The Good (And Not So Good) of the Small Business Jobs Act
Back in my article of August 6th, I predicted and discussed the imminent passage of a $30 billion Small Business Lending Fund bill. Well, it took longer than I expected, but on September 27, the "Small Business Jobs Act of 2010", which established this fund and includes important tax provisions for business, became law.
Here is a brief overview of the tax changes in that Act:
Enhanced small business expensing. To help quickly recover the cost of capital outlays, small business taxpayers can elect to write off these expenditures in the year they are made instead of recovering them through depreciation.
Under the old rules, taxpayers could generally expense up to $250,000 of qualifying property—generally, machinery, equipment and software-placed in service in during the year. This limit was reduced by the amount by which the cost of property placed in service exceeded $800,000.
Under the Act, for property placed in service in any tax year beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment limit to $2,000,000. Certain real property is also now eligible for expensing. Thus, the $500,000 amount can include up to $250,000 of qualified leasehold improvement, restaurant and retail improvement property.
50% bonus first-year depreciation. Before the Act, Congress already allowed businesses to more rapidly deduct expenditures of most new tangible personal property placed in service in 2008 or 2009 by permitting the first-year write-off of 50% of the cost. The Act extends the first-year 50% write-off to 2010.
Boosted deduction for start-up expenditures. The Act allows taxpayers to deduct up to $10,000 in business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out.
100% exclusion of gain from the sale of small business stock. Ordinarily, individuals can exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years. This exclusion was temporarily increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the Act, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of QSBS that is acquired in 2010 after September 27, 2010 and held for more than five years. In addition, the Act eliminates the alternative minimum tax (AMT) preference item on such sales.
General business credits of eligible small businesses for 2010 get five-year carryback. Generally, a business's unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax. Under the Act, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years instead of just one. Eligible small businesses are sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.
General business credits of eligible small businesses not subject to AMT for 2010. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. The Act allows eligible small businesses to use all types of general business credits to offset their AMT in tax years beginning in 2010.
Deductibility of health insurance for the purpose of calculating self-employment tax. The Act allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.
Cell phones no longer listed property. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.
S corporation holding period for appreciated assets shortened to five years. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years or face a built-in gain tax at the highest corporate rate of 35%. The Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.
Revenue raisers. These tax breaks come at a cost. For instance, information reporting will generally be required for rental property expenses made after 2010, and increased information return penalties will be imposed.
This means is that landlords must now file information returns (Form 1099-MISC) with IRS reporting payments of $600 or more during the tax year for rental property expenses, just as businesses do. Exceptions are provided for individuals renting their homes temporarily, taxpayers whose rental income doesn't exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regs).
Please keep in mind that I've described only the highlights of the most important changes in the Small Business Jobs Act. Also, the time frame for taking advantage of many of these provisions is relatively short. If you need more details about any aspect of the new legislation, you should consult your tax advisor.
