As a small business owner you need to have a good handle on your company's taxes. Some changes were slated to go into effect last year, and with the Obama tax plan, many more are coming up. Here are a trio of changes you need to know about right now. Two are good, one...not so good.
The Good News
It is always nice when the IRS decides to make life easier for the taxpaying public. Here are a couple of ways they are doing just that:
Business Equipment Deductions. Section 179 allows you to deduct 100% of the asset's cost in the year of purchase, just like any other operating expense. The limit has been gradually increasing over the past several years. In 2007, it was $125,000, but that was doubled in 2008 to $250,000. While this does mean that you may be able to forgo depreciation again this year, it is also true that depreciation is complex so make sure you educate yourself (IRS Publication 946, "How To Depreciate Property") and consult your tax professional before trying it yourself.
Mileage Rates. If you calculate your vehicle deduction with the Mileage Method, you will be happy to learn that the mileage rate has gone up again. On January 1, 2008, the rate was 50.5 cents per mile. On July 1, 2008, the rate was further increased to 58.5 cents per mile. Assuming you kept good records, this is easy to figure out with two calculations, one for January-June (miles * .505) and the other for July-December (miles * .585).
The Bad News
There is one thing certain, taxes tend to increase, and here is an increase that will hit the self-employed, as well as all other business owners, this year.
Self-Employment Taxes. If your business is a sole proprietorship (i.e. you file Schedule C) and your profit is at least $400, you are required to pay a 15.3% self-employment tax on that profit. This tax is a combination of social security tax (12.4%) and Medicare tax (2.9%). All of your profit is subject to the Medicare tax while the limit on the social security tax ($97,500 in 2007, $102,000 in 2008) is now, in 2009, $106,800). Remember: The rules about the social security tax portion of the self-employment tax also apply to employee wages and salaries. This means that all business owners, regardless of entity type, are affected by this defacto tax increase.
Don't go it alone. Federal tax rules are changing. They are changing this year, next year and onward. Make sure that you consult with your accountant or other tax professional about these changes, how they will affect you, or any other tax questions you may have.