10 Small Business Tax Definitions to Determine Your Eligibility

http://www.vipspatel.com/wp-content/uploads/2014/10/092914-small-biz-taxes-660x369.jpg

The term “small business” is casually used in conversation to describe companies that aren’t public companies or other large firms. But when it comes to taxes, the term has a very specific meaning, one that controls or limits eligibility to various tax breaks.

The term is based on the value of a company’s assets, number of employees, number of owners, gross receipts, or something else. It’s enough to make your head explode.

To help clarify matters so you can determine which tax breaks you are entitled to, below are 10 different small business tax definitions in the law.

Accrual Method Exception for Inventory-Based Businesses

Usually businesses that have inventory must use the accrual method of accounting. But small inventory-based businesses can use the cash method of accounting, a simpler way to report income and expenses. “Small” means having average annual gross receipts of no more than $10 million in the 3 prior years (or number of years in business if less than 3 years).

Bad Debts Deducted on the Nonaccrual-Experience Method

Bad debts usually are deductible only when and to the extent they go bad. But a small business can accrue anticipated bad debts in some cases. To use the nonaccrual-experience method, “small” in this case means having average annual gross receipts of no more than $5 million in the 3 prior years.

Building Improvements Safe Harbor

While ordinary repairs are currently deductible, the cost of capital improvements usually must be added to the basis of a building and recovered through depreciation. However, under a safe harbor, small businesses owning small buildings can deduct such improvements. “Small” means having average annual gross receipts of no more than $10 million; the building’s unadjusted basis must be no greater than $1 million.

Corporate Alternative Minimum Tax (AMT) Exemption

Corporations may have to pay AMT if it exceeds their regular tax liability. However, small corporations are exempt. “Small” applies to corporations having average annual gross receipts of no more than $7 million ($5 million for the first 3-year period).

DbK Retirement Plan

A hybrid retirement plan, combining a pension plan with a 401(k) plan, is available only for small businesses. This means companies with 500 or fewer employees. (Note: While DbKs were authorized back in 2008, no IRS guidance has been issued so financial institutions have yet to offer them.)

Disabled Access Credit

Small businesses that retrofit their space to accommodate the disabled can take a tax credit that amounts to $5,000. “Small” is having gross receipts of no more than $1 million in the preceding year or no more than 30 full-time employees.

Exemption From Reporting Health Coverage on Employees’ W-2s

An employer must include the cost of coverage, whether paid by the company, the employee, or both on Form W-2. However, “small” businesses are exempt. This means having filed fewer than 250 W-2s for the previous year.

Employer Mandate Exemption Under the Affordable Care Act

A small business is not required to provide health coverage for full-time employees, even though many small businesses choose to do so. An employer that does not offer minimum essential health coverage won’t be penalized if considered “small.” This means having fewer than 50 full-time and/or full-time equivalent employees. (Note: The employer mandate takes effect in 2015 for employers with 100 or more such employees, and in 2016 for those with 50 to 99 such employees.)

Employer Wage Differential Credit for Activated Reservists

Small employers that opt to continue wages paid to employees called to active duty can take a tax credit up to a set limit. This credit is limited to companies with fewer than 50 employees. (Note: This credit expired at the end of 2013, but could be extended for 2014.)

First-Year Expensing

Instead of depreciating the cost of equipment and machinery, a small business can opt to deduct the cost in full up to a set dollar limit. “Small” depends on the dollar limit of equipment purchases for the year. The dollar limit for 2014 is set to be $200,000 (with a phase-out of the deduction for purchases of up $225,000). It is expected to be increased retroactively by Congress, perhaps to $1 million.

Tax Prep Photo via Shutterstock

 

MarketingBusiness, Marketing
10 Small Business Tax Definitions to Determine Your Eligibility