Small Business Act & Other Pending Legislation
The Small Business Jobs Act
On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010. Summarized here are some of the key tax incentives in this new law.
Bonus Depreciation
The new law extends, through December 31, 2010, fifty percent bonus depreciation which previously expired at the end of 2009. The extension is retroactive and therefore applies for all purchases in calendar year 2010.
The limitation IRC 280F imposes on passenger automobiles has increased by $8,000 in the first year for qualifying automobiles. Therefore, the maximum first year depreciation for passenger automobiles for 2010 is $11,060 ($11,160 for light trucks).
IRC 179 Expense
Eligible taxpayers may elect to claim an IRC 179 expense deduction on the purchases of qualified property. Under previous law, the maximum deduction for tax years beginning in 2010 was $250,000; the dollar limit was reduced to the extent the cost of qualifying property placed in service during the tax year exceeded $800,000; and for 2011, the expensing limit was scheduled to revert to prior levels of $25,000 and $200,000, respectively. The new law increases the maximum deduction to $500,000 and the investment limit to $2 million for tax years beginning in 2010 and 2011. Eligibility for IRC 179 expensing does not phase out completely until the cost of eligible property purchased exceeds $2.5 million.
The new law also temporarily expands the definition of qualified IRC 179 property to include qualified real property, which is defined as qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. However, taxpayers are limited to expensing up to $250,000 of the total cost of these properties.
The new law also continues to treat computer software as qualified IRC 179 property that is subject to full IRC 179 expensing otherwise reserved for tangible property.
S Corporation Built In Gain Period
The built-in-gain tax prevents S corporations from avoiding corporate level tax on the disposition of appreciated assets it acquired while a C corporation. A C corporation that converts to an S corporation generally must hold any appreciated assets for ten years following the conversion or, if disposed of earlier, potentially pay tax on the appreciation at the highest corporate tax rate which is currently 35 percent. The American Recovery and Reinvestment Act of 2009 temporarily shortened the usual ten year holding period to seven years for disposition in tax years beginning in 2009 and 2010. The new law further shortens the holding period to five years in the case of disposition in any tax year beginning in 2011. To qualify for the shortened period, the fifth year in the recognition period must precede the tax year beginning in 2011.
Carryback of General Business Credits
The new law extends the carryback period for eligible small business credits to five years. Eligible small business credits are the sum of the general business credits determined for the tax year with respect to an eligible small business. The extended carryback provision is effective for credits determined in the taxpayer's first tax year beginning after December 31, 2009. An eligible small business for purposes of the enhanced credit is a corporation whose stock is not publicly traded, a partnership or a sole proprietorship. Additionally, the average annual gross receipts of the corporation, partnership, or sole proprietorship for the prior three tax year periods cannot exceed $50 million.
AMT Offset
Under the new law, an eligible small business credit can offset both regular and the Alternative Minimum Tax ("AMT") liability.
Qualified Small Business Stock
The 2009 Recovery Act temporarily increased the IRC 1202 percentage exclusion for qualified small business stock sold by an individual from 50 percent to 75 percent for stock acquired after February 17, 2009 and before January 1, 2011, and held for more than five years. The new law raises the exclusion to 100 percent for gain on stock acquired after the date of enactment of the bill and before January 1, 2011. Under the new law, the excluded gain will not count as an AMT preference item but the five year holding period continues to apply.
To be eligible for the exclusion both prior to and under the bill, the individual must generally acquire the small business stock at its original issue (directly or through an underwriter) for money, for property other than stock, or as compensation for services. When the stock is issued, the aggregate gross assets of the issuing corporation may not exceed $50 million. In addition, the corporation also must use at least 80 percent of the value of its assets in the active conduct of one or more qualified trades or businesses. The stock or eligible replacement must be held for at least five years.
The gain eligible for exclusion is capped at the greater of (1) ten times the taxpayer's basis in the stock or (2) $10 million.
Taxpayers failing to disclose participation in certain tax shelters are liable for penalties under IRC 6707A. The new law provides a general rule that a participant in a reportable transaction that fails to disclose the transaction is subject to a penalty equal to 75 percent of the decrease in tax shown on the return as a result of the transaction or which would have resulted if the transaction was respected for federal tax purposes. The new law also specifies minimum and maximum amounts.
Start up Expense Deduction
Start up expenses are costs related to creating an active trade or business, or investigating the creation or acquisition of an active trade or business. Taxpayers generally have been able to deduct up to $5,000 in qualified trade or business start up expenses. The $5,000 deduction was reduced by the amount of the taxpayer's total start up costs that exceed $50,000. The new law raises the deduction limit to $10,000 and increases the phase out threshold to $60,000 for 2010.
Self Employment Income and Health Insurance Deduction
A self employed individual can take a deduction for health insurance costs paid for the individual and his or her immediate family for income tax purposes. However, in determining the self employment income subject to self employment taxes, the self employed individual could not deduct any health insurance costs. Under the new law, the deduction for income tax purposes for the cost of health insurance is allowed in calculating net earnings from self employment for purposes of self employment taxes. The provision applies to the taxpayer's first tax year beginning after December 31, 2009.
Retirement Savings
The new law gives taxpayers new provisions for their retirement plan dollars. The provisions include:
- 457(b) Plan Deferrals: Beginning in 2011, the new law authorizes eligible state and local government 457(b) plans to allow participants to contribute deferred amounts to designated Roth accounts. A similar provision already applies to 401(k) and 403(b) plans and will take effect in 2011 for the federal Thrift Savings Plan.
- 401(k) Rollovers to Roth Accounts: The new law authorizes qualifying 401(k), 403(b) and 457(b) plans to allow participants to roll over qualified distributions into a designated Roth account within their plans. The rollover will be taxable, except for any after tax contributions. The provision is effective for distributions after September 27, 2010. Unless the taxpayer elects otherwise, the amount rolled over in 2010, will be taxed ratably over 2011 and 2012. The individual tax rates currently set to increase in 2011 should be taken into consideration.
Informational Reporting on Rental Property Expense Payments
The new law requires qualified individuals receiving rental income from real property to file 1099 forms reporting payments of $600 or more to rental property service providers . The new law applies to payments made after December 31, 2010. There are exceptions to this requirement for individuals who can show that the reporting requirement creates a hardship and any individual who receives rental income of not more than a minimal amount. There is also an exception for members of the military or employees of the intelligence community who rent their principal residence on a temporary basis.
Failure to File Penalties on Informational Returns
The new law substantially increases penalties for failing to timely file informational returns with the IRS. The maximum penalty increased from $50 to $100 per form and calendar year maximum from $250,000 to $1 million.
Pending Legislation
Individual Tax Rates
After December 31, 2010, reduced individual income tax rates are scheduled to revert to their pre-2001 levels, with the top rate rising to 39.6 percent. President Obama wants to permanently extend all of the 2001 individual rate cuts with the exception of the top two brackets. Other lawmakers are calling for a temporary extension of one or two years for all the tax rates.
Tax Extenders
The House and the Senate have both passed their own tax extender bills. Each bill has different extensions of tax incentives set to expire or that have expired.
