Small Business Jobs Act of 2010: Business
Bonus depreciation, enhanced Code Sec. 179 expensing, an increased deduction for qualified business start-up expenses, and Code Sec. 6707A penalty relief are just some of the business incentives in the just-passed small business jobs act (H.R. 5297). Congress passed the $12 billion small business jobs act to encourage investment and business spending. Although the new law carries the moniker “small business,” its provisions impact businesses of all sizes. This letter (email) highlights the business provisions in the new law.
Bonus depreciation. Many businesses took advantage of bonus depreciation which generally expired after 2009. An additional first-year depreciation deduction equal to 50 percent of the adjusted basis was available for qualified property placed in service in 2008 and 2009 (2009 and 2010 for certain longer-lived property and transportation property). The new law extends bonus depreciation for qualified property acquired and placed in service during 2010 (or placed in service during 2011 for certain longer-lived property and transportation property). The new law also includes a special long-term accounting rule for bonus depreciation.
Bonus depreciation on most property will only be available for 2010. Although making the provision retroactive to January 1, 2010 will provide an unexpected windfall for some businesses, Congress hopes that the short deadline of December 31, 2010 for remaining purchases will trigger immediate spending to boost the economy. To qualify, however, the property must not only be purchased but also be placed in service before January 1, 2011, providing a very tight deadline for customized equipment orders.
Code Sec. 280F. The limitation under Code Sec. 280F on the amount of depreciation deductions allowed with respect to certain passenger automobiles is increased in the first year by $8,000 for automobiles that qualify and for which the taxpayer does not elect out of the additional first-year deduction. For 2010, therefore, maximum first-year depreciation for passenger automobiles is $11,060.
Code Sec. 179 expensing. Many businesses have benefited from, and indeed relied on, enhanced Code Sec. 179 expensing, which has been routinely extended in recent years. Before Congress passed the new law, the maximum amount of Code Sec. 179 expensing was $250,000 and the phase-out threshold was $800,000 for qualified property placed in service for tax years beginning in 2010. The new law increases the maximum amount a taxpayer may expense under Code Sec. 179 to $500,000 and raises the phase-out threshold to $2 million. Enhanced Code Sec. 179 expensing is available for tax years beginning in 2010 and 2011.
The new law also allows taxpayers to expense qualified leasehold investment property, qualified restaurant property and qualified retail improvement property. Generally, a qualified leasehold improvement property is an improvement to an interior portion of nonresidential real property subject to certain requirements. Qualified restaurant property generally requires, among other things, that more than 50 percent of the building’s square footage is devoted to preparation of and seating for on-premises consumption of prepared meals. Qualified retail improvement property generally means any improvement to an interior portion of a building which is nonresidential real property if the portion is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public, and meets other requirements. The maximum amount with respect to real property that may be expensed is $250,000. Additionally, the new law provides for limitations on the carryover of qualified real property deductions. Taxpayers may elect to exclude real property from the definition of Code Sec. 179 property.
Start-up expenditures. Business start-up expenses are costs incurred subsequent to a taxpayer’s decision to establish a particular business and prior to the time the business actually begins operating. These costs generally include, but may not be limited to, advertising, salaries and wages paid to employees who are being trained and their instructors, travel expenses incurred in lining up prospective distributors, suppliers, or customers, and salaries and fees paid or incurred for executives, consultants and similar professional services.
The new law enhances the deduction for qualified business start-up expenditures. The amount of start-up expenditures that a taxpayer may elect to deduct increases from $5,000 to $10,000 for tax years beginning in 2010. The new law also increases the deduction phase-out threshold so that the $10,000 is reduced, but not below zero, by the amount by which the cumulative cost of qualified start-up expenses exceeds $60,000.
S corporation built-in gains tax. The Tax Code imposes a corporate-level tax on an S corporation’s net recognized built-in gains attributable to assets that it held at the time it converted from a C corporation to an S corporation, if the gain is recognized during the statutorily defined recognition period. The tax on built-in gains also applies if an S corporation sells, during the recognition period, assets that were acquired in a carryover basis transaction in which the S corporation’s basis in the assets is determined by reference to the C corporation’s basis in the assets.
The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) temporarily shortened the usual 10-year holding period to seven years for dispositions in tax years beginning in 2009 and 2010. The new law further shortens the holding period to five years in the case of any tax year beginning in 2011, if the fifth year in the recognition period precedes the tax year beginning in 2011.
Small business stock. Small businesses need capital, especially when starting out. To encourage investment in small businesses, individuals may exclude 75 percent of the gain from the sale of qualified small business stock held at least five years. The amount of gain eligible for the exclusion by an individual with respect to any corporation is the greater of 10 times the taxpayer’s basis in the stock or $10 million.
The 75 percent amount was put in place by the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) for qualified small business stock acquired after February 17, 2009 and before January 1, 2011. The new law raises the exclusion to 100 percent for qualified stock issued after the date of enactment and before January 1, 2011. The stock must be acquired at original issue from a qualified small business and held for at least five years.
Cell phones and other telecommunications devices. When property is identified by the IRS as “listed property,” it is subject to strict substantiation rules to distinguish business use from personal use. In 1989, the IRS designated cell phones as listed property because, at that time, they were very expensive. Today, cell phones and other telecommunications devices are widely used and inexpensive. In January 2010, the IRS temporarily suspended enforcing the strict substantiation on cell phone use. The new law removes cell phones from the definition of listed property for tax years beginning after December 31, 2009.
Code Sec. 6707A penalty relief. Many small businesses have been hit with harsh penalties under Code Sec. 6707A for failing to disclose participation in a reportable or listed transaction. In recognition of the fact that many small businesses were unaware that the transaction was a reportable or listed transaction, the IRS temporarily suspended collection of the Code Sec. 6707A penalties but the law remained on the books.
The new law reforms the Code Sec. 6707A penalty regime retroactively for taxpayers failing to disclose participation in reportable and listed transactions. Generally, the penalty would equal 75 percent of the reduction in tax reported on the participant’s return as a result of the transaction or that would result if the transaction was respected for federal tax purposes. Under the new law, the maximum penalty for an individual for failing to disclose a reportable transaction is $10,000 ($100,000 in the case of a listed transaction). The maximum penalty for all other taxpayers for failing to disclose a reportable transaction is $50,000 ($200,000 for all other persons).
General business credit. The new law extends the carryback period for eligible small business credits from one to five years. Eligible small business credits are defined for purposes of the new law as the sum of the general business credits determined for the tax year with respect to an eligible small business. An eligible small business 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. The extended carryback provision is effective for credits determined in the taxpayer’s first tax year beginning after December 31, 2009.
Retirement savings. Employers sponsoring retirement plans, such as 401(k) plans, may give plan participants new savings options. Under the new law, if a 401(k) plan has a qualified designated Roth contribution program, a distribution to an employee or surviving spouse from a non-designated Roth account may be rolled over to a designated Roth account under the plan. If an amount is rolled over in 2010, the amount is included ratably in income in equal amounts for 2011 and 2012 unless the taxpayer elects otherwise. The designated Roth provisions in the new law are effective for distributions made after the date of enactment. The designated Roth provisions in the new law also apply to 403(b) and governmental 457(b) plans.
Additionally, the new law allows partial annuitization of a nonqualified annuity contract. Only a portion of an annuity, endowment or life insurance contract may be annuitized while the balance is not annuitized. The annuitization period must be for 10 years or more, or for the lives of one or more individuals. The annuitization provision in the new law is effective for amounts received in tax years beginning after December 31, 2010.
Cellulosic biolfuel producer credit. The Patient Protection and Affordable Care Act of 2010 (PPACA) excluded so-called black liquor, a byproduct of paper manufacturing, from the cellulosic biofuel producer credit. The new law excludes crude tall oil and certain other substances, which are also largely generated as byproducts of paper manufacturing, from the cellulosic biofuel producer credit. The new limitations on the cellulosic biofuel producer credit are effective for fuels sold or used on or after January 1, 2010.
Income on guarantees. The new law overturns a decision by the Tax Court on the source rules for income on guarantees (Container Corp., 134 TC No. 5, CCH Dec. 58,131), which held that since the guarantee fees were treated as payments for services, the foreign parent was not subject to U.S. tax on them. The new law treats them prospectively as interest payments, whose source is determined by the position of the payor.
Federal contactors. The Federal Payment Levy Program allows the IRS to continuously levy on certain payments, such as government payments to federal contractors that are delinquent in their tax obligations. The new law streamlines the process and allows the IRS to issue levies before a collection due process (CDP) hearing in the case of certain federal contractors. The provision is effective for levies issued after the date of enactment.
Information return penalties. The new law overhauls the penalty regime for failing to file information returns. The new law also revises the penalty for failing to furnish a payee statement to provide tiers and caps similar to the tiers and caps for failing to file the information return. Maximum penalties are significantly increased. The revised penalty regime applies to information returns and payee statements required to be filed on or after January 1, 2011.
Corporate estimated tax payments. The new law increases the required payment of estimated tax by large corporations (with assets of at least $1 billion) by 36 percentage points for July, August, September 2015. The next required installment is proportionately reduced to reflect the increase.
If you have any questions about the small business bill please contact our office. Many of the tax incentives are temporary and may require immediate planning. Our office can help you maximize your tax savings from the new incentives.