The 2010 Small Business Jobs Act: What You Need to Know
The new 2010 Small Business Act includes a wide-ranging assortment of tax breaks and incentives for small business. Here’s a list of the changes Anders believes will be of most interest to our clients:
- Enhanced small business expensing/Section 179 expensing
- 100% exclusion of gain from the sale of small business stock for qualifying stock acquired after date of enactment and before Jan. 1, 2011.
- General business credits of eligible small businesses for 2010 allowed to be carried back five years.
- General business credits of eligible small businesses in 2010 aren’t subject to AMT.
- S corporation built-in gain holding period shortened
- Extension of 50% bonus first-year depreciation
- Special rule for long-term contract accounting
- Boosted deduction for start-up expenditures
- Limitation on penalty for failure to disclose certain reportable transactions
- Deductibility of self-employed health insurance in determining self-employed income
- Cell phones removed from listed property category
For details on each of these, please continue reading.
Enhanced Small Business Expensing. In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000. The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property expensed can include up to $250,000 of qualified real property including qualified leasehold improvement, restaurant and retail improvement property.
100% Exclusion of Gain. Under the new law, the amount of the exclusion is temporarily increased to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after date of enactment and held for more than five years. The new law also eliminates the alternative minimum tax (AMT) preference item attributable for that sale.
General Business Credits Carried Back Five Years. For the first tax year of the taxpayer beginning in 2010, eligible small businesses can now carry back unused general business credits for five years. Eligible small businesses consist of 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 Aren’t Subject to AMT. The new law allows eligible small businesses, as defined above, to use all types of general business credits to offset their AMT in tax years beginning in 2010.
S Corporation Holding Period. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to five years if the fifth tax year in the holding period precedes the tax year beginning in 2011.
Extension of 50% Bonus First-year Depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 and 2011 for certain property.
Special Rule for Long-term Contract Accounting. The new law provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.
Boosted Deduction for Start-up Expenditures. Under the new law, taxpayers can deduct up to $10,000 in trade or 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 threshold.
Limitation on Penalty for Failure to Disclose Certain Reportable Transactions. The new law limits the penalty to 75% of the decrease in tax resulting from the transaction. The minimum penalty is $10,000 for corporations and $5,000 for individuals. For failure to report a listed transaction, the maximum penalty is $200,000 and $100,000, respectively. These changes are retroactively effective to penalties assessed after Dec. 31, 2006.
Deductibility of Health Insurance. Business owners can deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax, according to provisions in the new law.
Cell Phones Removed from Listed Property Category. Cell phones can now be deducted or depreciated like other business property, without onerous recordkeeping requirements.
This brief overview highlights only the most important changes in the new law. If you would like more details about any aspect of the new legislation and how it specifically affects you or your business, please contact your Anders advisor or any member of our Tax Services Group.