The tax filing deadline for 2013 tax returns is right around the corner - March 17 for corporations reporting on a calendar year, and April 15 for partnerships, limited liability companies, and sole proprietorships.
More than one-third of business owners cut it close to the deadline and wait until two weeks before or less to file, according to a recent small-business survey by The Hartford. However, getting prepared earlier may be best in the long run. Owners should allow themselves ample time to sift through and understand the many new rules—some favorable, others unfavorable—that will impact the taxes that small business owners pay.
These changes significantly add to the complexity and concerns about compliance, but they cannot be ignored if optimum savings are to be achieved. Here are some key changes that could impact you and your small business:
New Medicare taxes
If your income is high enough, there are two new Medicare taxes from the Affordable Care Act for 2013 returns. These can help business owners on their personal returns:
• An additional Medicare tax of 0.9 percent on earned income—wages and net earnings from self-employment—over a threshold amount. The threshold amounts: $250,000 for joint filers and $200,000 for singles.
• An additional Medicare tax of 3.8 percent on the lesser of net investment income or modified adjusted gross income over the same threshold amounts for the 0.9 percent tax. This tax can apply to business income if the owner is not active in the business.
The additional Medicare taxes are paid only by individuals; there is no employer matching as there is with the basic Medicare tax. These taxes are not deductible.
Higher income taxes
Most small-business owners pay taxes on their company’s profits on their personal returns because the income is passed through to them. If you own one of these businesses and had a good year, your personal taxes may be higher in 2013 because of new rules:
• New top ordinary income tax bracket of 39.6 percent and a 20 percent rate on capital gains and qualified dividends. These rates apply when taxable income exceeds $450,000 for joint filers and $400,000 for singles.
• Phase-out of personal exemptions and itemized deductions if adjusted gross income (AGI) exceeds set limits. These reductions begin when AGI exceeds $300,000 for joint filers and $250,000 for singles.
Cost of living adjustments
Each year, the IRS adjusts dozens of tax rules to account for inflation. While inflation has been modest, there have still been some cost of living adjustments (COLAs) to numerous tax brackets, which means greater write-off opportunities. Some of the examples this year are:
• Increased limits on contributions and benefits for qualified retirement plans. For example, the deductible contribution limit for a Simplified Employee Pension (SEP) plan in 2013 is $51,000, up slightly from $50,000 in 2012.
• Higher standard mileage rate for business driving: 56.5 cents per mile, compared to 55.5 cents per mile in 2012.
• Higher contribution limits for health savings plans.
New way to determine the home office deduction
The Small Business Administration reports that roughly half of all businesses are now home-based. If your home office is your principal place of business and meets certain other requirements, you may be able to deduct costs associated with it as a business expense.
• Until now taxpayers had to figure the portion of mortgage interest or rent, utilities, homeowner’s insurance, and other expenses in order to deduct the percentage of these costs related to the home office, a process that can be very time consuming. On 2013 returns, though, you can opt to use a simplified home office deduction method. Regardless of the actual costs, the deduction is limited to $5 per square foot up to 300 per square foot of space, for a maximum deduction of $1,500.
• If your home office space is greater than 300 square feet, your home office deduction claimed in 2012 was more than $1,500, or you had significantly high home-related costs in 2013, deducting actual costs may result in a larger home office deduction.
New rules for 2014
Changes for 2014 don’t impact 2013 returns but should be taken into account for estimated 2014 taxes. If you pay estimated taxes for 2014, the first payment is due April 15—for individuals and corporations. Some changes you should be aware of before submitting are:
• An increased small employer health insurance credit for paying at least half the cost of medical insurance for employees.
• A standard mileage rate for business driving of 56 cents per mile (a half penny less than in 2013).
• Increased limits on contributions and benefits for qualified retirement plans.
• Higher Social Security wage base limit for FICA and self-employment tax: $117,000 compared with $113,700 in 2013.
Unfortunately, in making projections for estimated taxes, there is a great deal of uncertainty. This may be why one-fifth (19 percent) of owners are concerned they won’t maximize all the exemptions or deductions they’re eligible for, according to The Hartford’s survey.
Fifty-five tax breaks, including the increased Section 179 deduction and bonus depreciation for writing off equipment purchases, the research credit for increasing research activities, and the work opportunity credit for hiring certain workers, expired at the end of 2013 and have yet to be extended. Monitor what is happening with these expired rules so you can modify the remaining installments of estimated taxes if necessary.
These are just some of the most important changes you can expect to see as you’re preparing your returns. Of course, the more you know about tax opportunities, the more you can save.
Barbara Weltman is a tax and business attorney and the publisher of “Big Ideas for Small Business.” She partners with The Hartford on their Business Owner’s Playbook, which offers a wealth of information and advice to help individuals running a business.