September 28, 2010
Small Business Jobs Act of 2010
Tax Breaks and Incentives
On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (the “Act”). The Act includes many incentives to small businesses to grow and hire. The passage of this Act, which was marked by months of intense negotiations, should provide some well deserved tax relief to small, large and individual taxpayers. In addition to creating jobs, this Act is designed, in part, to reduce the tax gap and close unintended loopholes.
Some Highlights of the Small Business Jobs Act of 2010:
- For 2010 and 2011, Section 179 expensing for qualified property increases to $500,000. In addition, phaseout amounts increase to $2,000,000. Software will continue to be eligible for full Section 179 expensing. Virtually all small businesses and many mid size businesses will be able to take advantage of this expensing provision.
- The Act has expanded the definition of property eligible for Section 179 and permits expensing of up to $250,000 of certain real property such as leasehold improvements, restaurant property and retail property. The dollar cap for both qualified real property and tangible personal property must not exceed $500,000.
- Taxpayers will also be permitted to withdraw a Section 179 election without IRS consent.
- The new law extends 50% first year bonus depreciation and AMT depreciation adjustments on new property through 2010. The extension is retroactive to January 2010.
- Bonus depreciation is also extended to 2011 for property with a recovery period of 10 years or longer.
- Bonus depreciation will also be allowed to contractors utilizing the percentage of completion method. Contractors now can benefit from bonus depreciation even if they do not complete the contract during the same year.
- The amount of depreciation allowed for certain passenger automobiles is increased by $8,000 in the first year to $11,060 for autos and $11,160 for light trucks and vans.
- Cell phones provided as a fringe benefit to employees are no longer subject to the rigorous substantiation requirements of listed property pursuant to Section 280F. Employers can deduct these costs to the extent the cellphones are used for a valid business purpose.
Note: The depreciation provisions are deemed to be the most expansive tax break in the Act.
- For years beginning after December 31, 2009 and before January 1, 2011, taxpayers may deduct up to $10,000 of start up expenses. Further, the phase-out threshold is increased to $60,000. This provision was included to encourage investments and start-ups.
- Gain related to the sale of qualified small business stock that is acquired after September 27, 2010 and before January 1, 2011 will be completely excluded from income for both regular and AMT purposes provided that the stock is held for at least five years. Qualified small business stock is stock of a corporation whose gross assets do not exceed $50 million. The excluded gain will no longer be considered an AMT preference item.
- The Act provides a five year carry back for unused general small business credits generated in a tax year beginning in 2010. Previously, general business credits could only be carried back one year, and forward 20. Small businesses eligible for this benefit include non publicly traded entities (including S corporations, sole proprietors and partnerships) that have average gross receipts of less than $50 million for the last three years. Partners and shareholders must meet the same test. Among others, the General Business Credits include the Research and Development Tax Credit, Work Opportunity Tax Credit, Low Income housing Credit and the Employer-provided Child Care Credit.
- The General Business Credits generated by eligible small businesses will not be subject to the Alternative Minimum Tax (AMT) for tax years beginning after 2009. This is a huge benefit. Credits generated in 2010 can fully offset any 2010 tax liability. Any remaining credits can be carried back five years to offset prior years’ regular tax liability.
- The built-in-gains tax prevents C corporations from avoiding corporate level tax on the disposition of appreciated property. For tax years beginning in 2011, a C corporation that converts to an S corporation must hold appreciated property five years in order to avoid paying tax on the appreciation at the highest corporate level rate of 35%. The period of recognition is reduced from seven years.
- For 2010, a self employed individual is eligible to deduct health insurance costs from net earnings prior to computing self employment taxes.
- The Act relaxes the strict penalties applied to failure to include reportable transactions with returns.
- The new law allows participants in government Section 457 plans to treat elective deferrals as Roth contributions. In addition, the law authorizes 401(k), 403(b) and 457(b) plans to allow participants to roll over pre-tax accounts into a designated Roth account. (These provisions, while retirement friendly, will also raise revenue since the roll over to a Roth is a taxable event.)
Besides the retirement provisions described above, other revenue raisers included in the Act are intended to not only increase fees and eliminate a tax gap, but to close some loopholes:
- Qualified individuals receiving rental income from real property must file information reporting returns with the IRS to all service providers reporting payments of $600 or more. These reporting requirements apply after December 31 2010. While there are some exceptions to this provision, many landlords will now be required to issue a form 1099 to service providers such as plumbers, gardeners and electricians.
- Penalties for failing to timely file information returns with the IRS are increased for returns required to be filed after January 1, 2011.
- The income sourcing rules for guaranteed fees related to US source income from a foreign parent have changed. Guarantee fees paid after the date of enactment will be treated as interest and subject to withholding if paid by a US taxpayer to a foreign parent.
- The Act provides for increases to estimated tax payments for corporate taxes for years after 2014. These estimated tax payment requirements apply to corporations with assets of $1 billion or more.
- The Credit for Cellulosic Biofuel Producers has been limited to no longer include highly corrosive fuels.
Not Addressed in this Act and Still Pending, include:
- Reduced individual tax rates;
- Federal Estate Tax;
- Reduced Capital Gain taxes;
- AMT patch;
- Energy Tax Incentives.
The Act includes other provisions, not specifically related to taxes that are very small business friendly and include the expansion of the Small Business Administration Loan Program (SBA.) These provisions will include loan size increases, working capital loans and the implementation of private sector programs designed to support credit-worthy small businesses.
Should you have any questions related to the new Act or how it will affect you or your business, contact your Marcum LLP tax professional.