On 9/16/2010 the US Senate passed the Small Business Relief Act of 2010, and the US House passed the equivalent bill on 9/23/2010 and sent it to the President for his signature making it law (expected 9/24/2010 or 9/27/2010). I attended a tax update class on this on 9/24/2010. The no-doze medication is finally wearing off.
As you will hear bits and pieces about this from many sources, this brief recap gives my clients the changes that I have picked out as having an immediate effect on 2010 planning in summary fashion. Business owners should be aware of these things. As always, I bring an awareness of tax law to my clients, but specifics should also be discussed with your CPA firm before any plans are made.
I am not at all sure why it is called the Jobs Act.
There are a number of provisions in the bill that will affect small businesses, but sadly, the removal of the ridiculous 1099 requirement in 2012 is NOT part of the bill. In fact the rule has gotten worse-reporting has been extended to rental property owners in 2011, and the penalty per incorrect or missing 1099 has been increased from $50 to $100, but limited to the benefits received.
Bonus Depreciation: The 50% bonus depreciation provisions that originally expired at the end of 2009 have been extended through 12/31/2010.
Section 179: Super Section 179 limits of $250,000 had originally been extended through 12/31/2010. The Act increases Section 179 to $500,000 and extends it through 12/31/2011. The Act also increases the phase-out limit from $800,000 to $2,000,000.for 2010 and 2011. Section 179 will drop to $25,000 in 2012 according to the Act.
Section 179 Real Property: In possibly the most significant tax change of all, Section 179 for 2010 and 2011 is now allowed for up to $250,000 for qualified leasehold improvements; qualified restaurant property and qualified retail property. This effectively converts a 39 year life asset to an expense for 2010 or 2011. And if a taxpayer spends more than $250,000 in 2010 the excess may be carried over and deducted in 2011. This carryover will not apply to 2012.
Amended Section 179: The ability to amend a return to invoke, revoke or modify Section 179 has been extended through 12/31/2011.
Startup Costs: The expensing provision for startup costs has been increased from $5,000 for 2010 to $10,000 for 2010 only.
Cell Phone Listed Property: For years beginning after 12/31/2009 cell phones used primarily for business purposes will no longer be considered listed property, meaning a logbook of business usage will no longer be required. You were keeping a log, weren’t you?
Self Employment Income
For 2010 only, the self employed health insurance deduction will be deductible against self employment income.
Alternative Minimum Tax
The general business credit in 2010 will be allowable against alternative minimum tax and carry back 5 years for 2010 only.
S Corporation built in gains realized in 2011 (only) will not be subject to the tax if the S Corporation has been in existence for at least 5 years before 2011. 2009 and 2010 holding periods are still 7 years and 2012 holding periods will revert to 10 years. Six or seven year old S corporations getting ready to sell old built in gain assets need to hold off until January 1st of 2011.
Small business stock purchased after 9/24/2010 and before 1/1/2011 and held for at least 5 years will be eligible for a 0% tax rate upon sale.
457 retirement accounts (federal & state employees) would be eligible for rollover to Roth IRAs after 12/31/2010 and similar rollovers would be allowed to employer sponsored Roth’s from certain qualified plans.
Federal agencies are called on to solicit bids from small businesses and federal contracting requirements are amended to encourage small businesses to bid for federal contracts.
SBA Loans – not applicable to most – just an FYI
Small Business Lending Fund: The bill creates a Small Business Lending Fund to address ongoing effects of the financial crisis on small businesses by allowing the Treasury Department to make capital investments in eligible financial institutions to increase credit available for small businesses. Independent community banks may participate in a new $30 billion lending fund on the condition they make loans to small businesses and meet other requirements.
Increased Participation Limit for Section 7(a) business loans: The bill also increases the limit on the government’s participation in so-called Section 7(a) small business loans to 90% from 75% or 85% for all Section 7(a) loans regardless of loan amount.
Still awake? 🙂
Discussion after release to my clients this AM:
Where will the self-employed health insurance deduction be taken? We don’t know yet where on the forms the changes will be made. Could be simply deducted on Schedules C and F and E, but it’s my guess that the self-employed health insurance deduction will remain on page 1 of Form 1040 and that Schedule SE will have a line added on it for the deduction prior to calculating self-employment tax. That way the IRS can easily keep track of how much it really costs the Social Security and Medicare funds.
What does this really mean to me as an owner of a typical small business? Like I said, I don’t know why it is called the Jobs Act by Democrats seeking re-election. Except that this increase in the amount of depreciable assets that can be written off might cause a few small businesses to buy extra furniture and equipment in the coming months, and the manufacturers of that furniture and equipment might do some hiring, I don’t see how this helps. How many small businesses can afford to increase their fixed asset purchases from $250k to $500k this year? If they do, might they decide to buy more equipment and lay off workers to be able to afford the splurge?
If it is true that this helps (it will help equipment manufacturers to some extent), when the write off limit drops from $500k to $25K after next year, companies will stop buying and all gains will be lost. Only a permanent increase in depreciation write-offs would help. This is largely an election year political move.
How it could help you?
- You might be able to purchase more stock in your small business between now and the end of the year, and after 5 years be eligible to sell it with no tax on the gain.
- You can write off any leasehold improvements you make in your leased offices this year and next.
- Maybe, just maybe, you will have a better chance to win more federal contracts.
- You no longer have to worry about losing all of your cell phone expenses as a deduction if you are audited.