Maybe you’re a restaurant- or retail business-owner buying real property this year. Or an investor, looking for an additional incentive to invest in a small business.
Or perhaps you’re a small business investing in new plant and equipment. Or a self-employed person struggling to afford your family’s health insurance premiums.
If so, newly enacted legislation may help you–along with thousands of other small businesses and their owners and investors. The ability of America’s small businesses to hire and grow is vital to our economic recovery. To promote hiring, investment and entrepreneurship in the small business sector, President Obama signed the Small Business Jobs Act into law on September 27, 2010. Despite its name, the Act includes a number of tax breaks and other provisions benefitting individuals, as well as large and small businesses.
New lending provisions in the Small Business Jobs Act provide additional funding for the Small Business Administration’s (SBA) Recovery loan program, permanently increase the maximum loan size for two of the SBA’s largest loan programs, and create a new $30 billion Small Business Lending Fund to provide loan funds to small banks.
The Act also provides $15 billion for small business lending at the state level through a new State Small Business Credit Initiative.
The new Act includes roughly $12 billion in tax incentives, most of which are temporary.
Small Business Expensing
The Act broadens and enhances the expensing rules under Section 179 of the tax code for tax years beginning in 2010 and 2011 only.
Generally, Section 179 allows you to deduct the cost of qualifying new depreciable personal property in the year you place it in service, rather than depreciating it and recognizing the tax benefit over years. The property must be used in an active trade or business to qualify. For this purpose real estate rental properties, whether commercial or residential, do not constitute an active trade or business.
The Act increases the maximum amount of qualifying expenditures that your business can expense to $500,000. The pre-Act limits were $134,000 for 2010 and $25,000 for 2011. After 2011, unless Congress acts, the limit returns to $25,000.
Also for 2010 and 2011, you can include up to $250,000 of qualified real property in the amount you expense under Section 179–up to half of the $500,000 maximum. Qualified real property must be depreciable and must have been acquired for use in an active trade or business. It includes certain qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. After 2011, qualifying Section 179 deductions are again limited to personal property; real property will not qualify.
Under Section 179, the expensing election phases out when your business buys more than a specified amount of qualifying property. The Act increases the phase-out amount for 2010 and 2011. The expensing election now begins to phase out when your business buys more than $2,000,000 of expensing-eligible assets, up from the pre-Act phase-out of $800,000 for 2010 and $200,000 for 2011.
Your Section 179 deduction in any year is limited by the amount of your taxable income from an active trade or business. If your qualifying expenditures exceed this limit, you can generally carry the excess expenditures to future tax years until they can be deducted. However, under the new Act, you cannot carry over any amount that is attributable to real property to a tax year beginning after 2011.
Bonus First-Year Depreciation
The Act extends through 2010 the option to deduct 50 percent first-year bonus depreciation for qualifying property. For certain long-production-period and aircraft property, the deadline is extended through 2011. This tax benefit is available to both small and large businesses.
Increased First-Year Depreciation Limits for Passenger Autos
For 2010, the Act increases the first-year depreciation limit for cars, light trucks and vans by $8,000.
Capital Gains from Small Business Investments
For the remainder of 2010, the Act totally eliminates capital gains taxes on qualified small business stock that is acquired after September 23 and before January 1, 2011. The eligible stock must be held for five years.
Under the pre-Act provisions of the 2009 Recovery Act, only 75 percent of the gain was excludable for stock acquired after February 17, 2009 and before January 1, 2011. After 2010, the exclusion returns to 50 percent.
S Corporation Holding Period
Generally, a C corporation converting to an S corporation is required to hold its appreciated assets for ten years following conversion–although the holding period is shortened under certain circumstances. A corporation that fails to satisfy this holding-period requirement is subject to a built-in gains tax of 35 percent.
The Act temporarily shortens the holding period to five years if the fifth tax year in the holding period precedes the corporation’s tax year beginning in 2011.
Health Insurance Deduction for the Self-Employed
If you’re one of the more than 2 million self-employed Americans, you can deduct the cost of health insurance for yourself and the members of your family–including your spouse, children under the age of 27, and other dependents–when calculating your self-employment taxes for 2010.
Deduction for Start-Up Expenses
For tax years beginning in 2010 and 2011, the maximum amount you can deduct for trade or business startup expenses has been increased to $10,000 from the pre-Act limit of $5,000. Expenses in excess of this limit can be written off over a period of 15 years.
The amount of startup expenses you can deduct is reduced by the amount that your cumulative startup expenses exceed a specified amount–$60,000 under the Act, up from the previous $50,000. As a result, your allowable deduction this year is reduced to zero if you have cumulative startup expenses of $70,000 or more.
Five-Year Carryback of General Business Credits
The Act extends the carryback provisions of the general business credit.
If your business has unused general business credits, under prior rules you were allowed to carry the credits back one year, and then forward for 20 years. The Act allows eligible businesses to carry the credits back five years, beginning with the 2010 tax year. Eligible businesses include sole proprietorships, partnerships and those corporations that are not publicly traded and have gross receipts of less than $50 million (on average, over the prior three years).
AMT Exemption for General Business Credits
The alternative minimum tax (AMT) rules limit the use of most general business credits to your regular tax liability–and then only to the extent that your regular tax liability exceeds your AMT. Beginning in 2010, the Act allows eligible businesses (as defined above) to use all general business credits to offset AMT.
Tax Simplification for Cell Phone Deductions
If you use a cell phone for business, you’ve been required to maintain detailed records to document the business use. The Act changes the classification of cell phones―they’re no longer considered listed property–thus eliminating the burdensome paperwork. You can now deduct or depreciate them like other business property.
The Act includes a number of permanent provisions to raise revenue, including the following:
Roth IRA Rollovers from 401(k), 403(b) and Governmental 457(b) Plans
If you’re a participant in a 401(k), 403(b) or governmental 457(b) plan, you can roll over your pretax account balance(s) into a designated Roth account.
You’ll pay taxes on the conversion, but subsequent distributions of principal and earnings are generally tax-free. If you convert this year, you can choose to defer recognition of the resulting income by spreading it over the following two years. There are no age-based limitations on your ability to contribute to a Roth IRA.*
Reporting for Rental Income
If you receive income from renting real property, you’re subject to new reporting requirements next year. You must file Form 1099-MISC to report any payments of $600 or more that you make after December 31, 2010 to your accountant, plumber, handyman or other service provider for work related to your rental property.
There are exceptions if you’re renting your principal residence on a temporary basis or if your rental income doesn’t exceed an IRS-determined minimal amount.
Penalties for Failing to File a Correct Information Return
The Act increases the penalties for failing to file a correct information return. For example, the minimum penalty for intentionally disregarding your obligation to file has been increased to $250 from the previous $100.
In addition to its lending, tax and revenue provisions, the Act creates tools and a new State Export Promotion Grant Program to help small businesses export their products. It also enhances small business contracting and improves tax fairness for small businesses.
The impact of various provisions in the Small Business Jobs Act, some of them temporary and some permanent, can be quite complex. Consult with your advisor at Bader Martin to understand the impact on your tax plan–including your estimated tax payments. You may be able to accelerate the positive financial impact of the changes of the Act by reducing your scheduled payments to reflect its new provisions.
* Because of the interplay of factors involved in this important financial decision—and the significant tax and financial consequences—it’s critical that you consult with your advisor at Bader Martin before converting to a Roth IRA.