1-25-10 Tax Relief for Businesses in the 2010 Tax Acts
The U. S. Tax Code has undergone some dramatic changes during 2010. Most likely the political volleyball match (and how it affects our tax structure) is not over yet considering the U.S. Congress' symbolic vote to repeal the Health Care Reform Act on January 19, 2011. While the political pundits and even the Senate Majority Leader indicate the repeal legislation will never reach the Senate floor, it appears the stage is being set for further major changes (particularly after 2012).
However, for the time being, let's focus on the provisions of the Small Business Jobs Act and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "Acts") that could provide some relief for small businesses in their 2010 tax returns.
The Acts defines an "eligible small business" (ESB) as a partnership, sole proprietorship or privately held corporation where average annual U.S. gross receipts of the three preceding years do not exceed $50 million. Based upon 2003 IRS statistics (the most recent available), 99.9% of all U.S. businesses would have qualified as ESB's in 2003 as defined by the Act.
Relief Provisions
Section 179 expensing and bonus depreciation
The Acts increase the maximum amount a taxpayer may expense under IRC 179 to $500,000 and increases the phase-out threshold amount to $2 million for tax years beginning in 2010 and 2011. The first year 50% bonus depreciation is extended for one year to apply to property acquired and placed in service during 2010. Additionally, property placed in service after September 8, 2010 and before January 1, 2012 qualifies for 100% bonus depreciation. Since this also reduces the tax revenues for state governments, many states (including Arkansas) may not follow the Federal government's lead in this area.
Qualified small business stock
The Act increases the exclusion from taxable income for capital gain on the sale of small business stock from 50% to 100% for stock acquired after September 27, 2010 and before January 1, 2012. The minimum tax preference item does not apply on these excluded gains.
Business credits
The carry back period for eligible small business tax credits is extended from one to five years. The Act also allows taxpayers to used eligible small business credits to offset both regular and alternative minimum tax liability. Both provisions are effective for credits determined in the taxpayer's first tax year beginning after 2009.
Built-in gains tax
Built-in gains tax is the "penalty tax" incurred by C corporations converting to S corporations. For tax years beginning in 2009 and 2010, the recognition period for the built-in gains taxes is reduced from 10 to 7 years. For tax years beginning in 2011 only, the recognition period for the built-in gains tax is reduced from 10 to 5 years. Therefore, if you converted from a C corporation to an S corporation in 2002 through 2006 and disposed of assets with built-in gains during 2009 through 2011, the potential penalty tax may be avoided.
Start-up expenses
The Act increases the deduction for trade or business start-up expenses from $5,000 to $10,000 for tax years beginning in 2010. The deduction limitation is also increased from $50,000 to $60,000.
Cell phones
The Act removes cell phones from the definition of "listed property". Thus the heightened substantiation requirements and special depreciation rules that apply to listed property in the existing Internal Revenue Code no longer apply to cell phones.
Self-employed individuals' health insurance
The Act allows self-employed individuals who deduct the cost of health insurance for themselves, their spouses, dependents and children who have not attained age 27 as of the end of the tax year to take the deduction into account for purposes of calculating self-employment taxes as well. This provision applies to the first tax year beginning after 2009.
This is a summary of the business tax relief provisions of the Small Business Stimulus Act. We welcome any questions you may have about how these tax relief provisions may impact you and your business.
