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Tax strategies for small businesses

The topic of taxes makes for questionable dinner conversation save at a CPA convention or among friends when it’s about saving money. And if it is about saving money, then everyone lights up. So let’s get to it and talk about what to look for to reduce taxes in 2011 and beyond.

First, every business owner’s situation is unique so always consult with your tax advisor before taking any action. With that being said, there are some general areas to keep on your radar. As with all tax regulations there are many nuances so do your homework.

The payroll tax holiday is designed to put a little more in everyone’s paycheck. Employees pay 4.2 percent in Social Security tax for 2011 as opposed to 6.2 percent, which remains the rate employers pay. The self-employed will pay Social Security taxes at 10.4 percent in 2011 as opposed to the normal 12.4 percent rate. That 2 percent can amount to a maximum dollar savings of $2,136 for an individual earning at least $106,800 (the Social Security wage base) and $4,272 for a married couple both earning $106,800 for a total of $213,600 in combined wages.

President Bush’s favorable tax rates of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent will remain in effect through 2012. Had the rates been allowed to expire, all income earners would be subject to significantly higher taxes. There is no indication at this time as to what will happen to rates after 2012 so take advantage of the rates now for planning purposes.

As part of the extension of the above mentioned rates qualified dividends remain taxed at 0 percent for those taxpayers in the 10 percent or 15 percent tax bracket. Taxpayers above the 15 percent bracket will pay long-term capital gains rates of 15 percent on qualified dividends. Had this provision not been extended the potential existed for individuals to be taxed up to 39.6 percent on dividends.

For a business looking to make capital purchases of equipment, machinery, software and certain other investments, 2011 is the year to do so. Businesses will have more favorable limits and rules under which they can “write-off” (also known as a “Section 179 expense”) 100 percent of the cost of eligible expenses.

There are some advantageous rules for 2010 as well, so for those that have not filed yet for 2010 (or didn’t take advantage on their original filing and wish to amend) be sure you take advantage of this provision of the Small Business Jobs Act. Either way it will expire at the end of 2011 unless extended so consider this in your tax planning and budgeting projections.

In general there are several very generous laws that are favorable for small businesses. In addition to those mentioned above, they include increased startup cost expensing, small-business stock gain exclusion, numerous tax credits and more liberal carryback rules. The details are beyond the scope (and space) for this article but should be kept in mind.

Looking to 2012, some of these will remain in effect and others will expire at the end of 2011.

The one tax on the horizon that everyone who earns more than $200,000 individually or $250,000 as a married couple filing jointly should have top of mind is the increase in specific types of taxes to raise funds for the Medicare program. There will be a 0.9 percent payroll tax on earned income and a 2.9 percent income tax increase on passive income. Passive income includes capital gains on investments, including your home.

These two increases are slated to take effect in 2013 so again keep them in mind as you start your tax planning this summer.

Remember that failing to plan is like planning to fail.

 

Sean M. Dowling is a certified financial planner and president of the Dowling Group Wealth Management in Stamford. Reach him at sean@thedowlinggroup.com.

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