Signed into law by President Barack Obama on September 27, the Small Business Jobs Act of 2010 extends a number of existing tax breaks for small businesses and introduces new provisions designed to stimulate business investment and ease tax burdens on business owners.
Among the new tax provisions of the law are the following:
Enhanced deduction for start-ups. For 2010, the deduction for qualified business start-up expenses jumps from $5,000 to $10,000. The deduction that can be claimed is reduced by the amount of the business owner’s total start-up costs that exceeds $60,000, up from $50,000 in 2009.
Self-employment tax deduction for health care costs. In 2010 only, self-employed business owners are allowed to deduct health insurance expenses for themselves and their families when calculating their self-employment tax.
Five-year carryback of general business credits. Starting in 2010, small businesses with annual gross receipts of under $50 million are permitted to carry back general business credits to offset tax liabilities for five years, instead of one year. Businesses may also use these credits to offset alternative minimum tax (AMT) liabilities.
Cell phone deductions. Starting in 2010, cell phones are removed from the category of “listed property,” thus enabling business owners to deduct the cost of cell phones or similar communication devices used primarily for business purposes without having to keep extensive records.
Limits on tax shelter disclosure penalties. Under Code Sec. 6707A, taxpayers who fail to disclose participation in certain tax shelters to the IRS are liable to pay penalties. To reduce the impact of these penalty assessments on small businesses, the maximum amount of these penalties is limited to 75% of the tax benefit received, and caps have been placed on penalties for failure to disclose transactions.
Retirement account changes. Beginning in 2010, participants in 401(k), 403(b), and 457(b) plans are permitted to roll over funds into Roth accounts within their plans. For rollovers in 2010, taxable income may be spread ratably over the 2011 and 2012 tax years. Starting in 2011, taxpayers with a nonqualified annuity are permitted to annuitize a portion of the contract, while the balance continues to grow on a tax-deferred basis, provided that the annuitization period is for 10 years or more, or for the lives of one or more individuals.
The legislation also extends a number of the small business provisions included in previous stimulus packages:
Extension of bonus depreciation. For qualifying property bought and placed in service in 2010, small businesses have the option of depreciating 50% of the adjusted basis of the property. This is an extension of the 50% bonus depreciation provision of the American Recovery and Reinvestment Act (ARRA). Under the new legislation, bonus depreciation is also decoupled from the allocation of contract costs for certain assets.
Enhancement of Section 179 expensing. For 2010, and 2011, small businesses may expense up to $500,000 of Section 179 property, up from $250,000 in 2009. The amount that may be expensed is reduced only if the cost of the Section 179 property placed in service exceeds $2 million, up from $800,000 in 2009. The definition of qualified Section 179 property is temporarily expanded to include certain types of real property, but the expensing amount is limited to $250,000 for this property.
100% exclusion on sales of small business stock. Under ARRA, investors were permitted to exclude 75% of the gain from the sale of certain small business stock acquired and held for more than five years, up from 50% previously. Under the new law, the exclusion of qualified stock purchased between the date of enactment and January 1, 2011 is raised to 100%, and the excluded gain is not subject to the AMT.
Five-year S Corporation built-in gain period. For a C corporation that has been converted to an S corporation, the holding period for appreciated assets to avoid the highest corporate-level tax rate has been further shortened to five years for assets sold beginning in 2011, down from seven years in 2009 and 2010.
Among the provisions to help raise revenue, the new law expands reporting requirements for rental income from certain real property starting in 2011, increases failure-to-file penalties for returns filed on or after January 1, 2011, and raises the amount of corporate estimated tax payments in 2015.
For more information about the Small Business Jobs Act of 2010, contact one of our qualified tax professionals.