Small Business Tax TipsSmall Business Tax Tips

Felix Y. Cheng, CPAFelix Y. Cheng, CPA

Wednesday, March 23, 2011Wednesday, March 23, 2011

Changes in Filing Due DatesChanges in Filing Due Dates

Form 1040, Schedule C Filers (Sole Form 1040, Schedule C Filers (Sole Proprietors and Single-Member Proprietors and Single-Member LLCLLC’’s) - April 18, 2011. s) - April 18, 2011.

Massachusetts Form 1 - April 19, Massachusetts Form 1 - April 19, 2011. 2011.

What to file and When?What to file and When?

Partnerships Partnerships –– Form 1065 Form 1065 –– April 15 April 15thth, , 20112011

S-Corporations S-Corporations –– Form 1120S Form 1120S –– March 15March 15thth, 2011, 2011

C-Corporations C-Corporations –– Form 1120 Form 1120 –– March March 1515thth 2011 2011

LLCLLC’’s s –– Depends if filing Form 1065, Depends if filing Form 1065, 1120S, 1120, or 1040 (Schedule C).1120S, 1120, or 1040 (Schedule C).

How to best work with a CPA if How to best work with a CPA if you’re self-employed?you’re self-employed?

Have a bookkeeper, provide a Have a bookkeeper, provide a Quickbooks file. Quickbooks file.

No bookkeeper, provide bank statements No bookkeeper, provide bank statements for the tax year (January to December). for the tax year (January to December).

Depreciation of Equipment Depreciation of Equipment –– To To calculate, provide the following:calculate, provide the following:

• Type of equipmentType of equipment• The cost of the equipmentThe cost of the equipment• The percentage of business useThe percentage of business use• The date you started using it for businessThe date you started using it for business• The date you took it out of businessThe date you took it out of business

NEW FOR 2010 - Deduction for NEW FOR 2010 - Deduction for self-employed health insurance.self-employed health insurance.

If you are a sole proprietor, single-member LLC, If you are a sole proprietor, single-member LLC, partnership, or LLC (Limited Liability Company) that is partnership, or LLC (Limited Liability Company) that is treated like a partnership, treated like a partnership, • Reduce your net self-employment income by the amount of Reduce your net self-employment income by the amount of

your self-employed health insurance deduction in order to your self-employed health insurance deduction in order to calculate self-employment tax.calculate self-employment tax.

• Net self-employment income is $10,000Net self-employment income is $10,000Subtract: Self-employed Health Insurance Deduction: $4,800Subtract: Self-employed Health Insurance Deduction: $4,800________________________________________________________________________________________Self-employment tax is calculated on 92.35% of $5,200 versus Self-employment tax is calculated on 92.35% of $5,200 versus

$10,000 in 2009.$10,000 in 2009.

- Use worksheet on page 28 of the Form 1040 instructions to Use worksheet on page 28 of the Form 1040 instructions to calculate the self-employed health insurance deduction.calculate the self-employed health insurance deduction.

NEW FOR 2010 – Depreciation - NEW FOR 2010 – Depreciation - Increase in Section 179 expenseIncrease in Section 179 expense

Deduct up to $500,000 of the cost of section 179 property placed Deduct up to $500,000 of the cost of section 179 property placed in service in 2010 versus $250,000 in 2009. in service in 2010 versus $250,000 in 2009.

Phased out if the cost of the property exceeds $2,000,000 versus Phased out if the cost of the property exceeds $2,000,000 versus $800,000 in 2009. $800,000 in 2009.

ExampleExample• LetLet’’s say you buy $4,500 of equipment in 2010, assuming you meet s say you buy $4,500 of equipment in 2010, assuming you meet

the rules below, you may deduct the whole $4,500 in 2010 instead of the rules below, you may deduct the whole $4,500 in 2010 instead of only a portion of it.only a portion of it.

General rulesGeneral rules• Start deducting in the year you place the property in service meaning Start deducting in the year you place the property in service meaning

for business usefor business use• Property must be purchased and be used more than 50% for businessProperty must be purchased and be used more than 50% for business• The deduction may not cause a loss from business. The deduction may not cause a loss from business. • If you deduct only part of the cost due to limitations, you can generally If you deduct only part of the cost due to limitations, you can generally

depreciate the cost remaining under MACRS and carry over for an depreciate the cost remaining under MACRS and carry over for an unlimited number of years, the section 179 amounts remaining. unlimited number of years, the section 179 amounts remaining.

NEW FOR 2010 – Depreciation - NEW FOR 2010 – Depreciation - Extension of special allowanceExtension of special allowance

Extended to property placed in service in 2010. Extended to property placed in service in 2010. General rulesGeneral rules

• Applies only for the first year you place the property in service. Applies only for the first year you place the property in service. • Take an additional 50% (or 30%, if applicable) of cost after any section Take an additional 50% (or 30%, if applicable) of cost after any section

179 deduction and before you figure regular depreciation under MACRS 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service. for the year you place the property in service.

Example 1 Example 1 –– Without Section 179 deduction Without Section 179 deduction• LetLet’’s say you buy $4,500 of equipment in 2010. You can deduct 50% of s say you buy $4,500 of equipment in 2010. You can deduct 50% of

$4,500 being $2,250 as a special depreciation allowance. The $2,250 $4,500 being $2,250 as a special depreciation allowance. The $2,250 cost left over is then depreciated regularly under the MACRS system.cost left over is then depreciated regularly under the MACRS system.

Example 2 Example 2 –– With Section 179 deduction With Section 179 deduction• LetLet’’s say you buy $4,500 of equipment in 2010. You end up taking s say you buy $4,500 of equipment in 2010. You end up taking

$2,000 of Section 179 making the cost leftover at $2,500. Afterwards $2,000 of Section 179 making the cost leftover at $2,500. Afterwards you can deduct 50% of $2,500 being $1,250 as a special depreciation you can deduct 50% of $2,500 being $1,250 as a special depreciation allowance. The $1,250 cost left over is then depreciated regularly allowance. The $1,250 cost left over is then depreciated regularly under the MACRS system.under the MACRS system.

NEW FOR 2010 – Depreciation NEW FOR 2010 – Depreciation on vehicleson vehicles

Depreciation limits on vehicles.Depreciation limits on vehicles.     • For 2010, the first-year limit on depreciation, special For 2010, the first-year limit on depreciation, special

depreciation allowance, and section 179 deduction for depreciation allowance, and section 179 deduction for most vehicles is $11,060 versus $10,960 in 2009 most vehicles is $11,060 versus $10,960 in 2009 ($3,060 versus $2,960 in 2009 if you elect not to claim ($3,060 versus $2,960 in 2009 if you elect not to claim the special depreciation allowance).the special depreciation allowance).

• For trucks and vans, the first-year limit is $11,160 For trucks and vans, the first-year limit is $11,160 versus $11,060 in 2009 ($3,160 versus $3,060 if you versus $11,060 in 2009 ($3,160 versus $3,060 if you elect not to claim the special depreciation allowance). elect not to claim the special depreciation allowance).

Special Depreciation Allowance.Special Depreciation Allowance.     • If acquired new after September 8, 2010, and placed in If acquired new after September 8, 2010, and placed in

service before the end of the year, deduct 100% of the service before the end of the year, deduct 100% of the depreciable basis of the vehicle instead of 50%. depreciable basis of the vehicle instead of 50%.

NEW FOR 2010 - Increased NEW FOR 2010 - Increased deduction for start-up costs.deduction for start-up costs.      

If your business began in 2010, deduct up to $5,000 of certain If your business began in 2010, deduct up to $5,000 of certain business start-up costs paid or incurred after October 22, 2004, in business start-up costs paid or incurred after October 22, 2004, in tax years before 2010, and tax years before 2010, and

Up to $10,000 of certain business start-up costs paid or incurred in Up to $10,000 of certain business start-up costs paid or incurred in 2010. 2010.

The $5,000 limit is reduced (but not below zero) by the amount by The $5,000 limit is reduced (but not below zero) by the amount by which your total start-up costs exceed $50,000 and the $10,000 which your total start-up costs exceed $50,000 and the $10,000 limit is reduced (but not below zero) by the amount by which your limit is reduced (but not below zero) by the amount by which your start-up costs exceed $60,000. start-up costs exceed $60,000.

In addition, you can deduct up to $5,000 of organizational costs In addition, you can deduct up to $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total organizational costs exceed reduced by the amount your total organizational costs exceed $50,000. $50,000.

Any costs above the limit must be amortized starting with the Any costs above the limit must be amortized starting with the month you began operating your active trade or business ratably month you began operating your active trade or business ratably over a 180 month period. over a 180 month period.

You elect to deduct the start-up or organizational costs by claiming You elect to deduct the start-up or organizational costs by claiming the deduction on the income tax return (filed by the due date the deduction on the income tax return (filed by the due date including extensions) for the tax year in which the active trade or including extensions) for the tax year in which the active trade or business begins.business begins.

NEW FOR 2010 - Increased NEW FOR 2010 - Increased deduction for start-up costs.deduction for start-up costs.      

ExampleExample• You paid $50,000 of start-up costs and $50,000 of organizational You paid $50,000 of start-up costs and $50,000 of organizational

costs in tax years before 2010. If your business began in 2010, you costs in tax years before 2010. If your business began in 2010, you may deduct $5,000 of start-up costs and $5,000 of organizational may deduct $5,000 of start-up costs and $5,000 of organizational costs and the remaining $45,000 of each will be divided by 180 costs and the remaining $45,000 of each will be divided by 180 months at $250/month. For 2010, your deduction for start-up costs months at $250/month. For 2010, your deduction for start-up costs and organizational costs each will be $5,000 and assuming your and organizational costs each will be $5,000 and assuming your business started in January 2010, you will deduct $3,000 each of business started in January 2010, you will deduct $3,000 each of amortization expense ($250/month X 12 months)amortization expense ($250/month X 12 months)

Where to Deduct the start-up costs, organizational costs, and Where to Deduct the start-up costs, organizational costs, and amortizationamortization• For: For:

Sole proprietorships and single-member LLCSole proprietorships and single-member LLC ’’s. Schedule C, s. Schedule C, ““Part Part V. Other ExpensesV. Other Expenses””..

Partnerships and multi-member LLCPartnerships and multi-member LLC’’s. Form 1065, line 20, Other s. Form 1065, line 20, Other DeductionsDeductions

S-Corporations, Form 1120S, line 19, Other DeductionsS-Corporations, Form 1120S, line 19, Other Deductions C-Corporations, Form 1120, line 26, Other DeductionsC-Corporations, Form 1120, line 26, Other Deductions For the first year of amortization only, also file Form 4562.For the first year of amortization only, also file Form 4562.

Start-Up CostsStart-Up Costs

They include amounts paid for the following: They include amounts paid for the following: • An analysis or survey of potential markets, An analysis or survey of potential markets,

products, labor supply, transportation facilities, etc.products, labor supply, transportation facilities, etc.• Advertisements for the opening of the business.Advertisements for the opening of the business.• Salaries and wages for employees who are being Salaries and wages for employees who are being

trained and their instructors.trained and their instructors.• Travel and other necessary costs for securing Travel and other necessary costs for securing

prospective distributors, suppliers, or customers.prospective distributors, suppliers, or customers.• Salaries and fees for executives and consultants, or Salaries and fees for executives and consultants, or

for similar professional services.for similar professional services.

Organizational Costs - Organizational Costs - CorporationsCorporations

Examples of organizational costs Examples of organizational costs include: include: • The cost of temporary directors.The cost of temporary directors.• The cost of organizational meetings.The cost of organizational meetings.• State incorporation fees.State incorporation fees.• The cost of legal services.The cost of legal services.

Organizational Costs - PartnershipsOrganizational Costs - Partnerships

Examples of organizational costs Examples of organizational costs include:include:• Legal fees for services incident to the Legal fees for services incident to the

organization of the partnership, such as organization of the partnership, such as negotiation and preparation of the negotiation and preparation of the partnership agreement. partnership agreement.

• Accounting fees for services incident to Accounting fees for services incident to the organization of the partnership.the organization of the partnership.

• Filing fees.Filing fees.

NEW FOR 2010 - New credit for NEW FOR 2010 - New credit for small employer health insurance small employer health insurance

premiums.premiums.       Use Form 8941 to figure the credit for small Use Form 8941 to figure the credit for small

employer health insurance premiums for tax employer health insurance premiums for tax years 2010 and after. years 2010 and after.

The maximum credit is a percentage of premiums The maximum credit is a percentage of premiums the employer paid during the tax year for certain the employer paid during the tax year for certain health insurance coverage the employer provided health insurance coverage the employer provided to certain employees. to certain employees.

For For tax-exempt small employerstax-exempt small employers, the credit is , the credit is generally 25% of premiums paid, and is claimed generally 25% of premiums paid, and is claimed as a refundable credit on Form 990-T, Exempt as a refundable credit on Form 990-T, Exempt Organization Business Income Tax Return. Organization Business Income Tax Return.

For For all other small employersall other small employers, the credit is , the credit is generally 35% of premiums paid, and is claimed generally 35% of premiums paid, and is claimed as part of the general business credit on Form as part of the general business credit on Form 3800, General Business Credit. 3800, General Business Credit.

Eligible Small EmployersEligible Small Employers

1.1. Paid 50% or more of health Paid 50% or more of health insurance premiums for employees insurance premiums for employees     

2.2. You had fewer than 25 full-time You had fewer than 25 full-time equivalent employees (FTEs) for the equivalent employees (FTEs) for the tax year.tax year.     

3.3. You paid average annual wages for You paid average annual wages for the tax year of less than $50,000 per the tax year of less than $50,000 per FTE.FTE.     

NEW FOR 2010 – HIRE retention NEW FOR 2010 – HIRE retention creditcredit

Encourage retention of new hires Encourage retention of new hires Lesser of $1000 or 6.2 percent of wages during the 52 Lesser of $1000 or 6.2 percent of wages during the 52

consecutive week period. consecutive week period. The qualified employeesThe qualified employees’’ wages during the last 26 weeks wages during the last 26 weeks

must equal at least 80% of wages for the first 26 weeks.must equal at least 80% of wages for the first 26 weeks. 52 consecutive weeks starts on the date the employee 52 consecutive weeks starts on the date the employee

begins employment with the employer.begins employment with the employer. Qualified employees Qualified employees

• Begin employment after February 3, 2010, and before Begin employment after February 3, 2010, and before January 1, 2011, January 1, 2011,

• Have been unemployed or employed for 40 hours or Have been unemployed or employed for 40 hours or lessless  during the 60-day period ending on the date such during the 60-day period ending on the date such employment begins employment begins

• Are not family members of or related in certain other Are not family members of or related in certain other ways to the employer.ways to the employer.

Fill out Form 5884-BFill out Form 5884-B

NEW FOR 2010 – HIRE retention NEW FOR 2010 – HIRE retention creditcredit

For a calendar year taxpayer (January 1st to For a calendar year taxpayer (January 1st to December 31December 31stst), if the employee is hired on ), if the employee is hired on February 4, 2010, the requirement wonFebruary 4, 2010, the requirement won’’t be met t be met until February 3, 2011 so the credit will have to until February 3, 2011 so the credit will have to be taken on the 2011 income tax return.be taken on the 2011 income tax return.

A fiscal year taxpayer for example, April 1, 2010 A fiscal year taxpayer for example, April 1, 2010 to March 31, 2011, may claim on its 2010 income to March 31, 2011, may claim on its 2010 income tax return if the requirements have been met by tax return if the requirements have been met by March 31, 2011. For example, if you hired March 31, 2011. For example, if you hired someone on March 15, 2010, it will be met .someone on March 15, 2010, it will be met .

Home Office ExpensesHome Office Expenses To qualify to deduct expenses for business use of your home, you must use To qualify to deduct expenses for business use of your home, you must use

part of your home:part of your home:• Exclusively and regularly as your principal place of business,Exclusively and regularly as your principal place of business,• Exclusively and regularly as a place where you meet or deal with Exclusively and regularly as a place where you meet or deal with

patients, clients, or customers in the normal course of your trade or patients, clients, or customers in the normal course of your trade or business, business,

• In the case of a separate structure which is not attached to your home, In the case of a separate structure which is not attached to your home, in connection with your trade or business,in connection with your trade or business,

• On a regular basis for certain storage use, On a regular basis for certain storage use, • For rental use (see Publication 527), orFor rental use (see Publication 527), or• As a daycare facility. As a daycare facility.

For more information on home office expenses, read Publication 587: For more information on home office expenses, read Publication 587: If you are a sole proprietor or a single-member LLC, fill out Form 8829 If you are a sole proprietor or a single-member LLC, fill out Form 8829

which will go with your Form 1040.which will go with your Form 1040. If you are an employee, partner, shareholder, or member of an LLC taxed If you are an employee, partner, shareholder, or member of an LLC taxed

as a partnership or corporation:as a partnership or corporation:• Use the worksheet on page 26 of Publication 587Use the worksheet on page 26 of Publication 587• Once you figure out the deduction from the worksheet, report the Once you figure out the deduction from the worksheet, report the

amount on Form 2106, Employee Business Expenses on step 1, line 4 amount on Form 2106, Employee Business Expenses on step 1, line 4 which goes with your Form 1040.which goes with your Form 1040.  

Continuing EducationContinuing Education The education maintains or improves skills needed in your present work.The education maintains or improves skills needed in your present work. Even if the education meets the above test, it is not qualifying work-related Even if the education meets the above test, it is not qualifying work-related

education if it:education if it:• Is needed to meet the minimum educational requirements of your present trade Is needed to meet the minimum educational requirements of your present trade

or business, oror business, or• Is part of a program of study that will qualify you for a new trade or business.Is part of a program of study that will qualify you for a new trade or business.

You can deduct the costs even if it could lead to a degree.You can deduct the costs even if it could lead to a degree.

What expenses can be deducted?What expenses can be deducted?• Tuition, books, supplies, lab fees, and similar items.Tuition, books, supplies, lab fees, and similar items.• Certain transportation and travel costs.Certain transportation and travel costs.• Other education expenses, such as costs of research and typing when writing a Other education expenses, such as costs of research and typing when writing a

paper as part of an educational program.paper as part of an educational program. Where to deductWhere to deduct

For: For: • Sole proprietors and single-member LLCSole proprietors and single-member LLC’’s who file Schedule C or C-EZ, you may s who file Schedule C or C-EZ, you may

deduct it on the Schedule C or C-EZ as a business expense under deduct it on the Schedule C or C-EZ as a business expense under ““Part VPart V”” on on page 2.page 2.

• Employees, partners, shareholders, members of LLCEmployees, partners, shareholders, members of LLC ’’s with more than one s with more than one member, deduct it on Form 2106 or 2106-EZmember, deduct it on Form 2106 or 2106-EZ

For more information on continuing education, please go to Publication 970 under For more information on continuing education, please go to Publication 970 under ““Business Deduction for Work-Related EducationBusiness Deduction for Work-Related Education”” starting on page 64 starting on page 64

Deducting Volunteer ExpensesDeducting Volunteer Expenses

Drove to and from volunteer work. You Drove to and from volunteer work. You can take on line 16 of Schedule A: can take on line 16 of Schedule A: • Actual cost of gas and oil or 14 cents a mile. Actual cost of gas and oil or 14 cents a mile. • Add parking and tolls to the amount. Add parking and tolls to the amount. • Do not deduct any amounts that were repaid Do not deduct any amounts that were repaid

to you.to you. Deduct on line 16, out-of-pocket expenses Deduct on line 16, out-of-pocket expenses

you paid to do volunteer work. you paid to do volunteer work. Page A-8 of the Schedule A instructions Page A-8 of the Schedule A instructions

Child & Dependent Care Child & Dependent Care ExpensesExpenses

A qualifying child is one who is under age 13 whom you can claim as a A qualifying child is one who is under age 13 whom you can claim as a dependent. If the child turned 13 during the year, the child is a qualifying person dependent. If the child turned 13 during the year, the child is a qualifying person for the part of the year he or she was under age 13. for the part of the year he or she was under age 13.

What can you deduct (Assuming this is while you worked or looked for What can you deduct (Assuming this is while you worked or looked for work)work) • The services of a cook, maid, babysitter, housekeeper, or cleaning person if The services of a cook, maid, babysitter, housekeeper, or cleaning person if

the services were partly for the care of the qualifying person.the services were partly for the care of the qualifying person.• Dependent care center (Read instructions for Form 2441 for more details) Dependent care center (Read instructions for Form 2441 for more details) • Food and schooling only if the items are incidental to the care of the child Food and schooling only if the items are incidental to the care of the child

and cannot be separated from the total cost. and cannot be separated from the total cost. • Cost of day camp, even if it specializes in a particular activity, such as Cost of day camp, even if it specializes in a particular activity, such as

soccer.soccer. What canWhat can’’t you deductt you deduct

• Child support paymentsChild support payments• Expenses reimbursed by a state social service agency unless you included Expenses reimbursed by a state social service agency unless you included

the reimbursement in your income. the reimbursement in your income. • Services of a chauffeur or gardener. Services of a chauffeur or gardener. • The cost of clothing or entertainment. The cost of clothing or entertainment. • Overnight camp, summer school, or a tutoring program. Overnight camp, summer school, or a tutoring program.

• K-12 SchoolingK-12 Schooling

For more information, please visit the instructions for Form 2441For more information, please visit the instructions for Form 2441

Thank you very much!!!Thank you very much!!!

Felix Y. Cheng, CPAFelix Y. Cheng, CPAPhone: 781-218-9278Phone: 781-218-9278

E-mail: E-mail: felixychengcpa@gmail.com