April 15 — tax day — will be here before you know it. According to Adam Boatsman, a founding partner of Boatsman Gilmore Wagner and an expert on business tax issues, there are a number of special things small-business owners need to be aware of when preparing their taxes this year. Let’s take a look at four areas that may affect your business’ 2014 tax return.
The Affordable Health Care Act
Most people know that businesses with more than 50 employees will be heavily impacted by the the Affordable Health Care Act. But what about companies with only a few employees? It turns out that if small companies want to provide health insurance for their employees, they may be eligible for increased tax credits this year.
The maximum small-business tax credit has increased in 2014 from 35 to 50 percent of the combined total of for-profit employer contributions to employee health coverage, and from 25 to 35 percent for nonprofit employers. And because it’s a credit rather than a deduction, you’ll be able to reduce your tax liability dollar for dollar. To receive the credit, employers must purchase health care through the Small Business Health Care Exchange (SHOP). Boatsman says SHOP allows small businesses to purchase health care on the open market, which should provide you with more competitive pricing. Additional qualifications for the credit are:
> You have to pay a minimum of 50 percent of your employees’ health insurance premiums.
> The credit is based on a sliding scale. You’ll receive a 50 percent credit for up to 10 employees, but the credit decreases with the more employees you have. The maximum you can have and still receive a credit is 25. Your employee count is based on the number of hours they work, not how many paychecks you issue. So if you have two part-time employees who work 20 hours each, they will count as one full-time employee. Also, you can only count non-owner employees. In other words, neither you nor your family can be included in the total.
> The percentage of your credit will also be based on the average salary of your employees. If the average is $25,000 or less, you’ll receive the full 50 percent credit, and it goes down from there. If the average salary is $50,000 or more, you aren’t eligible for the credit.
> You can carry the credit one year forward or backward, but it’s only available to qualified employers for two consecutive taxable years.
> Healthcare.gov offers a tax credit estimator that will show you the credit you’re eligible for. You’ll use IRS form 8941 [PDF] to file for the credit, and you can also refer to the online instructions [PDF] for help. If you want to look at the regulations in full, the Federal Register provides them in one document.
Section 179 Tax Deduction
The Section 179 Tax Deduction allows business owners to write off equipment in the same year they bought it. But the $500,000 limit of 2013 was reduced to just $25,000 for tax year 2014. However, Congress passed the Tax Extenders Bill in mid-December, restoring the $500,000 expense limit. President Obama is expected to sign it into law, but has not done so yet (see “Tax Incentives Extended,” below).
The bill only extended the increased deduction for tax year 2014. It goes back down to $25,000 for tax year 2015. That means if you plan to purchase equipment, software, or vehicles for your business in excess of $25,000, you only have until December 31 to do it. To determine exactly how much you’ll be able to deduct on your taxes, you can use Crest Capital’s free Section 179 calculator. To claim the 179 deduction, you should use IRS form 4562 [PDF].
Boatsman says the way you structure your business can affect your taxes, with the least tax-efficient structures being sole proprietorships and C corporations. Here’s a brief look at how each one can affect your taxes:
> Sole Proprietorship: There is no legal separation between the owner and the business, so the owner is taxed on all profits, whether or not they withdraw it in salary or leave it in the business for future company expenses. Sole proprietors pay self-employment taxes, which for 2014 is 15.3 percent of the first $117,000 and an additional 2.9 percent for income above that.
> Corporation: A corporation is considered a separate entity from the owner, and the owners don’t pay taxes on income unless they withdraw it as a salary or bonus. The corporation will pay the taxes on the remaining profits.
> S Corporation: Owners of S corporations enjoy limited liability like corporation owners do, but the profits of S corporations pass through to the owners when filing taxes, just like sole proprietorships. S corporation shareholders are not subject to self-employment taxes.
> Partnerships: Partners individually pay taxes on the profits from the business, but they are divided in proportion to each partner’s percentage of ownership in the business. The partnership itself does not pay any taxes.
> Limited Liability Company (LLC): LLCs don’t pay any taxes, but instead, the business income passes through to the members, and they report it on their individual tax returns.
Tax Incentives Extended
A total of 55 tax incentives for small businesses expired this year, but Congress passed measures to extend them and make them retroactive for 2014. We are waiting for the president to sign the bill into law. In addition to the Section 179 Tax Deduction mentioned above, Boatsman says the primary incentives that will impact small businesses are the Research and Development Credit, Bonus Depreciation, and Accelerated Depreciation for Qualified Leasehold Improvements.
Small-business owners got good news on the tax front this year, but because some of these breaks were announced at the last minute, you’ll need to move quickly to take advantage of them.