Recent legislation has brought about important tax changes for small business owners, affecting the rest of 2010 and the coming years. Everything from expense deductions to startup expenditures have been adjusted to alleviate some of the stress that recession has wrought on entrepreneurs. Here are three areas that small company owners should bear in mind when contemplating spending for the fourth quarter and for next year.
Startup expenses. If you started a business in 2010 or plan to do so, you can deduct up to $10,000 in startup expenses. That's double the usual $5,000 deduction for expenses incurred before a company starts operating. Any expense—from legal to accounting, promotional, or marketing—can be considered a startup expense, says Scott F. Berger, principal with accounting firm Kaufman, Rossin in Florida. The increased amount applies only to 2010.
Capital expenditures. For the first time, companies can deduct as much as $500,000 in expenses for fixed assets such as machinery, furniture, and computers. The deduction was increased from $200,000 and will phase out after a company makes more than $2 million in capital investments. The difficulty in this economic climate is that many companies lack the cash reserves to make major purchases and cannot get credit. "Shifting income and timing deductions is always a challenge. But for companies that were looking to expand, this provides an incentive for them to do it now," Berger says. The $500,000 write-off limit applies to purchases made in 2010 and 2011.
Bonus depreciation. Entrepreneurs who purchase new equipment for their businesses can write off 50 percent of such expenses this year, rather than depreciating the full cost over time. A similar tax rule expired after 2009, but new legislation extends the provision through 2011, making it retroactive to Jan. 1. The White House estimates that 2 million companies will be eligible to take advantage of this provision, giving them incentives to invest in plants and equipment by accelerating the rate at which they can deduct capital expenditures.
Additional provisions, which include deductions for self-employed individuals who buy their own health insurance; a reduction in capital gains taxes on small business investments; and greater ease for small businesses to deduct the cost of cell phones, are outlined at the White House website.