2011 Small business tax changes

The following are some of the important tax changes for small businesses that are in effect for 2011:

Health insurance deduction reduces self employment tax - Self-employed taxpayers who pay their own health insurance costs can now reduce their net earnings from self-employment by these costs. Previously, the self-employed health insurance deduction was allowed only for income tax purposes.

Health care tax credit - This tax credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. Small businesses can claim the credit for 2010 through 2013 and for any two years after that.

The maximum credit goes to smaller employers - those with 10 or fewer full-time equivalent (FTE) employees - paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year.

Higher expensing/depreciation limits - For tax years beginning in 2010 and 2011, small businesses can expense up to $500,000 of the first $2 million of certain business property placed in service during the year.

In general, businesses can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property, after the relevant section in the Internal Revenue Code.

Depreciation limits on vehicles - The total depreciation deduction (including the section 179 expense deduction and the 50 or 100 percent bonus depreciation) you can take for a passenger automobile (that is not a truck or a van) you use in your business and first placed in service in 2010 is increased to $11,060. The maximum deduction you can take for a truck or van you use in your business and first placed in service in 2010 is increased to $11,160.

50% or 100% Bonus depreciation- Businesses that acquire and place qualified property into service after Sept. 8, 2010 can now claim a depreciation allowance of 100 percent of the cost of the property. The property must be placed in service before Jan. 1, 2012 (Jan. 14, 2013 in the case of certain longer-lived and transportation property). Businesses that acquire qualified property during 2010 on or before Sept. 8, 2010 can claim a depreciation allowance of 50 percent of the cost of the property. Bonus depreciation is in addition to Section 179 deductions noted above.

I prepared a reference guide for 2011, Tax Facts at a Glance, which highlights important tax rates and deductions for businesses and individuals.