The U.S. has seen numerous tax reforms in the last two years. Many new tax laws have been introduced and a few previous standing laws were modified. With these changes, both: small business owners and high income taxpayers could face a challenges this tax season. AG Tax professionals have prepared an overview of the few major tax adjustments that business owners should consider discussing with their tax advisors to strategize and minimize their tax burden.
Tax Adjustments for Small Business Owners
Small Business Health Insurance Credit (SBHIC)
Employers with 25 or less employees for which they pay a minimum of 50% of the premiums of affordable health insurance plans they provide are allowed to claim a tax credit (SBHIC) for this expense. The maximum credit amount, which was 35% of the employer contribution for small business employers and 25% for tax-exempt employers (charities), has now been increased to 50% of the employer’s contribution for small business employers and 35% for tax-exempt employers.
Net Investment Income Tax (NIIT)
The NIIT is a 3.8% surtax levied on the net investment income (unearned income, passive income) of a taxpayer, calculated on the basis of the Modified Adjusted Gross Income (MAGI) of the individual. Taxpayers will be subject to this surtax from their 2013 tax return onwards. Although it is considered to be a surtax affecting higher income taxpayers, it can also affect individuals who earn a significant amount through the sale of real estate assets, thus increasing their passive income, which is subject to NIIT.
Increased Income Tax Rate, Capital Gains Tax Rate & Additional Medicare Surtax
The earlier income tax rates of 10% (lowest) and 35% (highest) has been extended to include a tax rate of 39.6% for high-income taxpayers from 2013 onwards; which, along with a surtax of 3.8% (NIIT), would make an individual subject to a total tax of 43.4%. The tax rate for long-term capital gains and qualified dividends has also been increased to 20% compared to the earlier rate of 15%. Not only this, but high-income taxpayers earning wages, compensation or self-employment income above a certain threshold limit ($250,000 – Married Filing Jointly; $200,000 – Head of Household/Single/Qualifying widow(er) with dependent child; $125,000 – Married Filing Separate) would face an additional Medicare surtax of 0.9%.
Qualified Small Business Stock (QSBS) Gain Exclusion
Taxpayers, other than corporations, may exclude at least 50% of the gain recognized from the sale of qualified small business stock (QSBS) that has been held for more than 5 years from their gross income. For qualifying stock acquired between February 17, 2009 and September 27, 2010 the QSBS gain exclusion amount is 75%; while QSBS acquired between September 27, 2010 and January 1 2014 are allowed to exclude 100% of the realized gain.
Reduced Business Expensing Deduction
Under Section 179 of the Internal Revenue Code (IRC) the business expensing allowance has been reduced to $25,000 for an investment of $200,000 and $500,000 per year for an investment of $2.5 million.
Large Employer Mandatory Insurance Requirement
From tax year 2014 (return filed in 2015) onwards, large-scale employers (with 50 or more full-time employees) who either did not provide health coverage to all full-time employees or offered basic coverage, wherein employee contribution was more than 9.5% of their income or the total benefit is less than 60% of the income, could now be subject to a penalty if any of its full-time employees purchased health insurance through a state or federal exchange and qualified for either tax credits or a cost-sharing subsidy. (For more information, see AGTax’s Affordable Care Act Penalty on Individuals with Less Than Required Health Insurance Coverage article.)
Simplified Home Office Deduction
From tax year 2013 (return filed in 2014) onwards, qualifying taxpayers using their residence for business purpose may be able to claim a deduction of $5 per square foot to a maximum of $1,500 per year (300 sqft).
AG Tax LLP Can Help
Taxpayers should note that this is just a summary of the various tax situations that a business owner should be prepared for in 2014. It is recommended that business owners plan out their tax strategies for the coming years, taking into consideration these newly introduced tax laws and certain tax provisions which are set to expire soon, such as bonus depreciation, etc.
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canadian, and other international tax laws.
We can assist with:
- Canadian Personal and Corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
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Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
