hat can you do as a self-employed remodeler to reduce your tax hit for 2011? The fundamentals of effective tax planning—and the basis of most tax advice—are to defer taxable income and accelerate deductible expenses and losses.
Small Business Employee Health Insurance
If you provide health-care insurance for your employees and pay at least 50 percent of the premium, you may be entitled to a credit of up to 35 percent of the cost of health-care coverage you provide. You also may qualify if you have less than 25 full-time equivalent employees; phaseout begins when there are more than 10 employees. If average annual wages are no more than $50,000 per employee, phaseout begins when average wages are more than $25,000.
Retaining Qualified Employees
If you hired any employees who had been unemployed and had not worked more than 40 hours during the 60-day period before you hired them and you retained their employment with you for 52 consecutive weeks, you could be eligible for up to a $1,000 tax credit. Other criteria include the wages paid to the employees for the second 26-week period must be at least 80 percent as much as was paid in the first 26 weeks, the employees did not replace any other employee unless that other employee left voluntarily or for cause, and the employees are not related to you.
The HIRE retention credit is a general business credit equal to the lesser of 6.2 percent of the qualifying wages or $1,000 per employee. It is taken in the taxable year that the retained employee satisfies the 52-week period.
Reducing Self-employment Taxes
Incorporating your business will reduce self-employment taxes. If you run your business as a sole proprietor, partnership or LLC, you will be subject to a self-employment tax of 15.3 percent on your first $106,800 of net self-employment income on top of income tax.
For example, if your business profit at the end of the year was $60,000, you would pay income tax at your regular rate, but you’ll also pay about $9,000 in self-employment tax. By incorporating and using a hybrid employee-owner tax strategy, you could have a tax savings of about $4,500—and lower your chance of audit at the same time.
Medical Expense Reimbursement Plan
Business owners already deduct the health-care premiums they pay as an adjustment to income on page 1 of Form 1040. But you are most likely not getting any tax benefit for the medical expenses you pay because of limitations for itemized deductions imposed by the tax code.
A Medical Expense Reimbursement Plan, or MERP, can allow you to deduct medical expenses and your health-insurance premiums. This would convert medical expenses into a pretax benefit (pretax for income taxes and self-employment taxes). This is an employee benefit plan, which means it requires an employee. A MERP can be set up for a sole proprietor, partnership or LLC by hiring your spouse. If you’re not married, you can do this with a C corporation.
This is money you’d spend anyway, whether you get a deduction or not. You’re just moving it from a nondeductible place on your tax return to a deductible place. There’s no pre-funding required. You don’t have to open a special account, like with Health Savings Accounts or flexible-spending plans. You don’t have to decide how much to contribute, and there’s no “use it or lose it” rule. It’s just an accounting device that lets you characterize your family medical bills as business expenses.
If you expect to purchase equipment early next year, it may be to your benefit to accelerate the purchase before year-end even if you have to borrow. Thanks to recent tax-law changes you can combine two big tax breaks for buying equipment this year: a Section 179 deduction up to $500,000 for 2011 or 100 percent bonus depreciation for qualified new property placed in service.
There’s no need to wait until year-end, especially if you need the equipment now. For Section 179 purposes, it doesn’t matter when during the year you buy the equipment, as long as it’s placed in service by Dec. 31. The Section 179 deduction applies to new and used equipment, but the bonus depreciation break is limited to new equipment only.
Accelerate Payment of Deductible Expenses
You can prepay expenses due early next year to accelerate your tax deduction a year early. Expenses charged to a credit card before year-end are deductible this year even though the bill is paid next year. |
Randy Roth is a tax, estate and business consultant with Sacramento-based Incompass Tax, Estate & Business Solutions. Randy is a NARI member and is active in the Greater Sacramento chapter. He can be reached at (916) 974-9393 or firstname.lastname@example.org. Visit www.april15th.com for more information.
The foregoing is intended to provide general information, not specific tax or legal advice. For specific advice you should contact your tax adviser or you can contact Incompass Tax Estate & Business Solutions.