Two items for the afternoon:
First, the proposal by House Republicans to offer small businesses a tax deduction equal to 20% of profits in 2012 was approved by the U.S. House and Ways Committee today along party lines. The bill now moves to the full House for the next vote, which is expected to take place prior to the April 17th filing deadline.
One interesting note about the version of the bill that passed today: Though advertised as a boon to small businesses, the 20% deduction is limited to 50% of the wages paid to employees who aren’t owners. This means that closely held businesses that pay all of its wages to owners — and sole proprietorships that don’t pay any wages — will not benefit at all from the rule. Perhaps that’s why a recent study by the Tax Policy Center revealed that 49% of the benefit from the Republican plan would go to taxpayers earning more than $1,000,000.
Second, as April 17th draws closer, we focus so heavily on simply getting 2011 tax returns filed, we run the risk of losing sight of post year-end opportunities to reduce the tax liability reflected on those returns. Such opportunities do exist, and if employed correctly, can provide two benefits, allowing taxpayers to not only reduce their 2011 tax liability, but to also sock away money they can later use to fund their retirement or — much more likely — pay off their kid’s gambling debts.
Stuart Robertson at Forbes tells you how to do it:
If you have a 401(k) plan for your business, consider making a profit sharing contribution: There’s still time to make a 401(k) profit sharing contribution before April 17th and deduct it from your 2011 business taxes. It can make for a nice bonus for your employees as well as allow you (the owner) to receive the profit share in your own 401(k) account. When combined with personal tax-deferred contributions of up to $16,500 during 2011, this move can help lower your personal tax liability by up to $49,000. One significant barrier to profit sharing is if your business entity is a corporation (e.g. C-corp or S-corp). Unless you filed for an extension, tax filing deadlines for corporations expired on March 15.
If you don’t have a 401(k), tax-defer up to $5,000 in an IRA: A quick and easy way to reduce your personal taxes for 2011 is to put up to $5,000 (the current maximum, $6,000 if you’re age 50 or older) into an Individual Retirement Account (IRA). Funding an IRA is easy and can be set up quickly with almost any online brokerage. This assumes that neither you nor your spouse is an active participant in a qualified retirement plan for 2011. If either of you are participants, there are some phase-out rules that can limit the amount you can deduct from your taxes.