The year 2010 will go down in the annals of tax history (yes there are those who actually keep track of such things) as a remarkable year. There were lots of changes early in the year, followed by months of the "yo-yo effect" (votes advancing proposed legislation through one house of Congress only to be stalled in the other) capped off with the extension of most of the Bush-era tax changes for two more years and a resolution of the 2010 Estate Tax debacle.
Here is a summary of business and individual tax changes from last year that may affect your federal income tax returns for 2010 and beyond.
Business Taxpayers
Small business health care tax credit. Subject to a phase-out, an eligible small employer (ESE) may claim a credit equal to a percentage of non-elective contributions for health insurance for its employees. This credit is 35% in tax years beginning in 2010 through 2013 and 50% in tax years beginning after 2013. An ESE is generally an employer with no more than 25 full-time equivalent employees employed during its tax year, and whose employees have average annual wages of no more than $50,000. Be aware that as of the writing of this Article, Congress was taking aim at the 2010 health care law, so changes to the 2010 changes may be coming.
General business credit for employers. General business credits can offset both regular income tax and alternative minimum tax (AMT) of eligible small businesses. This provision is effective for any general business credits determined in the first tax year beginning after December 31, 2009, and to any carryback of such credits. The general business credit includes, among others, the investment credit (which includes the rehabilitation credit, the energy credit, and the reforestation credit), the work opportunity credit, the welfare-to-work credit, the alcohol fuels credit, the R&D credit, the low-income housing credit, the empowerment zone credit, the employer FICA credit on tips, the Indian employment credit, the enhanced oil recovery credit, the disabled access credit and the renewable-resource electricity production credit.
Expensing election. For tax years beginning in 2010 and 2011, small businesses can expense up to $500,000 of the first $2 million of certain business property placed in service during the year.
Bonus depreciation (50% or 100%). Businesses that acquire and place qualified property into service after September 8, 2010 and before January 1, 2012 (January 14, 2013 in the case of certain longer-lived and transportation property) can claim a first-year depreciation allowance of 100% of the cost of the property. Businesses that acquire qualified property during 2010, on or before September 8, 2010, can claim a first-year bonus depreciation allowance of 50% of the cost of the qualified property.
Depreciation limits on business vehicles. The total depreciation deduction (including the section 179 expense deduction and 50% or 100% bonus depreciation) that a taxpayer can take for a passenger automobile used in a business and first placed in service in 2010 is increased to $11,060 ($11,160 for a truck or van). If bonus depreciation can't be taken for a passenger automobile, truck, or van used in a business and first placed in service in 2010, the maximum deduction that can be taken is $3,060 for a passenger automobile ($3,160 for a truck or van).
Small businesses must use EFTPS for deposits. The paper coupon system for Federal Tax Deposits will no longer be maintained by the Treasury Department after December 31, 2010. Most businesses must now make deposits and pay federal taxes through the Electronic Federal Tax Payment System (EFTPS).
Transferring business interests under the new $5 million gift tax limit. If your estate planning advisor (or your brother-in-law or someone at a cocktail party) recommends transferring interests in your business to take advantage of the new $5 million gift tax limit, make sure you take all of the tax consequences into account. For businesses, there can be income tax pitfalls in having interests transferred. For example, transfers of interests can affect:
- Qualification as an S corporation
- Loss limitations arising from changes in ownership under Code Section 382
- Eligibility to participate in tax-deferred reorganizations
- Application of rules relating to U.S. taxation of foreign income
- A plethora of rules governing related-party transactions
Individual Taxpayers
Three extra days to file and pay. Because of the Emancipation Day holiday in the District of Columbia, the due date of Form 1040 for 2010 is April 18, 2011, instead of April 15, 2011. The April 18 deadline applies to any return or payment normally due on April 15, and to the deadline for requesting a tax-filing extension and for making 2010 Individual Retirement Account (IRA) contributions.
Special charitable contributions for certain IRA owners. Taxpayers who are age 70 ½ or older can make qualified charitable distributions (QCDs)—tax-free distributions to a charity from an IRA of up to $100,000. QCDs are counted in determining whether the owner has met the IRA's required minimum distribution (RMD). Where individuals have made nondeductible contributions to their traditional IRAs, QCD amounts are treated as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds. These distributions are not subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the taxpayer's return. These rules are available for charitable IRA transfers made in tax years beginning before January 1, 2012. In addition, a taxpayer can elect for such a distribution made in January of 2011 to be treated as if it were made on December 31, 2010. This option is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible to be treated as a QCD.
More taxpayers qualify for Roth IRA conversions. The 2010 tax year is the first in which taxpayers may convert funds in regular IRAs (as well as qualified plan funds) to Roth IRAs regardless of their income level. In addition, taxpayers have the choice of paying the tax on the conversion when they file their 2010 returns or deferring the tax hit on the conversion to the 2011 and 2012 tax years. For 2010 rollovers and conversions only, half of the resulting income must be included in income in tax year 2011 and the other half in 2012, unless the taxpayer chooses to include all of it in income in 2010.
Personal exemptions and itemized deductions are no longer phased out. For 2010 (and for 2011 and 2012), no overall income limits for personal and dependency exemptions and itemized deductions apply. Limitations continue to apply to particular itemized deductions, such as medical and dental expenses, certain miscellaneous itemized deductions, and casualty and theft losses.
Adoption credit is expanded. The maximum adoption credit for 2010 is increased to $13,170 per child, and the credit is refundable. In addition to filling out the appropriate form, taxpayers must include with their return an adoption order or decree or certain other documents. As a result, taxpayers claiming the adoption credit must file paper tax returns.
Self-employed health insurance deduction. In 2010, eligible self-employed individuals can use the self-employed health insurance deduction to reduce their Social Security self-employment tax liability in addition to their income tax liability. Premiums paid for health insurance covering the taxpayer, spouse and dependents generally qualify for this deduction. Premiums paid for coverage of an adult child, under age 27 at the end of the year, for the time period beginning on or after March 30, 2010, also qualify for this deduction, even if the child is not the taxpayer's dependent.
First-time homebuyer credit. The first time homebuyer tax credit claimed for homes bought after April 8, 2008 and before January 1, 2009, generally must be recaptured in equal installments over a 15-year period that begins in 2010. Many of those affected by this requirement received reminder letters from IRS. In addition, a taxpayer generally must repay any credit claimed for 2008 or 2009 if he sold the home in 2010 or he stopped using it as his main home in 2010.
Deduction for corrosive drywall. The IRS allows individuals with corrosive drywall to apply a safe harbor formula to treat the costs of repairing the defective drywall as a casualty loss. The safe harbor applies for original and amended federal income tax returns filed after September 29, 2010. The IRS will not challenge this treatment of damage resulting from corrosive drywall as a casualty loss (which might otherwise be difficult to achieve under the regular rules) if the loss is determined and reported under the safe harbor rule. A taxpayer who has a pending claim (or intends to pursue reimbursement) may claim a loss for 75% of the unreimbursed amount paid during the tax year to repair damage to the taxpayer's personal residence and household appliances that resulted from corrosive drywall.
Standard mileage rates for 2010. The standard mileage rate for business use of a car, van, pick-up or panel truck is 50 cents for each mile driven. The rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 16.5 cents per mile. The rate for using a car to provide services to charitable organizations is set by law and remains at 14 cents a mile. For 2011, these rates are 51 cents, 19 cents and 14 cents, respectively.
AMT exemption is increased. For tax-year 2010, the alternative minimum tax (AMT) exemption increases to: $72,450 for a married couple filing a joint return and qualifying widows and widowers; $36,225 for a married person filing separately; and $47,450 for singles and heads of household.
Tax breaks extended. Several tax breaks that expired at the end of 2009 were renewed and can be claimed on 2010 returns, including:
- State and local general sales tax deduction in lieu of state and local income taxes.
- Higher education tuition and fees deduction.
- Educators' $250 expense deduction.
Making work pay credit. Finally, though not a change in the law, it is important to note that the making working pay credit is available to eligible individuals for a tax year beginning in 2010. The credit, which is refundable, is the lesser of (1) 6.2% of an individual's earned income or (2) $400 ($800 for a joint return). It is phased out for higher income taxpayers. The amount of the credit generally will have been paid in advance through reduced withholding, but the credit still must be claimed on Schedule M, attached to Form 1040 or Form 1040A.
We recommend that you consult with your legal and other advisors to determine if any of the information in this article is applicable in your specific circumstances. If these advisors are not available to you, please feel free to contact us.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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