State Tax Law

Although a state may wish to boost its economy by adopting some of the business incentive provisions, they cannot afford to create deeper revenue shortfalls. How the states respond to legislation impacts taxpayers in 2010 and subsequent years. This is especially true regarding a state's treatment of bonus depreciation and the increased Code Sec. 179 deduction which may also impact a decision to accelerate AMT and investment credit. The state's treatment of these and many other provisions should be a significant consideration when tax planning.

Future Legislation-Capital Gains

The Obama administration has proposed to increase the income and capital gains tax rates on single individuals with income of more than $200,000 and married couples with income exceeding $250,000. For S corporation shareholders, partners and sole proprietors who recognize income on their individual returns, following the traditional year-end planning maxim of deferring income into the next year may not be a positive tax strategy. Deferring too much income into 2011 could result in income taxed at a higher rate. These and other individual tax planning issues are discussed in, 2010 Year-End Tax Planning for Individuals.

Sole proprietors.

Sole proprietors have additional unique tax planning considerations. For a complete discussion on tax planning for the self-employed, see, Planning 2010: Tax Consequences for Self-Employed Individuals.

Health Insurance Deduction for purposes of self-employment tax. The 2010 Jobs Act amends Code Sec. 162(l)(4) to allow a deduction for self-employed health insurance costs in computing "net earnings from self-employment" for the 2010 tax year. Generally, the health insurance deduction does not reduce the income base for purposes of the Social Security Act. However, for purposes of calculating self-employment tax and the self-employment tax deduction, self-employed individuals may deduct health insurance costs incurred in 2010 for themselves, their spouses, their dependents, and (effective March 30, 2010) any of their children who as of the end of the tax year have not attained age 27.

2010 Year End Tax Planning for Businesses:

Tax planning for year-end 2010 presents new challenges for business taxpayers to reduce or defer federal income tax liability. Although traditional planning techniques remain fundamentally important considerations this year, there are new opportunities with recent legislation and changes in the tax laws. In addition, tax planning is complicated when considering the effective dates for many popular tax incentives, and anticipating those tax laws that may be put to a vote in Congress before year's end.

Alternative Minimum Tax for Businesses

The alternative minimum tax (AMT) is not a challenge reserved solely for the individual taxpayer. A corporation (or LLC that is taxed as a corporation) that is not a "small business corporation" may be required to pay AMT if:
(1) the corporation's taxable income (before any net operating loss deduction) plus AMT adjustments and tax preference items is more than $40,000 (or the corporation's allowable exemption amount, whichever is lower), or
(2) the corporation claims a general business credit, the qualified electric vehicle credit, or the credit for a prior year minimum tax.
The AMT income tax rate for businesses is a flat 20 percent.