Signed into law on September 27, 2010, the Small Business Jobs Act has several provisions to provide support to small businesses and incentives to help them grow and hire.
Within the Act are several tax cuts that become effective in 2010, as well as immediate extensions of some of the more successful SBA Recovery Act provisions – most notably that the Small Business Administration’s Recovery Lending activity will be restarted, and that the SBA’s maximum loan size is increased, ostensibly to help small businesses expand and (hopefully) create new jobs.
Tax Cut Provisions
Increase of Section 179 Expensing and Expansion to Certain Real Property – there is an increase in the amount of Section 179 expense, to a maximum of $500,000, subject to a phase-out at $2,000,000 of assets placed in service. This provision is effective for tax years 2010 and 2011.
Extension of Bonus Depreciation – this extension is for the first-year bonus 50% depreciation for qualified property purchased and placed in service in 2010.
Special Rule for Long-Term Contract Accounting – this provision decouples the bonus depreciation from the allocation of contract costs under the percentage of completion accounting method rules for assets with a depreciable life of seven years or less. Bonus depreciation can be claimed without triggering an increase in the contract completion percentage – effective for 2010 tax year.
Increase Vehicle Depreciation Limit – there is an increase to the first-year depreciation limit on vehicles to $11,060 (up from $3,060) for cars, light vans, and trucks placed in service in 2010.
Extension of the Time to Claim Section 179 Election for Computer Software – the time for Section 179 Election for computer software is increased by one year to include any tax year beginning after 2002 and ending before 2012.
Extension of the Time to Revoke Section 179 Election – there is also an increase in the time to revoke any Section 179 Election without IRS consent for the same period, after 2002 but before 2012.
Provisions Helping Small Businesses Access Capital
Exclude 100% of Small Business Capital Gains – For stock in a small business acquired after September 27, 2010 and before January 1, 2011, which is held for more than five years, there has been a temporary increase in the exclusion amount to 100% of the capital gain on the sale. The Act also eliminates this sale as an AMT preference item. In order to qualify, the stock must be from a C corporation whose gross assets do not exceed $50 million and which meets specific active business requirements. The excludable gain is limited to the greater of ten times the taxpayer’s basis in the stock, or $10 million.
Extension of General Business Credit Carryback – normally general business credits can only be carried back for one year. For tax year 2010, the carryback has been increased to five years for small businesses.
General Business Credit Not Subject to AMT – for those same small businesses (sole proprietorships, partnerships, and non-publicly traded corporations with $50 million or less in average annual gross receipts over the prior three years) that use General Business Credits, these credits are not preference items for calculating AMT, for the 2010 tax year.
Shortened Holding Period for S-Corp Built-in Gains – for the tax year 2011, assets subject to the built-in gains tax will have the holding period reduced to five years if the fifth year of the holding period was prior to tax year 2011.
Start-Up Deduction Increased – for tax year 2010, any new start-up business is eligible to deduct up to $10,000 in start-up expenses (up from $5,000), subject to a $60,000 threshold.
Health Insurance is Deductible When Calculating SE Tax – The self-employment tax calculation includes the ability to deduct health insurance costs for business owners and their family members for the 2010 tax year.
Removal of Special Treatment of Cell Phones – previously cell phones were considered “listed property” which removed the ability to depreciate or deduct the cost – under this provision, beginning in 2010 and extending into the future, cell phones can be depreciated or their cost deducted just like other equipment.
Establishment of the Roth 457 – governmental retirement plans (457 plans) can now have a Roth component (Designated Roth Account, or DRAC), just the same as 401(k) or 403(b) plans.
Roth Conversions Allowed in DRAC Plans – as detailed in the article New Opportunities to “Roth”, in-plan conversions are allowed from regular 401(k) and 403(b) plans to their Roth counterparts. The conversion, if completed in 2010, can be eligible for the 2011 & 2012 special tax spread option, but without the ability to recharacterize (which applies to all in-plan conversions, not just 2010).
Partial Annuitization of Non-qualified Annuities Allowed – if you hold a non-qualified annuity outside of a qualified plan or IRA, beginning in 2011 you can now elect to receive a portion of the contract in the form of a stream of annuity contracts and leave the remainder of the annuity to accumulate tax-deferred.
Filing Information Returns
Information Reporting for Rental Property Expense Payments – information returns (1099s) are required, beginning in 2011, of taxpayers who own rental property, for any service providers to whom payments of $600 or more are paid during the year. There is a general exception for folks who are renting their principal residences, including active military members.
Penalties Increase for Failure to File Information Returns – this act includes a provision to increase, beginning in 2011, the penalties for failure to timely file information returns to the IRS. The first-tier penalty increases from $15 to $30, with the calendar year maximum increased from $75,000 to $200,000. Second-tier penalty increases from $30 to $60, with the calendar year maximum increased from $150,000 to $500,000. Third-tier penalty increases from $50 to $100, with the calendar year maximum increased from $250,000 to $1,500,000.
For small filers, the calendar year maximum is increased from $25,000 to $75,000 for first-tier; second-tier increased from $50,000 to $200,000; and third-tier increased from $100,000 to $500,000.
The minimum penalty for failure to file due to intentional disregard is increased from $100 to $250, and the penalty amounts will adjust every five years per inflation.
In addition to the above tax cuts, certain other provisions were included in the Act:
Application of Continuous Levy to Tax Liabilities of Certain Federal Contractors – this provision provides the IRS with the ability to issue levies prior to the standard Collection Due Process hearing for certain federal contractors, as well as to provide the taxpayer with the opportunity for a CDP hearing within a reasonable time after the levy is issued. This is in effect immediately.
Modification of Section 6707A Penalty – IRC Section 6707A requires disclosure of certain “reportable transactions”, such as listed tax shelters, large losses, or confidentiality agreements. This modification for failure to report increases the penalty to 75% of the tax benefit received. This provision takes effect immediately.
State Small Business Credit Initiative (SSBCI) – this provision provides $1.5 billion in grants to states to support small business lending programs. States can apply for the funds to be used for approved programs that leverage private lenders to extend credit to small businesses and manufacturers. Funds are allocated to the states using formulas based on state unemployment data.
Small Business Lending Fund – this provision authorizes the creation of the Small Business Lending Fund, which provides the US Treasury with the ability to purchase preferred stock and other debt instruments from eligible financial institutions (insured depositories, bank and S&L holding companies, and community development funds) with less than $10 billion in total assets. Participating institutions will pay a 5% dividend rate on the preferred stock, and the rate can be reduced to as low as 1% if the bank demonstrates a 10% increase in small business lending compared with the previous four quarters. This dividend rate will increase to 7% of the bank does not increase its small business lending within two years.