Year-end tax planning appears confusing as the political climate in Congress changes and Congress remains in a stalemate over extending tax cuts scheduled to expire on December 31, 2010.

Generally, year-end tax planning involves finding ways to accelerate or defer income and/or deductions based on this and next year's potential tax liability. However, because most of the tax cuts authorized by Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), are scheduled to expire on Dec. 31, 2010, unless Congress acts soon, tax rates will automatically go up for all individual taxpayers, including those subject to the lowest tax rates.

While Congress may not act until next year, tax planning now must concentrate on what we know.

Since the tax cuts enacted by the EGTRRA expire at the end of this year, the income tax rates and other provisions for 2010 will be very similar to last year, except for cuts that expired at the end of 2009.

Small Business Job Act (SBJA)

The Small Business Jobs Act of 2010 (SBJA) signed into law on September 27, 2010, extended some of the business tax cuts that had expired in 2009. Highlights of new or extended SBJA tax provisions include:

  • Extending and increasing the Section 179 expensing option for depreciable property used in business, i.e., computers, office furniture, equipment, vehicles, or other tangible business property, to a maximum of $500,000 for tax years beginning 2010 and 2011 only. Also, the expensing election now applies to qualified leasehold improvement property, such as any improvements to an interior portion of a building which is nonresidential real property.
  • Extending the 50percent bonus depreciation deduction for 2010 which was set to expire at the end of 2009, for qualifying property as long as the property is placed into service before January 1, 2011.
  • Limiting penalties for errors in tax reporting that disproportionately affect small businesses.
  • Allowing the deduction of cell phone business use without additional documentation.
  • Temporarily increasing the amount of start-up expenditures entrepreneurs can deduct from their taxes in 2010 from $5,000 to $10,000 (with a phase-out threshold of $60,000 in expenditures).
  • Allowing certain small businesses (with average annual gross receipts for the preceding three tax years of $50 million or less) to "carry back" general business credits to offset five years of taxes. Also general business credits that arise in tax years beginning in 2010 are allowed to offset AMT for 2010.
  • Allowing a deduction for the cost of small business health insurance premiums in calculating self- employment taxes.