Tax Breaks for Booming Businesses

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Despite continued concerns of many struggling businesses, there are other businesses that are thriving today. If your business is booming, take advantage of tax rules to make sure that Uncle Sam doesn't earn more than you do from your efforts.

Invest in Machinery and Equipment

Now is a great time to buy new items — computers, furniture, heavy machinery — that can help your company run more efficiency and do more business. There may be attractive (low-rate) financing from sellers to help swing your purchases.

If you buy no more than $250,000 worth of equipment in 2010, you can opt to deduct the cost this year rather than depreciating it over five, seven, or more years (the length of time is fixed by the tax law, and the dollar limit phases out for purchases up to $800,000). The $250,000 expensing limit for 2011 is scheduled to be only $25,000, unless Congress changes the law.

To take advantage of this "expensing" rule, you must be profitable. However, the write-off applies whether you buy new or pre-owned equipment. It also applies whether you pay cash or finance the purchase in whole or in part.

Find more about expensing in IRS Publication 946, How to Depreciate Property.

Hire New Employees

Now may be an ideal time to add to your staff so that you can handle your growing sales.

• Payroll holiday: If you hire someone now who has not worked more than 40 hours during the 60 days ending on the date you hire the worker, you won't pay any Social Security taxes on wages to this worker through the end of the year. This is a 6.2% savings on the wages that you would normally have paid as part of the employer share of FICA. This break applies only to qualified workers hired before January 1, 2011. Find answers to questions about this payroll tax exemption from the IRS.
   
• Retention credit: If you keep this new worker on your payroll for 52 consecutive weeks, you'll be entitled to claim a $1,000 tax credit next year. There is no cap on the number of such credits you can take, so if you hire five new qualified workers, your tax credit in 2011 will be $5,000. A tax credit is even better than a tax deduction because it reduces your tax bill dollar for dollar.
   
• Work opportunity credit: If you hire a worker from a designated group, you may qualify for a different tax credit. The work opportunity credit in most cases is 40 percent of up to $6,000 in first-year wages, for a top credit of $2,400. The designated groups include vocational rehabilitation referrals, ex-felons, and long-term family assistance recipients. For 2010, two special groups include unemployed veterans and disconnected youth. (These groups do not apply in 2011 unless Congress changes the law).

To claim the credit, you must file a certification form with your state workforce agency within 28 days of hiring; use IRS Form 8850, Pre-Screening Notice and Certification for the Work Opportunity Credit for this purpose.

Note: If you hire someone eligible for both the work opportunity credit and the payroll holiday, you must choose the tax break that is better for you; you can't use both for the same worker.

Save for Retirement

Business owners weary (and wary) of Wall Street may not give much thought to saving for retirement. However, doing so on a tax-advantaged basis can provide current tax savings. Contributions to qualified retirement plans are tax deductible (within limits). What's more, having a plan is an important way to attract and retain qualified workers who value this fringe benefit.

There are many types of qualified retirement plans from which to choose for your business. The one you select depends in part on your goals: whether you want to maximize your personal savings, minimize company contributions, or achieve some other objective. For example, if you set up a Simplified Employee Pension (SEP) plan, you can add up to $49,000 for yourself. However, the contribution rate you use for yourself must apply to other participants (most employees must be included); all of the contributions are tax deductible. Use the IRS Retirement Plans Navigator to compare your plan options.

Tax bonus: If you don't yet have a qualified retirement plan for your business, you may qualify for a tax credit of up to $500 for the first three years of the plan to cover administrative costs. To qualify for the credit, the plan must cover at least one person who is not an owner or owner's spouse; there can be no more than 100 employees in the company. Details about the small employer pension-plan startup credit can be found in the instructions to Form 8881.

Final word

If you've had a great year so far, don't delay action that can help you achieve tax savings. Even if the first two quarters of the year have not been stellar but you expect the next two to be much better, these tax-savings strategies are worthy of your consideration. Since this is the mid-point of the year for most companies, now is a great time to meet with your CPA or other tax-adviser to discuss these and other ways to save taxes for 2010 and for years to come