Tax Planning Letter
Friedman, Leavitt and Assoc., Inc.
Dear Clients and Friends
We would like to take this opportunity to wish you and your family a healthy, happy and
prosperous new year. Thank you for your business. We have appreciated the opportunity
to serve you in the past and we welcome the opportunity to serve you in the coming year.
Please call any time we can be of assistance to you. We would appreciate your referrals;
if you know someone in need of our services, please mention our name to them. We are a
growing firm and we would like more good clients like you.
On September 27, the President signed into law the “Small Business Jobs Act of 2010”
which includes a wide-ranging assortment of tax breaks and incentives for businesses. It
extended the life of expiring provisions we’re familiar with and added some new
deductions that we’ve not seen before. Here’s a brief overview of the tax changes in the
new Act and other year-end business tax planning ideas.
Enhanced small business expensing (Section 179 expensing)
To help small businesses quickly recover the cost of capital outlays, small business
taxpayers can elect to write off these expenditures in the year they are made instead of
recovering them through depreciation. Under the old rules, taxpayers could generally
expense up to $ 250,000 of qualifying property – generally, machinery, equipment, and
software – placed in service during the tax year. This annual limit was reduced by the
amount by which the cost of property placed in service exceeded $ 800,000. Under the
Small Business Jobs Act, for tax years beginning in 2010 and 2011, the $ 250,000 limit is
increased to $ 500,000 and the investment limit to $ 2,000,000.
A new provision is also added to allow up to $ 250,000 of Section 179 expensing of
qualified real property. Qualified real property includes qualified leasehold
improvements, restaurant, and retail improvement property.
The qualified property must be depreciable, and acquired for use in the active conduct of
a trade or business. Qualified leasehold improvement property is an interior improvement
to a building. The improvement is made “under or pursuant to a lease,” either by the
lessee, sublessee, or lessor of the building. The portion of the building is to be occupied
exclusively by the lessee (or any sublessee). The improvement is placed in service more
than 3 years after the date the building was first placed in service.
The Code doesn’t define what types of building improvements are eligible to be treated
as qualified leasehold improvement property. Rather, it lists the types of property that
can’t be so treated. Under Code Sec. 168(k)(3)(B), qualified leasehold improvement
property does not include any improvement for which the expense is attributable to:
enlargement of the building,
any elevator or escalator,
any structural component benefitting a common area, and
the internal structural framework of the building.
The following types of improvements would appear to qualify, if they benefit the tenant’s
space rather than a common area:
electrical or plumbing systems (including sprinkler system);
permanently installed lighting fixtures;
ceilings and doors; and
heating equipment, cooling equipment, air conditioners, and other air
Extension of 50% bonus first-year depreciation
Before the Small Business Jobs Act, Congress already allowed businesses to more
rapidly deduct capital expenditures of most new tangible personal property placed in
service in 2008 or 2009 by permitting the first-year write-off of 50 percent of the cost.
The new Act extends the first-year 50 percent write-off to apply to qualifying property
placed in service in 2010.
Boosted deduction for start-up expenditures
The Small Business Jobs Act allows taxpayers to deduct up to $ 10,000 in trade or
business start-up expenditures for 2010. The amount that a business can deduct is reduced
when start-up expenditures exceeds $ 60,000. Previously, the limit of these deductions
was capped at $ 5,000, subject to a $ 50,000 phase-out threshold.
100% exclusion of gain from the sale of small business stock
Ordinarily, individuals can exclude 50 percent of their gain on the sale of qualified small
business stock (QSBS) held for at least five years. This percentage exclusion was
temporarily increased to 75 percent for stock acquired after February 17, 2009 and before
January 1, 2011. Under the Small Business Jobs Act, the amount of exclusion is
temporarily increased yet again, to 100 percent of the gain from the sale of qualifying
small business stock that is acquired after September 27, 2010 and held for more than
five years. In addition, the Act also eliminates the alternative minimum tax (AMT)
preference item attributable to such sales.
Five-year carry back of general business credit
Generally, small business’s unused general business credits can be carried back to the
previous year and the remaining amount can be carried forward for 20 years. Under
Small Business Jobs Act, for the first tax year of the taxpayer beginning in 2010, eligible
small businesses can carry back unused general business credits for five years instead of
just one. Eligible small businesses are sole proprietorships, partnerships, and non-
publicly traded corporations with $ 50 million or less in average annual gross receipts for
the prior three years. Further, general business credits are not subject to AMT for 2010.
Health insurance tax credits to certain small employers
The recently enacted health reform legislation provides small employers with a tax credit
for non-elective contributions to purchase health insurance for their employees. To
qualify, a business must offer health insurance to its employees as part of their
compensation and contribute at least half the total premium cost. The business must have
no more than 25 full-time equivalents (FTEs), and the employees must have annual full
time wages that average no more than $ 50,000. However, the full amount of credit is
available only to an employer with 10 or fewer FTEs and whose employees have average
annual full time equivalent wages of not more than $ 25,000. The credit can offset
employer’s regular tax or its alternative minimum tax (AMT) liability.
Self-employed individuals, including partners and sole proprietors, two percent
shareholders of an S corporation, and five percent owners of the employer are not treated
as employees for purposes of this credit.
Payroll tax holiday and up to $ 1,000 tax credit for hiring unemployed workers
The recently enacted “Hiring Incentives to Restore Employment (HIRE) Act” provides
payroll tax holiday and up to $ 1,000 tax credits to the businesses that hire unemployed
workers. The payroll tax holiday exempts employers from paying the employer share of
social security taxes (6.2%) on wages paid in 2010 to qualified newly hired workers. The
qualified newly hired workers are individuals who:
begin employment after February 3, 2010 and before January 1, 2011.
have been unemployed for at least 60 days.
do not replace any existing employees.
are not related to the employer.
Apart from the payroll holiday, the employer can claim up to $ 1,000 credit for “retained
workers”. A retained worker is any qualified individual as explained above and:
who was employed by the taxpayer on any date during the tax year.
who was employed for the period of not less than 52 consecutive weeks.
whose wages for that employment during the last 26 weeks equaled at least 80
percent of the wages during the first 26 weeks.
In addition to these new hiring incentives, the HIRE Act also includes a one-year
extension of the enhanced small business expensing option under code section 179.
Year-End Moves for Business Owners
Hire a worker who has been unemployed for at least 60 days before year-end if you are
thinking of adding to payroll soon. Your business will be exempt from paying the
employer’s 6.2% share of the Social Security payroll tax on the formerly unemployed
new-hire for the remainder of 2010. Plus, if you keep that formerly unemployed new-hire
on the payroll for a continuous 52 weeks, your business will be eligible for a
nonrefundable tax credit of up-to-$1,000 after the 52-week threshold is reached. This
credit will be taken on the business’s 2011 tax return. In order to be eligible, the formerly
unemployed new-hire’s pay in the second 26-week period must be at least 80 percent of
the pay in the first 26-week period.
Put new business equipment and machinery in service before year-end to qualify for the
50 percent bonus first-year depreciation allowance. Unless Congress acts, this bonus
depreciation allowance won’t be available for property placed in service after 2010.
Tax basis – Review your tax basis in partnerships or S corporations that may have a
current-year loss. If the tax basis is insufficient to claim the loss, you may need to make a
contribution to the capital of the business to deduct the loss.
Deductibility of health insurance for the purpose of calculating self-employment tax
The Small Business Jobs Act allows business owners to deduct the cost of health
insurance incurred in 2010 for themselves and their family members in calculating their
2010 self-employment tax.
Cell phones no longer listed property
This means that cell phones can be deducted or depreciated like other business property,
without onerous recordkeeping requirements.
Tax Considerations for the Self-Employed
For cash-basis method businesses, send out invoices late in December so that collections
will not be made until January.
Establish a retirement plan before the end of the year. The deduction is allowed on the
current-year return even if funded just before you file the return next year. While many
plans can be funded in 2009 for a 2009 deduction, only a SEP plan can be established
next year. Other plans need to be established this year.
Establish a medical insurance plan or convert to or establish a high-deductible health
Employ your minor children to perform administrative tasks and avoid Social Security
taxes on the wages – this shifts income to a lower bracket (the children may establish
Roth IRAs to gain significant benefits for the future).
Review your meal and entertainment expenditures to make sure you have proper
Consider your eligibility for home office expenses.
As noted earlier, there are many other considerations in tax planning that are not
addressed here, but our intent is that you use this as a primer for your year-end planning.
Starting now can make the process less stressful and leave you with some time to take
necessary steps before year-end. However, with significant tax laws scheduled to change
before year-end, be sure to find with us - before year end - any other tax opportunity(ies)
that may emerge and would be more beneficial and helpful to your specific tax situation.
Sharing a common goal – to defer or avoid paying taxes as much as possible.
Friedman, Leavitt & Assoc., Inc.
Our Firm is a Member of:
American Institute of Certified Public Accountants
Ohio Society of Certified Public Accountants
“When we started our firm in 1968, we were committed to developing client relationships
built on trust and service. From our one-room office decades ago, we have significantly
expanded our facilities, added personnel and developed technological capabilities to
anticipate the ongoing growth, diversification and challenges of our clients.
When you do business with Friedman, Leavitt, there is no other client more important
than you. Whether you need accounting and tax services expertise, proven technology
solutions, financial planning, or management advisory services, Friedman, Leavitt
matches the right team to each project.
You will find we give personal attention to business problems and we take a business
approach to personal financial management. We are not so modern that every client is a
number on a computer database, but we are innovative in providing state-of-the-art
services. You can count on the service Friedman, Leavitt provides being “just right.”
The firm’s philosophy is simple; understand the client’s needs, be responsive to clients
requests, be committed to our clients, build long-standing relationships, and charge
reasonable fees for our service.”