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Every builder has go-to tools for certain jobs. But when it comes to dealing with the ever-changing tax code, builders too often lack the tools they need.
Whether you’re filing as an individual or as a small business, there's so much going on this year it's even more confusing than usual. This isn't the year to go it alone. But for small business owners who play it smart, there are lots of ways to save money at tax time.
Taxpayers have received some good news already, however. Most should note the 2% increase in their 2011 paychecks. This is due to a change in federal law that reduced taxpayer’s contributions to Social Security from 6.2% to 4.2% for 2011.
“This means if you earn $50,000 a year, you will have an extra $1,000 in your paycheck — or $600 more than from the Making Work Pay Credit. You can put this money to work by contributing to IRAs and 401(k)s, paying bills or funding a college savings account.”
To navigate the rest, here are 10 tips to help you through this tax season:
- You may be able to deduct your home office — But there’s a catch: You can claim the deduction only if you have a room, or a distinct portion of a room, dedicated exclusively and regularly for your main place of business. The rules differ slightly depending on whether you are self-employed or an employee. Running your business from the workbench won’t cut it. But if you can document your use of qualifying space, then you should be able to claim the deduction.
- Self-employed health insurance deduction — This is applicable if you’re self-employed and pay health insurance premiums for yourself and your family. For 2010, you can also deduct those premiums from your income for purposes of calculating self-employment tax. For 2010 and after, you can deduct the cost of health insurance premiums for your children younger than age 27 at the end of the year, if they don’t have access to employer-provided insurance. This applies even if the child is not a dependent for tax purposes.
If you are a small business owner who needs help calculating the potential impact of the new health care law on your business, including premium costs and employee coverage requirements, check out this calculator from The Tax Institute.
- Cell phones can be deducted — We don’t have to tell you how indispensable cell phones are for builders. The good news for 2010 is that you can deduct cell phone expenses related to your business under the regular rules for business property. So, if you purchased a cell phone in 2010 for $200, and you use the phone entirely for business purposes, then you can deduct up to $200.
- Start-up business expense deduction increased from $5,000 to $10,000 for 2010 only — If you started a new business in 2010, you may be able to deduct up to $10,000 in start-up expenses, which includes costs such as advertising and employee training prior to opening the business.
- General business credit modified — Eligible small businesses may carry back the general business credit for five years instead of one year. So, if you qualify for a credit such as the Energy Efficient Home Credit, but you have low tax liability in 2010, you may be able to carry the credit back to a prior year, such as 2005, and claim a refund.
- PMI deduction — Private mortgage insurance (PMI) premiums on home mortgages issued after Dec. 31, 2006, are deductible for qualifying home owners through 2011 as mortgage interest.
- Energy efficiency credits — For 2010 filing you can receive an income tax credit of up to $1,500 if you, as a home owner, installed external windows and doors, insulation, roofing, HVAC and non-solar water heaters that meet specific energy guidelines. Home owners planning ahead should note that the credit will be reduced to $500 in 2011 and won’t be available in 2012. The maximum credit a taxpayer can claim in 2011 is reduced by credits claimed in previous years.
A credit for 30% of the cost of some alternative energy equipment such as solar panels or geothermal heat pumps also is available.
- 2008 home buyer credit repayment starts — If you became a home owner in the past few years you need to remember the distinction between the 2008 and the 2009 and 2010 credits. The 2008 credit was similar to an interest-free loan and taxpayers must begin repaying it with their 2010 tax returns. Taxpayers must repay $500 (or 1/15th of the credit they claimed) each year for 15 years. If the home is no longer your principal residence, then you have to repay the credit in full with your next tax return.
If you claimed the credit in 2009 and 2010 you will not have to repay it unless the house is sold or is no longer your principal residence within three years of purchase.
- Capital gains rates remain the same — Builders with investments should plan ahead for 2011 as the capital gains rate has not changed, staying at a maximum rate of 15%.
Last but not least:
- 2011 federal filing deadline is April 18 — This year the filing deadline for federal tax returns is Monday, April 18 because of a city holiday in Washington, D.C. But remember: some state filing deadlines will remain Friday, April 15.
Kathy Pickering is the executive director of The Tax Institute at H&R Block, the go-to source for objective insights on federal and state tax laws affecting the individual. The Tax Institute is H&R Block’s independent research and analysis division, which draws on H&R Block’s more than 55 years of experience as one of the world’s largest tax services providers.
"Accounting and Financial Management for Residential Construction," available through NAHB BuilderBooks is a solid resource for builders, remodelers, developers and contractors that provides detailed information on how an accounting system operates and the basic principles for processing financial data.
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