By Claude Titche
Oct. 21, 2010
The Small Business Jobs Act of 2010 includes a number of very important tax provisions for all businesses, not just small businesses. The bill provides $12 billion in tax breaks coupled with a $30 billion lending fund designed to encourage enhanced lending activities by small community banks.
The Act also contains a number of revenue generators to meet the Congressional rule of revenue neutrality. In an effort to fund the tax benefits provided, the dollar cost of a number of penalties increases. Reporting requirements for rental property owners are expanded and the ROTH conversion option is extended to other non-IRA retirement accounts. This may seem counter-productive in the long term because the growth in the account will be tax free after five years. However, to benefit from the ROTH conversion, current tax must be paid on the conversion amount.
The $12 billion in tax breaks include:
For companies that are currently profitable, there is an increased Section 179 expensing election. A maximum cost of $500,000 can be immediately expensed if the company remains profitable and has current year acquisitions of under $2 million. The deduction phases out for taxpayers with fixed asset additions between $2 and $2.5 million. Purchases of fixed assets anytime during 2010 and 2011 qualify.
Section 179 has been expanded to include qualified real property purchased in 2010 and 2011. Qualified real property includes leasehold improvements, restaurant and retail property. No carry over of basis to years after 2011 is allowed.
For companies that are not currently profitable and have large current acquisitions, or would like to generate a net operating loss, the now extended 50 percent bonus depreciation deduction can generate cash flow for a company. For example, the purchase of a new five-year asset at a cost of $100,000 can generate a first year depreciation deduction of up to $70,000. The bonus depreciation deductions can be generally carried back up to five years to obtain refunds of previously paid tax.
Eligible small business credits under Section 38 can now be carried back five years rather than one year. The credits can also be utilized for both regular tax and the Alternative Minimum Tax. This is a major change that will allow many more taxpayers to utilize credits that were carried forward because of the AMT liability. Section 38 credits include the research credit, work opportunity and low income housing credit among others. Many companies that have eligible research and development activity have forgone the credit because of limitations that have now been removed. An eligible small business is defined as:
1. A corporation that is not publically traded, partnerships and sole proprietorships and
2. Average annual gross receipts for the prior three-tax year period of less than $50 million.
Other provisions in the Act include:
1. The ability of self employed individuals to deduct the cost of health insurance in the calculation of self employment tax.
2. For new corporations formed after Sept. 27, 2010 until Dec. 31, 2010 there is a 100 percent exclusion of the gain if sold after a five year holding period. This is an increase in the exclusion from 75 percent. This has a very short time frame under current legislation.
3. Start up expenses deductible under Section 195 increase from $5,000 to $10,000 for tax years beginning in 2010 or 2011. The phase out limitation increases from $50,000 to $60,000.
To pay for the benefits granted in the legislation, new information reporting on rental operations will be required for payments made after Dec. 31, 2010. Taxpayers will be required to file information returns (Form 1099) for payments in excess of $600 per year to service providers. For example, if a plumber was paid $1,000, a Form 1099 would be required. There will be some IRS defined minimum rental amounts and hardship provisions that have not yet been defined.
The penalty fees for failure to timely file information returns and failure to furnish a payee statement will increase. Both the per item fee increases as well as the yearly maximum penalties increase. The minimum penalty for a failure to file due to intentional disregard increases from $100 to $250. These penalties may become much harder to have abated than in the past since balancing the budget is achieved through the receipt of these anticipated penalties.
The Small Business Jobs Act of 2010 contains many tax savings opportunities for businesses of all sizes. If you remain compliant and current with the various required filings, the benefits of the legislation will generally outweigh the costs.
Claude A. Titche III is a partner at Beene Garter LLP, West Michigan’s largest independently owned accounting and consulting firm. Located in downtown Grand Rapids, Claude can be contacted at ctiche@beenegarter.com.