Retirement Savings for the Self-Employed
In recent years, many options have become available to self-employed individuals to provide for their retirement. Tax planning for retirement can include contributions to a Keogh plan, traditional or Roth IRA, SEP plan, SIMPLE plan or a one-person 401(k) plan. You may wish to consider the implementation of one of these plans for yourself and/or your employees to benefit from a current tax year deduction and accumulate tax-deferred retirement savings.
Each of these plans has advantages and disadvantages, and some may not be applicable to your situation. For instance, a sole-owner 401(k) retirement plan allows a contribution for you as both an employer and as an employee. Therefore, a sole-owner 401(k) may provide for the largest deductible contribution. However, a sole-owner 401(k) is not available to the self-employed with employees other than a spouse or relative. As an alternative, a Keogh plan provides more flexibility, but is more complicated to maintain than a SEP or SIMPLE plan. Regardless, of which plan you qualify for or what your retirement needs are, it is important to begin planning now for your retirement.

Work Opportunity Tax Credit - Congress has taken a special interest in the Work Opportunity Tax Credit (WOTC) as a mechanism to encourage employers to hire individuals who are economically-challenged. The 2009 Recovery Act modifies the definitions of eligible veterans and disconnected youth to bring more individuals under the WOTC. This treatment is temporary.

S corporations - A built-in gains tax applies to corporations that make an S corporation election. The tax is computed by applying the highest corporate tax rate to the net recognized built-in gain of the S corporation for the tax year. The 2009 Recovery Act reduces the recognition period for assets subject to the built-in gains tax from 10 to seven years, for dispositions in tax years beginning in 2009 and 2010.

Small business stock - Generally, an investor other than an entity doing business as a C corporation, may exclude 50 percent of the gain from the sale or exchange of “qualified small business stock.” The 2009 Recovery Act new law raises the 50 percent exclusion to 75 percent. However, the increase is temporary and applies to stock acquired after the date of enactment and before January 1, 2011. Holding period rules also apply.

Executive compensation - The economic slowdown cast a spotlight on the executive compensation practices of Wall Street firms and many lawmakers are unhappy with what they see as “excessive” compensation. The 2009 Recovery Act reflects the changing mood in Congress. Lawmakers especially singled-out expenditures for luxury items by companies receiving financial assistance from the government's Troubled Asset Relief Program (TARP) for more regulation. Congress also directed the Treasury Secretary to review bonuses, awards and other incentives paid to senior executives at these firms and determine if the payments were contrary to public interest.

COBRA - Individuals who are involuntarily separated from employment between September 1, 2008 and January 1, 2010 can elect to pay 35 percent of their premiums for COBRA coverage and will be treated under the new law as paying the full amount. The former employer will pay the remaining 65 percent of the premium. In return, the employer will be able to credit its share of this temporary COBRA subsidy against wage withholdings and payroll taxes. The COBRA subsidy is generally only available for nine months. The Department of Labor has issued model notices that employers can send to former employees who are eligible for the COBRA subsidy. The IRS has also issued guidance on what qualifies as involuntary termination for purposes of the COBRA subsidy.

Energy incentives - Producers of alternative and renewable energy are definite winners under the 2009 Recovery Act. Congress has rewarded them with significant increases in energy tax incentives. Among the incentives are an enhanced renewable electricity production tax credit, an expanded energy investment tax credit, an increased alternative fuel pump tax credit, and an investment credit election. The incentives are temporary. First-time homebuyer credit. While the first-time homebuyer credit is thought of as being targeted to individuals, it will impact businesses, especially home construction. The U.S. housing market is in one of its steepest slumps in recent memory. The 2009 Recovery Act extends the first-time homebuyer tax credit to include purchases made before December 1, 2009. The 2009 Recovery Act also raises the credit to $8,000 and eliminates the repayment requirement. Home builders, sellers and others in the housing industry need to market this credit aggressively.

More incentives - The 2009 Recovery Act also prospectively revokes a controversial IRS notice affecting NOL limitations on banks and expands the health coverage tax credit for eligible taxpayers. The new law also increases the New Markets Tax Credit program, modifies the low income housing credit, decreases estimated tax payments for certain individuals whose incomes come from small businesses and delays withholding on government contractors. For the auto industry and consumers alike, the new law allows the sales tax paid on a new vehicle purchase from February 17, 2009 through December 31, 2009 as a deduction whether or not an individual itemizes deductions. Congress also enhanced many tax-exempt and tax-credit bond rules to help states and local governments generate revenue.

This is just a brief snapshot of the business incentives. Most are temporary. Don't delay in contacting our office to learn more about these tax incentives. We're ready to help you maximize your tax savings.