Small Business Jobs Act of 2010: Individual Tax Incentives

You may have heard that Congress recently enacted a new small business jobs act (the Small Business Jobs Act of 2010). The new law is generally targeted to businesses but also includes some provisions impacting individuals, especially individual retirement savings, which should not be overlooked. Some of the provisions are temporary; others are permanent, so careful planning is very important to maximize your tax benefits. This letter (email) describes the provisions in the new law impacting individuals.

Retirement savings.  Individuals have a variety of savings vehicles for retirement. Many employers sponsor 401(k) plans, which are defined contribution plans where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions such as, matching the employee’s contributions up to a certain percentage.  Public schools and tax-exempt organizations may sponsor 403(b) plans and government employers may sponsor 457(b) plans, both of which are similar to 401(k) plans.

A plan may permit an employee to designate some or all of his or her elective contributions under the plan as designated Roth contributions. Under the new law, if a Code Sec. 401(k), 403(b) or governmental 457(b) 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 new law also adds governmental 457(b) plans to the plans that are permitted to include a designated Roth program.

Additionally, the new law allows partial annuitization of a nonqualified annuity contract. Holders of nonqualified annuities (annuity contracts held outside of a tax-qualified retirement plan or IRA) may elect to receive a portion of the contract in the form of a stream of annuity contracts, leaving the remainder of the contract to accumulate income on a tax-deferred basis. Under the new law, 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.

Rental property expense payments.  Congress has enacted a number of provisions to enhance tax filing accuracy. The new small business act continues this trend by imposing information reporting requirements on certain recipients of rental income. Rental income recipients making payments of $600 or more to a service provider will file an information return with the IRS and the service provider.  Service providers for purposes of the new law include electricians, painters, roofers, and others. The new rental property expense information reporting requirement applies to payments after December 31, 2010.

The new law permits the IRS to exclude individuals for whom reporting would be a hardship. Individuals who receive only minimal amounts of rental income may also be excluded from the requirement. Additionally, certain members of the military and intelligence services are also excluded.

Keep in mind that the new rental property expense information reporting requirement is distinct from another new information reporting requirement. The Patient Protection and Affordable Care Act of 2010 generally expanded reporting requirements to include a business’ payments related to goods and other property, and payments to most corporations. The expanded information reporting requirements under the PPACA apply to payments after December 31, 2011.

To further complicate reporting, the IRS has proposed that many business purchases made with credit or debit cards would be exempt from the new reporting requirement because they are already reported by banks and other payment processors. Congress has also considered excluding some small businesses from the expanded information reporting requirements. Our office will keep you posted of developments.

Information return penalties. Along with imposing additional information reporting requirements, the new law revises the penalties 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.  The new penalty regime applies to information returns and payee statements required to be filed on or after January 1, 2011.

Self-employment tax.  Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.  Self-employed individuals may be able to deduct premiums paid for medical and dental insurance and qualified long-term care insurance for the taxpayer, his or her spouse, and dependents. However, for self-employment taxes, the self-employed individual cannot deduct any health insurance costs.

The new law allows the deduction for income tax purposes for the cost of health insurance in calculating net earnings from self-employment for purposes of self-employment taxes.  The provision is temporarily and only applies to the self-employed taxpayer’s first tax year beginning after December 31, 2009.

Cell phones and other telecommunications devices.  If your employer provides you with a cell phone or other telecommunications device for work-related calls, emails, and so on, the IRS generally treats these items as “listed property.” Employer-provided listed property subjects the employer and employee to strict IRS substantiation rules. The new law removes cell phones from the definition of listed property for tax years beginning after December 31, 2009.

If you have any questions about the new law, please contact our office.