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Enrolled Agent Update: Changes On Self-Employed Tax Returns


The number of individuals going into business for themselves has skyrocketed over the past five years, which has meant that enrolled agents have probably honed their skills when it comes to filing small business tax returns. Like any other registered tax return provider who court this sector, the enrolled agent also knows that the IRS is auditing more businesses this year than in past tax seasons, a consequence of the spike in self-employed tax returns.  To avoid a possible IRS audit for self-employed business clients, and to ensure that these entities continue to flourish, enrolled agents should be mindful of a several key tax changes this year that impact this particular population. This information will no doubt be incorporated into EA CPE, the enrolled agent continuing education courses required to maintain certification, but to ensure compliance with the Tax Code on the 2010 return, these changes are outlined below:


Standard Mileage Rates

To help soften the blow of rising gas prices, business owners using a vehicle for business purposes hot some good news this tax season.  The IRS raised the business standard mileage reimbursement rate are to 50 cents-per-mile on the 2010 tax return. The rate also has been set for 2011 at 51 cents-per-mile. The rate for medical miles driven was 16.5 cents-per-mile for 2010 and will be 19 cents-per-mile for 2011. The charitable standard mileage rate means at 14 cents, because it is fixed by the Tax Code.

AMT Exemption

This season, the Alternative Minimum Tax exemption for a married couple is $72,450, and $47,450 for people filing individually. In 2011, these figures have been set at $74,450 for a joint return and $48,450 for single return.

Health insurance deduction

According to standard practice, health insurance premiums paid by small business owners can be deducted on the first page of the 1040. However, for 2010, those same premiums can be a deduction, which would shrink net earnings from self-employment and the self-employment tax. This could yield the taxpayer as much as15.3 % in savings on the cost of health insurance.

Retirement Plan Contributions

Say an IRA contributor doesn’t have a retirement plan through work, but is married to someone who does, the deduction is phased out, provided the couple’s income falls somewhere between $167,000 and $177,000.

Start-up Expense Deduction

Start-up businesses scored another victory that is sure to sweeten the pot for 2010. The  deductible amount for business start-up expenses was increased from $5,000 to $10,000. Taxpayers wishing to claim additional amounts must spread out these expenses over 180 months.

Period for Net Operating Loss Carry-Back period

There is also some post-recession good news for self-employed businesses that experienced losses in 2010. The number of prior years’ taxes that are legally recoverable -- by carrying back a current year loss -- was increased to as much as 5 years.  This good bring some relief in the form of much-needed cash flow.

Section 179 deduction

Small businesses have received even more incentive to invest in new equipment when the IRS increases the maximum allowable deduction under Code Section 179.  This amount was increased to $500,000 from $250,000. There’s even better news: the limit for the phase-out of the deduction was simultaneously increased to $2 million from $800,000.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

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