited in the amount of FF&E you can expense for the year, up to 50% of the cost can be expensed under this rule instead.
- If you’ve started a new business, up to the first $10,000 of start-up expenses are deductible in 2010. If you’ve yet to open for business, doing so by December 31 will allow you to claim such expenses in 2010, as well as being allowed to claim expenses for the purchase of FF&E and building improvements as mentioned above.
- New for 2010, is the ability for self-employed individuals to deduct the cost of health insurance premiums when calculating their self-employment taxes. Prior to 2010, health insurance premiums paid by self-employed individuals were deductible for income tax purposes, but not for purposes of calculating self-employment taxes.
- A number of “taxpayer friendly” provisions enacted back in 2001 are scheduled to expire at the end of 2010. As a result, most taxpayers will face increased income taxes in 2011. Some of the changes you should be aware of when planning for 2010 are:
- The deduction for purchasing new FF&E (described above), will be substantially reduced in 2011.
- The tax rates in effect for 2010 are 10, 15, 25, 28, 33 and 35%. Beginning in 2011, the 10 tax rate disappears, and a new top rate of 39.6% is added. The tax rates scheduled to be in effect in 2011 are 15, 28, 31, 36 and 39.6%.
- Beginning in 2011, high income earners (single individuals with earned income above $200,000, and couples above $250,000) will be subject to an additional 0.9 % Medicare tax, and potentially an additional 3.8% Medicare tax on their net investment income.
- The limitation on itemized deductions is reinstated back to levels that existed back in 1991, as adjusted for inflation. Many taxpayers will not be able to fully deduct their itemized deductions, resulting in higher taxable income and income tax.
- For those married taxpayers who don’t itemize, the standard deduction will be reduced in 2011. This brings back the so-called “marriage penalty” that existed in prior years. A marriage penalty exists when the combined tax of a married couple exceeds what they would pay if they were single and filed separately.
- The deduction for personal exemptions will also be reduced or eliminated for certain high-income taxpayers.
- The impact of the Alternative Minimum Tax (AMT) will be felt by many more taxpayers. Various “AMT patches” or fixes enacted in recent years to eliminate the additional tax for many taxpayers, goes away. As a result, many taxpayers will be paying AMT beginning in 2011.
- The favorable tax rate of 15% on long-term capital gains ends after 2010, and is replaced by a tax rate of 20%.
Though discussions are underway in Congress to reduce the impact of impending changes for 2011, most taxpayers will be faced with increased income taxes next year. As a result, carefully consider your income tax situation for both 2010 and 2011 before undertaking any “tax saving” moves for 2010. Though delaying tax deductions into 2011 may result in higher taxes for 2010, those deductions may provide a larger tax savings next year.
Richard Finafrock is part of the WRA Consulting Network and a principal and senior tax manager with the Certified Public Accounting firm of Clothier & Head P.S. He is a member of their Hospitality Services Group. Get a FREE 30-minute consultation with him by calling the WRA Consulting Network at 800.225.7166.
ANY TAX ADVICE IN THIS ARTICLE IS NOT INTENDED TO BE A “COVERED OPINION” AS DESCRIBED UNDER IRS CIRCULAR 230. IT IS THEREFORE NOT INTENDED TO BE USED, AND CANNOT BE USED, BY ANY PERSON OR ENTITY FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER.
