Small business owners face tax threats and opportunities in many areas. Here are two to consider: depreciation and fixed asset purchases, and health reimbursement accounts (HRAs).
Section 179 deduction
In December many small business owners who had a good year look for ways to reduce their tax bills. One way is to buy fixed assets – vehicles, equipment, furniture & fixtures and other business property which has a useful life longer than one year.
The cost of fixed assets is generally deductible through depreciation, but depreciation is slow. Depending on the type of property you buy and the business that you’re in, it can take 5 years, 7 years, or longer to deduct the cost of assets you buy this year.
The section 179 deduction lets taxpayers take a deduction for the entire amount of the purchase in the current year, subject to certain limitations. The amount deductible under section 179 started out small – just $25,000. It was mostly an administrative convenience for small businesses that don’t buy many fixed assets. If you expense an asset, you don’t have to keep track of depreciation for it for the next 5 years or more. But, when economic downturns hit, Congress sees section 179 as a tool for economic stimulus. Suppose a business owner could use additional vehicles or equipment, but not urgently – he could put the purchases off for another year and still get by. During a recession, Congress wants him to buy, in order to help out the businesses producing and selling the fixed assets. So, they increase the amount that can be deducted in the current year under section 179. That way, businesses with significant taxable income for the current year have an incentive to buy the assets now, rather than waiting for next year or later.
For tax years beginning in 2010 through 2013, Congress raised the section 179 limit to a whopping $500,000. But they didn’t increase the limit permanently. They’ve just been increasing the limit a year at a time.
Update: Congress has passed legislation increasing the section 179 limit to $500,000 for 2014. Click here for more information.
As of 11.30.14, Congress hasn’t raised the limit for 2014 tax years. The limit is currently just $25,000. But, they’re considering an increase to $500,000 again, and could enact it at any time. In fact, the House passed an increase earlier in the year, but the Senate didn’t act on it.
What does this mean to me?
It means that, if you have taxable income for 2014 and are thinking about buying some fixed assets for your business anyway, be ready to act before 12.31.14 (for calendar year taxpayers). Identify the assets and look into financing so that, if Congress does raise the limit, you’re in position to take advantage of it and lower your 2014 tax bill.
Tip: Remember, there are other restrictions on section 179. Be sure to consult your tax advisor and make sure you’re eligible before making any purchases.
Health reimbursement arrangements (HRAs)
The Affordable Care Act (ACA, or Obamacare) has a nasty trap for some small businesses that have stand-alone HRAs. A stand-alone HRA is one that is not integrated with a group health plan that satisfies ACA requirements.
First, note that this trap applies to almost all employers. Many of the provisions of the ACA do not apply to small employers – those with fewer than 50 full-time-equivalent employees. However, this provision applies even if you are a small employer.
Instead of offering a group health insurance plan to workers, some employers let employees purchase their own insurance. The employer then reimburses the employees for premiums and perhaps other medical expenses, and the reimbursements are not taxable income to the employees.
These stand-alone HRAs are prohibited by Obamacare and subject the employer to hefty fines. The fine is up to $100, per employee, per day. That means you could be fined $36,500 per year for each worker receiving these benefits.
What can I do?
One fix is to give employees a raise in the approximate amount of their health premiums, instead of reimbursing the employees for their premiums. The raise would be taxable income to the employee, so it is not as attractive as the previous arrangement. Note that the raise cannot be conditioned on the employee obtaining health insurance. The employee must be free to use the increase in pay as he chooses. Do not request substantiation of premium payments from your employees if you choose this option.
Another fix is to institute a qualifying group health plan for your employees.
This is a complex topic. Consult your tax and benefits advisors for important information.
Permissible HRAs
Some HRAs are still allowed.
- An HRA can be used in conjunction with a group health plan that satisfies ACA requirements. All employees enrolled in the HRA must be eligible for, and actually enrolled in, the group health plan.
- An HRA can generally be used if it has fewer than two current employees as participants (i.e. one employee or zero employees). The intent of this provision is to allow HRAs for retired employees. But, some very small businesses can continue their HRA under this rule.
- HRAs that only cover vision or dental expenses are still allowed.
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