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The Small Business Jobs Act of 2010 was signed into law on September 27th. Though many of the Act’s provisions focus on small businesses, the new law also contains tax incentives that apply to all business owners as well a their retirement savings incentives. The Act enhances and extends a number of tax incentives that were originally included in 2008 Stimulus Act and the 2009 Recovery Act. Also, it is important to note that some of these provisions offer taxpayers a very small window of opportunity, requiring action before the end of the year to take advantage of the savings. |
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INCENTIVES FOR ALL BUSINESSES Bonus Depreciation Retroactive to January 1, 2010, the Act extends the 50-percent first-year bonus depreciation that previously expired at the end of 2009, giving businesses an important opportunity to reduce their tax burden. The bonus depreciation is available for qualifying property placed in service on or before December 31, 2010, and for certain longer production period property placed in service on or before December 31, 2011. Of note to contractors looking to benefit from this opportunity, the Act separates bonus depreciation from allocation of contract costs under the percentage-of-completion accounting method rules for assets with a depreciable life of seven years or less. Therefore, contractors can now take advantage of bonus depreciation even when the contracted work is not completed within the same year. The Act also increases the first-year depreciation limitation allowed under Code Sec. 280F for certain passenger vehicles when the taxpayer does not opt out of the additional first-year deduction. The $8,000 increase means that the maximum first-year depreciation for qualifying passenger automobiles in 2010 is $11,060. Expanded Code Sec. 179 Expensing The Act further expands the availability of Code Sec. 179 expensing to give many larger businesses the option of writing off the cost of qualifying capital expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. The Act increases the maximum deduction from $250,000 to $500,000 and the investment limit from $800,000 to $2 million for tax years beginning in 2010 and 2011. Thereafter, the expensing and investment limits are scheduled to revert to their pre-2008 Stimulus Act levels of $25,000 and $200,000, respectively, not indexed for inflation. This popular provision allows eligible taxpayers to claim an expense deduction on the purchase price of qualifying Code Sec. 179 property, such as furniture, fixtures, machinery and equipment. The Act also temporarily expands the definition of qualifying property to include qualified real property, such as qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. Up to $250,000 of the total $500,000 Sec. 179 expense can be qualified real property, and is subject to carryover limitations. Shorter Holding Period for S Corp Built-In Gains The new law also further shortens the holding period for S Corp built-in gains from seven years down to five for dispositions in any tax year beginning in 2011, if the fifth year in the recognition period precedes the year beginning in 2011. This provision is designed to benefit corporations that were initially C Corps, but elected to be taxed as S Corps and had net built-in gains when they made the S Corp election. A built-in gain is the difference between the fair market value of an asset and its tax basis at the time the election is effective. The 2009 Recovery Act temporarily shortened the traditional 10-year holding period to seven years for dispositions in tax years beginning in 2009 and 2010. Cell Phones Excluded from Code Sec. 280F Requirements In addition, the Act removes cell phones, along with other similar devices provided to employees for business purposes, from the listed property classification. This action allows the fair market value of the personal use of such devices to be excluded from gross income, and frees such devices from the strict substantiation requirements of use as well as the additional restrictions placed on depreciation deductions. SMALL BUSINESS INCENTIVES In addition to provisions designed to improve access to credit, the Act includes some tax incentives targeted to help small businesses. Extended Small Business Credit Carryback The Act extends to five years the carryback period for qualifying small business credits determined in the taxpayer’s first tax year beginning after December 31, 2009. Eligible small business credits are the sum of the general business credits (e.g., investment tax credits, R&D credits, work opportunity credits) each tax year for a qualifying small business. As defined in the Act, a qualifying small business is a corporation without publicly traded stock, a partnership, or a sole proprietorship, and has average annual gross receipts of $50 million or less for the prior three tax year periods. The credit can be used to offset both the taxpayer’s regular and AMT liabilities. Exclusion of Gain on the Sale of Qualified Small Business Stock The 2009 Recovery Act increased the exclusion of gain on the sale of certain small business stock held for more than five years from 50 percent to 75 percent for stock issued after February 17, 2009 and before January 1, 2011. The new law raises the gain exclusion to 100 percent, effectively eliminating all capital gains taxes on qualifying small business investments, for stock acquired after September 27, 2010 and before January 1, 2011. Relief for Penalties Under Code Sec. 6707A The Act provides a measure of relief to certain taxpayers liable for penalties assessed after December 31, 2006 under Code Sec. 6707A for failing to disclose participation in certain tax shelters. The retroactive date creates a possible refund opportunity for those taxpayers who may have already paid penalties that the IRS has not otherwise held in abeyance. Under the new law, a taxpayer that fails to disclose participation in a reportable 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 penalty cannot exceed: • $10,000 for an individual taxpayer who fails to disclose a reportable transaction, or $50,000 for all other taxpayers; or • $100,000 for an individual taxpayer who fails to disclose a listed transaction, or $200,000 for all other taxpayers. The Act also sets a minimum penalty of $5,000 for an individual taxpayer that fails to disclose a reportable transaction or a listed transaction, or $10,000 for all other taxpayers. Enhanced Start-Up Expense Deduction For 2010 only, the Act increases the deduction limit for qualified trade or business start-up expenses from $5,000 to $10,000. The $10,000 deduction is reduced (but not below zero) by the amount of total start-up costs that exceeds $60,000. Qualifying trade or business start-up expenses include costs related to investigating, creating, or acquiring an active trade or business. Qualifying costs are not directly related to capital or equipment.
Starting in 2010, the Act allows self-employed individuals to deduct health insurance costs in calculating net earnings from self-employment for the purposes of determining self-employment taxes. RETIREMENT SAVINGS INCENTIVES FOR INDIVIDUALS The Act offers taxpayers some new options for retirement savings, including a first-time opportunity that allows participants in 401(k) and other plans to roll over existing balances to certain Roth accounts. 401(k) Rollovers to Roth Accounts Effective immediately, the Act allows 401(k), 403(b), and 457(b) plan participants to roll over certain pre-tax account balances into designated Roth accounts within their plans. With an exception for any after-tax contributions, this rollover will be taxable. Unless the taxpayer elects otherwise, any amount rolled over in 2010 will be included ratably in income in 2011 and 2012. 457(b) Plan Deferrals Starting in 2011, the Act allows participants of eligible state and local government 457(b) plans (but not plans of not-for-profit organizations) to make deferred contributions to designated Roth accounts. Annuitization The Act allows an owner of a nonqualified annuity contract to claim some of the contract’s benefits as a separate annuity payment stream without affecting the balance of the contract, which would continue to accumulate earnings on a tax-deferred basis. The annuitization period must be for 10 years or more, or for the lives of one or more individuals. The provision applies to amounts received in tax years beginning after December 31, 2010. ADDITIONAL REVENUE OFFSETS AND PENALTY INCREASES In addition to the new retirement savings incentives, which will produce some tax revenue, the Act includes some notable new requirements and penalty increases. Rental Property Expense Reporting Under the Act, certain individuals who receive rental income from real property will need to start filing information returns with the IRS to report certain payments to service providers. This new information reporting requirement is effective for payments made after December 31, 2010, and is triggered if the individual receiving rental income pays a service provider $600 or more in any tax year. Certain exceptions and exemptions apply. Increased Penalties for Failure to File Information Returns The Act significantly increases the penalties assessed on taxpayers who fail to file information returns with the IRS in a timely manner. The Act also increases the penalties for failing to file information returns to payees. The minimum penalty for each intentional instance increases from $100 to $250 effective for returns required to be filed on or after January 1, 2011. For qualified small filers with average gross receipts less than $5 million, the calendar-year maximum increases as follows: • from $25,000 to $75,000 for the first-tier penalty • from $50,000 to $200,000 for the second-tier penalty • from $100,000 to $500,000 for the third-tier penalty Levies for Cases Involving Federal Contractors Effective immediately, the Act allows the IRS to issue levies before a collection due process (CDP) hearing in cases that involve particular federal contractors. CONCLUSION This short summary is by no means a comprehensive review of the new law. Look for more details in the months ahead about how these and other provisions of the Act may provide you and your business with considerable opportunities to maximize tax savings or contact McConnell & Jones’ Small Business Solutions Team to ensure that you and your business receive the maximum possible benefit of these provisions. |
