10 Tax Breaks Every Small Business Owner Must Know About

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It’s tax season.

Those words usually strike dread into the hearts of everyone who hears them. And after a particularly rough year like 2009, the last thing you want to do is shell out more money.

Small business owners: cheer up!

This year, doing your taxes should be slightly less painful for many of you. Congress has recently implemented some cool tax breaks — mainly in The American Recovery and Reinvestment Act of 2009 (a.k.a. the “Recovery Act”) — to make things a little easier on small businesses.

We spoke with Jean Baxley, a tax attorney in Washington, DC, about the latest changes.

Be sure to talk to your accountant about whether or not you qualify for these breaks!

Click here to check out the 10 updated tax breaks every small business owner should know about >

First-year expensing

For businesses that were profitable in 2009, here's some great news.

'Usually, the cost of equipment and machinery purchases has to be recovered by depreciation, which is an allowance deducted over a number of years (typically five or seven years),' according to the Wall Street Journal.

But, under the amended Sec. 179 deduction, you can now expense up to $250,000 of the cost of your property and equipment put in use during 2009, all at once.

First-year bonus depreciation

General business credit

If your business was operating at a loss, bonus depreciation is not very useful to you right now.

So the Recovery Act also allows businesses to claim a higher limit on their refundable credits instead, if you would rather do so.

Cancellation of debt

Work Opportunity Tax Credit expansion

The existing Work Opportunity Tax Credit reduces income tax liability for small businesses if they hire employees who fall into certain 'target groups who have consistently faced significant barriers to employment,' according to the US Department of labour.

The new provisions in the Recovery Act add two new categories: unemployed veterans and disconnected youth (you can find IRS definitions of both groups here.)

The terms apply to employees who were hired and began to work in 2009 or 2010.

NOL carrybacks

Normally, businesses can carryback net operating losses (NOLs) just two years to generate a tax refund against previous profits.

In 2008, that time period was temporarily extended to five years for small businesses. The Recovery Act renews this provision, and gives small businesses the option to choose a three-, four-, or five-year carryback.

Your small business qualifies if you averaged $15 million or less in annual gross receipts for the last three years.

Higher caps on business vehicle depreciation

There's a limit on the maximum depreciation deduction a business can take on a car, light truck, or van the year it's bought. The Recovery Act increased that limit by $8,000.

Deferral of estimated taxes

The Recovery Act enables qualified small businesses to reduce their estimated taxes to only 90% of their liability for the preceding year ( as opposed to 100%.)

To qualify, your income must fall under $500,000 and you must have earned more than 50% of it from your small business.

S-corp built-in gains tax period reduction

Exclusions on gains from sales of small business stock

If you're invested in eligible small business stock, you may be able to exclude 75% of the gain you receive upon the sale of the stock (as opposed to the normal 50%). It also reduced the time you had to hold the stock from 5 years to 3 years.

This is applicable only if you acquired the stock after February 2009 and before January 2011.

Bonus: Section 1231 losses and gains

Even though it's not that new, if you don't know about this one, you should.

Business property that falls under Section 1231 gets a big break: net gains from the disposal of this property are taxed as capital gains, but net losses from the disposal of this property are taxed as though they're ordinary losses.

And, if you had Section 1231 losses in the last five years, you treat any gains this year as ordinary income, as opposed to capital gains. This is known as the five-year lookback rule, and it's a big break for anyone who suffered this past year.

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