This post will explain a couple more of the changes in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
In this post, I will focus on
- 100% bonus depreciation for September 8, 2010 through December 31, 2011
- 50% bonus depreciation for all of 2012
- The reduction in the employee portion of FICA for Old Age, Survivors, and Disability Insurance
100% and 50% Bonus Depreciation
It seems like only a month ago when I posted the return of 50% bonus depreciation under the Small Business Jobs Act of 2010. Actually, it was two months ago. That post can be read here. Bonus depreciation allows you to deduct the purchase price of certain assets much faster than if you had to follow the normal depreciation schedules.
The 2010 Tax Relief Act extends and expands additional first year depreciation to equal:
- 100% of the cost of qualified property placed in service after September 8, 2010 and before January 1, 2012
- Why such a specific date such as September 8? Wonder what Congressperson/Senator has a constituent that bought a lot of assets on September 9…
- 50% of the cost of qualified property placed in service after December 31, 2011 and before January 1, 2013.
Example: ABC Corp bought $1 million of assets on October 1, 2010. It can fully deduct the $1 million of asset purchases in 2010. If it creates a net loss for the business, the loss can be carried back or carried forward.
Only assets that meet the following criteria are eligible for bonus depreciation:
- It falls into one of the following categories:
- property with a recovery period of 20 years or less
- which includes most physical assets other than real estate
- computer software (generally, off-the-shelf software)
- qualified leasehold improvement property
- ITS ORIGINAL USE BEGINS WITH THE TAXPAYER (I.E., IT IS PURCHASED NEW)
Qualified leasehold improvement property means any improvement to an interior portion of a nonresidential building if
- such improvement is made pursuant to a lease by the lessee, sublessee, or lessor of such improved portion
- such portion is to be occupied exclusively by the lessee or sublessee
- such improvement is placed in service more than 3 years after the date the building was first placed in service
Qualified leasehold improvement property does NOT include:
- an enlargement of a building
- any elevator or escalator
- any structural component benefiting a common area
- the internal structural framework of the building
A lease between related persons (e.g., a lease between a taxpayer and his 80% owned business) does not qualify.
Bonus depreciation will not apply to qualified restaurant or qualified retail improvement property.
FICA Tax Cut
The Federal Insurance Contributions Act (FICA) imposes two taxes that total 7.65%. The first is a 6.2% tax for Old Age, Survivors, and Disability Insurance (OASDI). The second is a 1.45% tax for hospital insurance (Medicare). Under old law, the employer and employee each paid a FICA tax rate of 7.65%. Self employed people pay both the employer and employee portion of FICA and therefore pay self employment tax of 15.3% (7.65% times 2).
For compensation received in 2011, the Act reduces the employee OASDI tax rate from 6.2% to 4.2%. The total FICA taxes paid by employees will be 5.65% (4.2% OASDI plus 1.45% Medicare). The employer portion of OASDI remains at 6.2%. The employer continues to pay the current FICA rate of 7.65% on its employees’ wages (6.2% OASDI plus 1.45% Medicare).
The OASDI rate for self employment people is reduced from 12.4% to 10.4%. The total self employment tax is therefore 13.3% for 2011 (10.4% OASDI plus 2.9% Medicare).
Under old law, self employed people were able to deduct half of the self employment taxes paid. The deductible half represented the employer portion of FICA. Since the employer portion of OASDI is 6.2% and the employee portion is 4.2%, the deductible employer portion of total OASDI is now 59.6% (6.2% divided by total OASDI of 10.4%). The deduction for the Medicare portion of self employment tax remains at 50%.
Example: Joan has a proprietorship with $92,350 income subject to self employment tax. The OASDI portion of self employment tax is $9,604.40 ($92,350 times OASDI tax rate of 10.4%. The Medicare portion of self employment tax is $2,678.16 ($92,350 times Medicare tax rate of 2.9%). Joan can deduct 59.6% percent of her OASDI tax of $9,604.40–which is a deduction of $5,724.22. Joan can deduct 50% of her Medicare tax of $2,678.16–which is a deduction of $
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.