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The president has released the 2011 federal budget with a significant number of changes in federal tax laws that will impact self employed individuals and small businesses. Here is a highlight of some of the proposed changes.
- Make the $250,000 Section 179 capital asset deduction permanent. Section 179 provides that, in place of capitalization and subsequent depreciation, taxpayers may elect to deduct the cost of qualifying property placed in service each taxable year.
- Extend the Make Work Pay $400 tax credit another year to include 2011.
- Extend COBRA subsidies to include people who were laid off between March 1, 2010 and January 1, 2011. The subsidy would last for 12 months instead of 9.
- Extend bonus depreciation deductions. An additional first-year depreciation deduction equal to 50% of the cost of the asset is allowed for qualified property placed in service during 2008 and 2009. The proposed budget would extend bonus depreciation to 2010 and 2011.
- Expand eligibility for child care credits. In 2010, taxpayers with child or dependent care expenses who are working or looking for work are eligible for a nonrefundable tax credit that partially offsets these expenses. The percentage of expense eligible for the credit is reduced for people earning between $15,000 and $43,000. Under the new law the credit would not be reduced until earnings reached $85,000.
- Require an automatic IRA option. Under the proposed law employers with more than 10 employees who do not offer a retirement plan, would be required to offer an option for employees to automatically contribute to an IRA through payroll deductions.
- Eliminate capital gains on investments in small business stock. Individual taxpayers may exclude 50 percent of the gain from the sale of certain small business stock held for five years. Under the American Recovery and Reinvestment Act (ARRA), the exclusion was increased to 75 percent for stock acquired between February 17, 2009 and January 1, 2011. The taxable portion of the gain is taxed at a maximum rate of 28 percent. Under the proposal the exclusion would be permanently increased to 100 percent.
- Make the Research and Experimentation Tax Credit permanent. The research and experimentation (R&E) tax credit is 20 percent of qualified research expenses. The current credit expired December 31, 2009.
- Remove cell phones from listed property. Generally, a taxpayer may claim a deduction for ordinary and necessary expenses paid or incurred in carrying on any trade or business. However, with respect to “listed property,” the deduction is limited and requires the taxpayer to substantiate the business use of the asset. Cell phones are currently listed property.
- Repeal the LIFO method of accounting for inventory. The LIFO method of accounting for inventory can offer a tax advantage to taxpayers facing rising inventory costs. Taxpayers that currently use the LIFO method would be required to write up their beginning LIFO inventory to its FIFO value in the first taxable year beginning after December 31, 2011.
- Expand information return requirements. The requirements to file 1099’s would be greatly expanded to include payments to corporations and require real estate investors and federal, state and local governments to file 1099’s for service providers. Additionally contractors would be required by law to furnish a W-9 and businesses would be required to verify the taxpayer id number with the IRS and businesses would be required to notify independent contractors of the tax consequences of being classified as an independent contractor rather than an employee. Businesses would also be required to offer to withhold income tax from independent contractor’s payments. Finally the IRS would be allowed greater flexibility to work with businesses to insure that they are properly classifying independent contractors and employees, but penalties for incorrect filing would be increased.
- Make the “temporary” Federal Unemployment surtax permanent. In 1976, Congress passed a “temporary” surtax of 0.2 percent of taxable wages to be added to the permanent FUTA tax rate. Thus, the current 0.8 percent net FUTA tax rate has two components: a permanent tax rate of 0.6 percent and a temporary surtax rate of 0.2 percent. The surtax has been extended several times, most recently through June 30, 2011. After 34 years, they would just admit it is a permanent tax.
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