I sat with Tim Nelson today (of Evans Nelson and Company CPAs) and discussed
many of the recent changes of both federal and state taxes that directly affect
individuals and business owners. We covered a number of topics, and thus this
article will likely jump around – much like our conversation.

Consumer Energy Tax Credits (http://www.energy.gov/taxbreaks.htm)

The Consumer Energy Tax Credits (many of which were up to 30% of the purchase
cost of energy efficient products and renewable energy systems) expired at the end
of 2010 and while new credits were passed, they were at lower levels (10 %).

Overhaul of the Tax Code

The Taxpayer Advocate Service (an independent organization within the IRS)
is calling for a major overhaul of the tax code, a task which is being debated by
legislators. The last time this happened was in 1986 (and resulted in the current tax
system we are using). That overhaul took approximately 2 years to complete, and
any current tax code overhaul would likely take at least that long.
(http://www.nytimes.com/2011/01/06/business/economy/06tax.html)

There have been recent talks about levying a tax on services at the state level. The
state revenue increase would be enough to lower the tax on goods. However, many
of the professional service lobbies oppose such a tax on services and thus Tim
considers it unlikely that such a proposal will get out of committee.

Equipment and Start Up Expenses:

Section 179 of the Tax Code allows you to elect to expense certain business
equipment all within the first year. However a business’ ability to do so is contingent
upon their profitability – you can’t expense if you’re not profitable.

However, the Economic Stimulus act of 2008 added a 50 percent depreciation
allowance for qualifying purchases which is not contingent upon profitability. In
fact there is a 100 percent allowance for certain types of furniture, equipment,
leasehold improvements.

The total amount of start-up costs that can be expensed has been increased. These
costs included the cost of professional services, including attorneys, accountants,
Secretary of State costs, business licenses, and tangible items like business supplies,
stationary, and business cards.

Estate Taxes and Gift Tax exclusion

Estate taxes have gone through some major fluctuations over the last three tax
years. In 2009, there was an exemption of 3.5M after which a 45% tax was levied on
the rest of the estate.

In 2010 the estate tax had been allowed to sunset and congress, dealing with
healthcare, did not reinstate the tax. Thus there was the option of either the in-line
$5M exemption with a 35% estate tax rate, or a $0 exemption with a 0% tax rate.

For 2011, the exemption is back to $5M with a 35% tax rate.

Tim highlighted the fact that the recession has creates some great gift tax planning
opportunities. With values being depressed, and with the gift tax exclusion
increasing, many people now have the opportunity to transfer assets either directly
to downstream heirs or indirectly into irrevocable trusts.

Further, one can gift property (especially real estate) at a much lower value and
have it appreciate on the recipient’s end.

Small Business Health Care Tax Credit (http://www.irs.gov/newsroom/article/0,,id=220839,00.html)

The federal government is encouraging small businesses to provide health
insurance for their employees. Small business employers who are paying their
employees an average of $50k or less per year can get a credit (up to 35% of the
premiums paid) for providing health insurance for their employees.

HIRE Act (http://www.irs.gov/businesses/small/article/0,,id=220745,00.html)

Additionally, businesses are being encouraged to hire – if a business hires for a
new job (or an under very certain conditions hires for an existing position) they
can receive a credit for the payroll taxes for the employee for a period of time, and
if they are still employed a year later they receive another $1k for each additional
person on the payroll.

No More Golf Carts

Tim laughingly lamented the end of the Golf Cart Credit which was a tax credit based
on the purchase of electric cars. However, the criteria for the eligible vehicle were
such that golf cart companies soon realized those who purchase their golf carts

could legitimately claim tax credits. Some of the credits, when calculated, would
equal the cost of the golf cart.

Not surprisingly, that tax incentive was not continued in 2011.

Home Office Deductions (http://www.irs.gov/businesses/small/article/0,,id=204169,00.html)

One place where many individuals make mistakes is in the use of home offices. For
employees, the use of home as a place of work must be for the convenience of the
employer (there must be a statement in writing to that effect). Additionally, for
employees and business owners alike, the space itself must be used exclusively for
work. Tim has battled with IRS agents before over the exclusion of specific areas
of a home office because of the existence of personal items within those areas (like
family photos, etc). Thus it’s important that one fully understands the rules of home
office deductions before attempting to deduct expenses for the business use of one’s
home.

General expense deductions

In general, Tim sees the most mistakes when it comes to documenting the expenses
within a business, especially for car mileage and business trips. Expenses must be
ordinary, necessary, and reasonable.

Business in a down economy

While Tim and I agreed that it’s hard out there for businesses, he sees the silver
lining. “It’s also one of the best times,” said Tim, “because when the economy is
down it stirs people to be more creative, entrepreneurial.” Tim has seen a huge
uptick in the number of new businesses approaching him for accounting assistance.

Evans Nelson and Company CPAs is located at 50 Continental Drive, Reno, NV
89509. Tim Nelson can be reached at 775-825-6008 and found at his website
www.bestcpareno.com.

Already, the Affordable Care Act is providing tax credits of up to 35 percent of employee premium costs, helping small business owners reinvest thousands of dollars to grow their business and create jobs at tax time.

Eligibility for Tax Credits

Generally, tax credits are available for small business owners who:

· Have started or continued health insurance coverage for employees in 2010

· Contribute at least 50 percent of employee premiums at the single coverage rate

· Have fewer than 25 full-time employee equivalents (part-time employees are counted proportionately)

· Pay their employees an average of less than $50,000

The IRS has provided a simple three-step worksheet (below and at www.irs.gov/pub/irs-utl/3_simple_steps.pdf) to help determine your eligibility:

Four million of the nation’s six million small businesses that employ workers could be eligible for these credits. For small businesses, the maximum tax credit is 35 percent of the business’ premium costs, and for small nonprofit organizations, the maximum credit is 25 percent. On Jan. 1, 2014, these rates will increase to 50 percent and 35 percent, respectively. These credits phase out for firms with average wages over $25,000 and for firms with the equivalent of more than 10 full-time employee equivalents.

Effectiveness of Tax Credits to Date

While nearly all firms with more than 200 employees offer health insurance benefits, smaller U.S. firms are much less likely to offer coverage because their premium costs are about 18 percent higher than the same coverage for larger employers. They also have less purchasing power in the health insurance marketplace. Early signs show that these tax credits are stimulating activity in the health insurance market.

A Los Angeles Times report of increased market activity in the small group market at the end of 2010 included three examples of how these tax credits show initial signs of promise:

• UnitedHealth Group (Minnesota) added 75,000 new customers who work for businesses with less than 50 employees
• Coventry Health Care (Maryland), an insurer that focuses on small businesses, signed contracts to cover 115,000 new workers, an increase of 8 percent.
• Blue Cross Blue Shield of Kansas City reported an increase of 58 percent in the number of small businesses buying insurance.

Also, a report from the Lincoln Journal Star in February noted:

• Blue Cross and Blue Shield of Nebraska reported a 34 percent increase in health insurance sales to small businesses for 2011.

In addition, other insurers such as CareFirst Blue Cross Blue Shield of Maryland have announced that they are specifically marketing their products to small businesses due to this credit.

Small businesses themselves have also reported on how these tax credits are helping them provide coverage to employees. Just a few examples from around the country include:

• Mark Hodesh, owner of Downtown Home and Garden in Michigan, was able to claim $15,000 on his tax return this year and hire an additional employee.
• Kiersten Firquain of Bistro Kids in Kansas City was able to start providing coverage to her chefs last year for the first time.
• John and Angela Sweet of Niedlov’s Breadwords in Tennessee had been wanting to offer insurance for some time, and when these tax credits made it more affordable, they “jumped at the opportunity.”

If you are interested in learning more about various health insurance plans that are available in your area, I encourage you to visithttp://finder.healthcare.gov where you can quickly compare them.

2014: Higher Credits and “Exchanges”

In 2014, the tax credits for small employers who provide coverage will increase from 35 percent to 50 percent. At the same time, small business owners should be aware that states will simultaneously roll out small business “exchanges” that will allow employers with less than 50 employees to band together to leverage their collective buying power, reduce administrative costs, and negotiate fairer rates from insurance companies. These exchanges will be available online, and an independent study suggests that they will help reduce costs and increase competitive pressure on insurers, driving down premiums for small businesses by up to 4 percent.

Repeal Efforts

The President supports eliminating a bookkeeping provision that would unfairly burden small businesses. The Administration continues to work with Congress to repeal the expanded 1099 reporting requirement, which is too big of a paperwork burden on small business owners. Repealing the entire law or preventing key provisions from being implemented, however, would hurt small businesses by:

• Raising taxes on up to 4 million small business owners who provide employees with health insurance coverage
• Preventing the formation of a marketplace where insurance companies compete for your hard-earned dollars
• Stifling the ability of entrepreneurs to break out on their own to help America compete in the 21st century

The Affordable Care Act uses market based incentives, such as tax cuts and cost savings, to make quality, affordable health insurance available to all Americans. There is no requirement, mandate, responsibility, penalty or fee of any kind for small businesses with less than 50 workers who choose not to provide insurance, which represents 96 percent of all U.S. firms.

The President has also backed a bipartisan proposal to allow states to implement alternatives to the law beginning in 2014 if those alternatives are able to meet the shared goals of making health insurance affordable and accessible to all Americans, including those with pre-existing conditions.

Instead of re-fighting the battles of the last two years, let’s fix what needs fixing and move forward.

Access to affordable health care is the number-one concern for small businesses across the country. I have worked with many small businesses over the years that are looking at every possible option to offer coverage for their employees, who they often consider to be members of their own family. In 2009, I met a small business owner in New Jersey who said that the day she was able to provide health insurance coverage was the day she knew that her business was a success.

I encourage you to work with your tax adviser, accountant and/or bookkeeper to actively explore the tax credits, exchanges, and other provisions in the Affordable Care Act to help you grow your business and create jobs.

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Since Nevada has a very small government and was the fastest-growing state for decades, did the former cause the latter?

It’s not likely.

Examine the statistics comparing the real growth of a state’s GDP (gross domestic product) to the share of GDP provided by state and local governments for all states during the past 45 years, and you will find no correlation. States with relatively smaller governments have not tended to grow any faster than other states.

There is, however, a strong statistical relationship between a state’s real GDP growth rate and the lagged growth rate of its state and local government. A fall in state and local government spending in one year tends to be followed by lower economic growth in the next year.

Why is this? One way to look at it is that state and local governments provide essential public goods that cannot be adequately provided by the private sector, such as roads and education. While higher taxes might create some disincentives for private investment and growth, many of these public goods are necessary investments for the private sector to function.

For example, interstate and state highways increase productivity by making it possible for retailers such as Walmart to incorporate just-in-time inventory management. Otherwise, stores would have to hold large inventories, decreasing profits while increasing consumer prices. Similarly, without good public education, the private sector lacks the educated work force it needs.

You can also consider what economists call spending multipliers, which are particularly important in a recession. If the state spends less to fix a bridge, this means less revenue for a construction company, fewer jobs and fewer purchases of material from other companies and subcontractors, so they also have fewer jobs. Firing a school teacher means less money is spent by that teacher on rent, food and other goods.

In Nevada, good estimates are that a $100 reduction in state and local spending reduces Nevada’s GDP by $162, and reduces household income by $136. Firing 100 state or local employees reduces Nevada’s total employment by 153 workers.

Meanwhile, an increase in taxes to fix that bridge or keep that teacher reduces the money firms can pay to their workers or to their stockholders, and taxpayers have less to spend on purchases in restaurants, furniture stores and the like. Increasing state and local taxes by $100, however, reduces Nevada’s GDP by much less than $100, though it depends on the type of tax.

In short, the multipliers for state and local government spending cuts are larger than the multipliers for tax increases.

Economists teach this to every first-year student in macroeconomics, and estimates from real data consistently find it to be true.

Tom Harris is professor of resource economics and director of the University Center for Economic Development. Elliott Parker is professor and chairman of economics at the University of Nevada, Reno. College of Business.

This article was originally published by the Reno Gazette Journal on 01/12/2011.

That’s where the new IRS e-News for Small Businesses comes in.

IRS e-News for Small Businesses offers small businesses and the self-employed a real time-saver. e-News is a bi-weekly newsletter that alerts them to what’s new, hot and important for small business owners to know. It’s quick to read, easy to subscribe – and it’s free.

e-News for Small Businesses is the IRS’s e-newsletter for businesses with specialized content consisting of:

• Important upcoming tax dates for small businesses
• What’s new for small businesses on IRS.gov
• Reminders and tips to assist small businesses with tax compliance
• IRS news releases and special IRS announcements
• Direct links to a variety of Web sites and resources
• Availability of IRS products, services, and training opportunities

Subscribe Now to IRS e-News

Businesspeople may also want to take a look at other IRS e-newsletters:

• IRS Tax Tips – tax information via e-mail from the IRS daily during the tax-filing season and periodically the rest of the year
• Retirement News for Employers – information about current developments and upcoming events within the retirement plan arena; issued periodically during the year