Taking On Tax Breaks

By EMILY MALTBY

For small businesses, the anxieties of tax season go beyond filing returns and paying on time. Many owners realize, often too late, missed opportunities for tax breaks and how they will affect their businesses' future growth.

Numerous tax-law changes in recent years, especially small-business tax relief introduced during the recession, have been difficult for owners and their accountants to stay on top of. Among them: hiring credits, expanded capital-gains tax relief, a larger expensing limit for business assets and new health-care deductions.

The new provisions also come with a host of caveats and many lack permanency, making it difficult for owners to know which tax breaks are coming and going, and whether or not they qualify.

"It's a lot more stress than I ever recall," says Vadim Michael Korytny, a 28-year-old business owner. Each week, he spends three to four hours dealing with tax-related documents to stay in compliance. He also takes additional time to research tax information and talk with accountants and other owners.

"I'll learn about [a tax credit] and it will go and change on me," says Mr. Korytny, whose start-up, Paradigm AMO Corp. in Fort Lee, N.J., owns three Web businesses. "Or, I'll find out about it too late and realize I could have benefited." He recently found out about a five-year carry-back-loss provision introduced in the 2009 Recovery Act that his professional accountant hadn't mentioned.

For some firms, namely those in the technology sector, getting research-and-development tax credits is "a mind-numbing exercise," says Scott Hodge, president of the Tax Foundation, a research group based in Washington, D.C. "It's complicated, it's changed over time, and it requires a tremendous amount of paperwork backup and justification."

The most onerous tax breaks are those that tend to carry both a heavy paperwork burden and also frequently changing restrictions.

Congress has changed the Section 179 deduction several times in recent years, increasing the expensing limit from $150,000 to $250,000 for 2009 and then to $500,000 for 2010 and 2011. Businesses use Section 179 to write off certain equipment purchases. Although it means more available tax relief, the uncertainty of what the limit will be going forward stymies future business planning.

Two tax breaks enacted last year—one that gives a $1,000 credit for each new employee who was previously unemployed for 60 days, and another that relieves the employer's share of Social Security taxes on wages for newly hired workers—fell off the radar at many small firms because the health-care overhaul bill, which passed a few days later, overshadowed them. Owners who did know and qualify had to process additional paperwork, including the new IRS form W-11, to show that they and the employees met the requirements for the tax relief.

Not all missed tax breaks are unintentionally overlooked. Some business owners deliberately choose not to take them because they involve too much paperwork.

The home-office deduction "is so complicated that many business owners choose not to even claim the deduction," says Bill Rys, tax counsel for the National Federation of Independent Business, a lobbying group in Washington. "It's a one-page form and 13 different times they refer you back to the instructions to figure out how to calculate the deduction."

Other breaks have plagued business owners for years, says Jina Etienne, director of taxation for the American Institute of CPAs, based in New York.

Meals, for instance, have a host of stipulations on which types can and can't be deducted. And write-offs for car use, she says, are complicated. The deduction can be calculated either by the miles driven for business use, or by the actual expenses of the car, such as repairs, insurance and registration.

Tai Aguirre, 60, says he can't bear to keep track of the mileage on his car for business, so he takes the deduction based on the actual-cost method, even if the mileage-rate method could provide him with a greater relief.

Mr. Aguirre is vice president of sales and development at Taico Incentive Services Inc. in Patterson, N.Y.

"For all I know, I could benefit more if I take every single mile, but because of the paperwork and time investment, I take the general allotment," says Mr. Aguirre. "If I had a CPA sitting next to me all day…we could split hairs on everything that I do to collect more deductions."

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