2010 Tax Law Changes and Your Small Business

The 2010 tax year brings a number of changes to business tax laws, many of which could affect your small business investment and growth strategies.

Below is an overview of the major changes in federal income tax law that can impact your business in 2010. This is not a comprehensive list, so be sure to talk to a tax adviser if you have questions about how your small business is affected.

Major changes include:

  • Cancellation of Business Debt – First implemented under the American Recovery and Reinvestment Act (ARRA) in 2009, it enables certain businesses to elect to delay recognition of income from the cancellation of business debt in both 2009 and 2010. Income recognition can be deferred until the 5th year after the reacquisition, and then the income is included ratably over the following five years. For more information, view the guidelines from the IRS here.
  • Domestic Production Activities Deduction – In 2010 this deduction increases to nine percent of qualifying business net income. “Domestic production” applies to a restricted group of businesses including construction, engineering or architectural firms. The IRS has more information on this deduction and eligibility here.
  • Updated Mileage Rates – Standard mileage rates for the business use of vehicles has been reduced slightly for 2010. Beginning on Jan. 1, 2010, the standard mileage rate for the use of a car (also vans, pickups or panel trucks) is:
    – 50 cents per mile for business miles driven
    – 16 cents per mile driven for medical or moving purposes
    – 14 cents per mile driven in service of charitable organizations (no change)
    • First-Time Buyers with Home-Based Businesses – If you purchase a first-time home and choose to operate your business from that home you can still qualify for an $8,000 tax credit – if you purchase your home before April 30, 2010. The IRS has more information about eligibility here.
    • R&D Tax Credit – This tax credit for research and development was set to expire after 2009, but the House of Representatives has since voted for its extension, effectively pushing $31.1 billion in expiring tax provisions through 2010. Keep an eye on this one as it goes on to the Senate.
    • Section 179 Expense Deduction due to be phased out – The increases in the Section 179 Expense Deduction, first introduced by President Bush in 2008, phases out completely in 2010. Small business had been able to deduct up to $250,000 of the cost of machinery, equipment, vehicles, furniture and other qualifying property placed in service during 2009. In 2010, this limit is due to drop to $135,000.
    • Payroll Tax Changes – The maximum amount of wages subject to Social Security tax will remain the same as 2009 at $106,800. As in prior years, there is no limit to wages subject to the Medicare Tax; therefore, all covered wages are still subject to the 1.45% tax. The FICA tax rate, which is the combined social security tax rate of 6.2% and the Medicare tax rate of 1.45%, remains at 7.65% for 2010. The maximum social security tax that employees and employers will each pay in 2010 is $6,621.60.

    These are just some of the changes for tax year 2010. To stay up-to-date on changes throughout the year, keep checking our blog. You can also contact one of our tax experts at CGP to help you plan and monitor tax changes affecting your business.