7 New Tax Changes Every Entrepreneur Needs To Know

Holly Magister for Forbes writes: President Obama’s Administration put forth a proposal for the fiscal year 2014 federal budget several months ago. Included in the Administration’s 256-page explanation  are many significant proposed changes for taxpayers, including entrepreneurs. As America watches the political showdown in Washington DC this week, the entrepreneur may want to take note of the proposed tax changes, which if passed by Congress, would impact his business and/or personal tax bill.

10% Tax Credit for New Jobs and Wage Increases

For employers with less than $20 million in OASDI (Old Age Survivor and Disability Insurance) wages in 2012, a general tax credit will be available and based on the increase in the wage base. The maximum tax credit is $500,000 per employer. This tax credit proposal would be temporary if enacted and would not apply to self-employment wages.

Permanently Extend the Code Section 179 Deduction

Entrepreneurs who invest in depreciable tangible personal property for the use in their trade or business in 2013 are eligible to expense up to $500,000 for such expenditures and are subject to a phase-out limitation if total capital expenditures exceeded $ 2million. For qualifying property placed in service in taxable years beginning after 2013, present law states that the limit is set to revert to a $25,000 Code Section 179 expense deduction with a $200,000 phase-out limitation.

The proposal would permanently allow for a $500,000 Code Section 179 expense deduction with a $2 million phase-out limitation which would index for inflation in years beginning after 2013.

Reinstate the Federal Unemployment Surtax

On July 1, 2011, the 0.2 percent FUTA surtax expired and has not been reinstated since. The proposal would permanently reinstate the additional 0.2 percent FUTA surtax assessed against the first $7,000 wages paid to every employee annually. If this proposal is enacted, the annual FUTA tax per employee will increase from $42 to $56. This proposal would take effect for wages paid on or after January 1, 2014.

Expand and Simplify the Tax Credits for HealthInsurance

Since 2010, qualified employers who make uniform contributions of at least 50% of the employee’s health insurance premium may qualify for a tax credit. Among other requirements, to be considered qualified an employer may not have more than 25 full-time equivalent employees during the taxable year. Such employees may not have annual full-time equivalent wages that average more than $50,000.

The current law provides for a phase out on a sliding scale between 10 and 25 full-time equivalent employees. Another phase-out is imposed when the average annual wage of the employer’s full-time equivalent employees falls between $25,000 and $50,000. This knocked out many, otherwise eligible employers from being eligible for the Health Insurance tax credit.

The proposal addresses the phase out issues and would ensure that most employers with fewer than 50 employees having average wages of less than $50,000 become eligible for the credit. It also eliminates the ‘uniform contribution’ and ‘State average premium’ requirements which currently eliminate many employers from eligibility. This proposal would be available for taxable years beginning after December 31, 2012.

Upper Income Taxpayers Reduced Tax Deductions and Income Exclusions

Entrepreneurs in the upper income tax brackets (33%, 35%, and 39.6%) currently are able to reduce their taxable income by excluding certain types of income and claiming certain deductions when computing their AGI (Adjusted Gross Income). AGI in the United States Tax Code is a pivotal figure. It is used as a threshold in various tax computations when preparing a taxpayer’s annual federal tax return.

In recent years, many taxpayers have been surprised by their sudden increase in federal tax due to the Alternative Minimum Tax, which is driven from the taxpayer’s AGI.

The proposal would limit the tax value of specific deductions, such as contributions to HSA, Archer, and MSA’s. It would also limit the value of exclusions from AGI such as the employee contributions to defined contribution retirement plans and IRA’s, employer-sponsored health insurance paid for by employers, health insurance costs of self-employed taxpayers, etc.

The limitation proposed would reduce the value of various deductions and income exclusions from the upper income tax rates of 33%, 35% and/or 39.6% to 28% making tax deductions and income exclusions less valuable.

Doubling the Start-Up Expense Deduction

The proposal would permanently double the amount of start-up expenditures that an entrepreneur may deduct in the first year of business from $5,000 to $10,000 and would be effective upon enactment.

Require Small Employers to Auto-Enroll Employees in IRA’s

This proposal requires employers in business for more than two years who have more than ten employees to automatically enroll employees in a Traditional IRA or ROTH IRA, unless an employer-sponsored, qualified retirement plan, SEP or SIMPLE is offered.

Employees who do not opt out of the IRA would be automatically enrolled with a default contribution rate of three percent of the employee’s compensation.

For those small employers with no more than 100 employees and who offer the automatic IRA arrangement may be eligible to claim a temporary, non-refundable tax credit for their expenses related to setting up the plan. The tax credit amount is dependent upon the number of enrolled employees and is available for six years.