Thursday, July 28, 2011

Helping Small Businesses - Section 179 Deduction

Most people think the Section 179 deduction is some arcane or complicated tax code.  It really isn't, as the following will show you. Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It's an incentive created by the U.S. Government to encourage businesses to buy equipment and invest in themselves.

Section 179 for 2011 at a glance:

2011 Deduction Limit - $500,000 (up from $250k previously). Good on new and used equipment, including new software.

2011 Credit Phase out on equipment purchases - $2 Million Dollars (up from $800k previously).

“Bonus” Depreciation - 100% (taken after the $500k deduction limit is reached). Note, bonus depreciation is only for new equipment. This can also be taken by businesses that exceed $2 million in capital equipment purchases.

Essentially, Section 179 works like this:
When your business buys certain items of equipment, it typically gets to write them off a little at a time through depreciation. In other words, if your company spends $50,000 on a machine, it gets to write off (say) $10,000 a year for five years (these numbers are only meant to give you an example.)

Now, while it's true that this is better than no write off at all, most business owners would really prefer to write off the 
entire equipment purchase price for the year they buy it. In fact, if a business could write off the entire amount, they might add more equipment this year instead of waiting. 

Who Qualifies for Section 179?
All businesses that purchase, finance, and/or lease less than $2 million in new or used business equipment during tax year 2011 should qualify for the Section 179 Deduction.  If a business is unprofitable in 2011, and has no taxable income to use the deduction, that business can carry-forward the deduction to a year when the business is profitable.

What's the difference between Section 179 and Bonus Depreciation? 
The most important difference is both new and used equipment qualify for Section 179 Deduction (as long as the used equipment is "new to you"), while Bonus Depreciation covers new equipment only. Bonus Depreciation is useful to very large businesses spending more than $2 million on new capital equipment in 2011.

When applying these provisions, Section 179 is generally taken first, followed by Bonus Depreciation - unless the business has no taxable profit in 2011 (the unprofitable business is allowed to carry the loss forward to future years).

The above is an overall, “simplified” view of the Section 179 Deduction for 2011. Please consult your tax adviser prior to implementing any strategies in this article.

Your State and Local Tax Obligations

In addition to business taxes required by the federal government, you will have to pay some state and local taxes. Each state and locality has its own tax laws. Having knowledge of your state tax requirement can help you avoid problems and your business save money. The most common types of tax requirements for small business include:
              Tax Permit
In most states, business owners are required to register their business with a state tax agency and apply for certain tax permits. For example, in order to collect sales tax from customers, many states require businesses to apply for a state sales tax permit.
               Income Taxes
Nearly every state levies a business or corporate income tax. Your tax requirement depends on the legal structure of your business. For example, if your business is a Limited Liability Company (LLC), the LLC gets taxed separately from the owners, while sole proprietors report their personal and business income taxes using the same form. Consult the General Tax Information link under your state for specific requirements.
             Employment Taxes

      In addition to federal employment taxes, business owners with employees are also responsible for paying certain taxes required by the state. All states require payment of state workers' compensation insurance and unemployment insurance taxes.

State of Michigan Tax Resources


·                  Michigan Taxes e-Registration
·                  General Tax Information and Forms
·                  Workers' Compensation Insurance
·                  Unemployment Insurance Tax

Why Keep Records? Part 2

Part 2

Kinds of Records To Keep.  Except in a few cases, the law does not require any specific kind of records. You can choose any record keeping system suited to your business that clearly shows your income and expenses.

You must decide whether to use a single-entry or a double-entry bookkeeping system. The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone and may not give you nessessary data to run your business effectively. The Double-entry system is better because it has built-in checks and balances to assure accuracy and control.

Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. Keep them in an orderly fashion and in a safe place. For example organize them by year and type of income.

How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support an item of income or deduction on a return until the statute of limitations for that return runs out. The period of limitations is the period of time in which the IRS can assess additional tax. Generally, this is 3 years from the date of filing or 6 years if income was under reported by 25% or more. If a return is not filed or is fraudulent then the statute does not run against the IRS. Before destroying your records you should consult your tax adviser because special circumstances my require records to be kept beyond the limitation period.

Why Keep Records? Part 1

Everyone in business must keep records. Good records will help you do the following.

Monitor the progress of your business. You need good to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success.

Prepare your financial statements. You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business.

 • An income statement shows the income and expenses of the business for a given period of time.
• A balance sheet shows the assets, liabilities, and business expense.

Identify source of receipts. Your records can identify the source of your receipts. You need this information to separate business from non-business receipts and taxable from n

Keep track of deductible expenses. You may forget expenses when you prepare your tax return unless you record them when they occur.

Prepare your tax returns. You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statements.

Support items reported on tax returns. You must keep your business records available in the event of an audit by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. Good records will speed up the examination and hopefully save you money.