Small Business Jobs and Credit Act of 2010 Includes Beneficial Tax Provisions to Fuel Business Growth

On Monday, September 27, 2010, President Obama signed into law H.R. 5297, the Small Business Jobs and Credit Act of 2010.   In addition to creating the Small Business Lending Fund Program which aims to increase the availability to credit for small businesses, the Act includes several significant tax provisions which aim to encouragement investment, promote entrepreneurship and provide small business relief. (Also see fellow AllBusiness.com blogger Sam Thacker’s 9/26/10 post “President Obama Signs Small Business Jobs Bill” in which he explains the Bill’s impact on SBA loans)  A summary of the Act’s tax incentive provisions follows:

Increase in Section 179 Expense Deduction:  The Act increases the Section 179 expense deduction limit to $500,000 for tax years beginning in 2010 and 2011.  Additionally, the Act increases the phase-out threshold to $2 million.  This means that a business may be allowed to take a deduction of up to $500,000 on each of their 2010 and 2011 tax returns for the cost of “qualifying property” which is “placed in service” in the same year.  A dollar-for-dollar reduction in the Section 179 deduction is required once the cost of the qualifying property exceeds $2 million.  Under current law, the Section 179 expense deduction was limited to $250,000 with a phase-out of $800,000.  (For more on the Section 179 expense deduction see IRS Form 4562, the form’s instructions, and IRS Publication 946.  Also, see fellow AllBusiness.com blogger Manny Davis’ 9/17/10 post “Current Expenses VS. Capital Expenditures: Tax Implications & Rules”)

Bonus Depreciation Extension:  The fifty percent (50%) first-year special depreciation allowance provision (i.e., “bonus depreciation”) that had expired at the end of 2009 is now extended through December 31, 2010 and made retroactive to January 1, 2010 by the Act.  Bonus depreciation on property with a recovery period of 10 or more years (e.g., certain long-lived assets and transportation property) is extended through 2011. Because bonus depreciation is allowed in addition to the Section 179 expense deduction, these two provisions in tandem can create a significant tax deduction for businesses making capital investments. (See IRS Form 4562, the form’s instructions, and IRS Publication 946 for more on bonus depreciation)

Increase in Dollar Amount of the Deduction for Start-Up Expenditures:  The Act doubles the amount of start-up expenditures that may be deducted in the year incurred from $5,000 under current law, to $10,000 for tax years beginning in 2010.  Additionally, the phase-out limitation is increased from $50,000 to $60,000.  Therefore, businesses that make the election to expense qualifying start-up expenditures (made on IRS Form 4562) may benefit from an additional deduction of up to $10,000. (Note that taxpayers that fail to make the requisite election are required to capitalize start-up expenditures and are only able to deduct these costs pro-rata over 180 months.)

Qualified Small Business Stock Capital Gain Exemption:  The Act introduces a 100% capital gain exemption on the disposition of Qualified Small Business (“QSB”) stock.  This exemption applies to QSB stock acquired after September 27, 2010 and before December 31, 2011.

Extension of Carryback Period for General Business Credit of Unincorporated Businesses:  For tax years beginning in 2010, the Act extends the carryback period of the general business credit (“GBC”) of certain unincorporated taxpayers from one year to five.  The extended carryback period is available only to businesses structured as sole proprietorships, partnerships and non-publicly traded corporations with average annual gross receipts over the past three years of less than $50 million.  While a tax deduction is beneficial in that it reduces the amount of income subject to tax, a tax credit provides an even larger benefit because it reduces the actual tax liability of a business on a dollar-for-dollar basis.  Additionally, because the GBC can be carried back for five and/or carried forward for twenty years, the credit can reduce prior and future year taxes.  The Act also allows these businesses to use their GBC to offset their Alternative Minimum Tax.  Note that the GBC of a “pass-through” entity (e.g., a partnership, limited liability company, or S corporation) will flow up to the entity’s owners.  However, an owner of a flow-through business will only be able to take the credit if the owner meets the qualifying test themselves.

Lifting of Substantiation Requirements and Depreciation Limits on Employer Provided Cell Phones:    Under the current law, cell phones fall into a category of depreciable assets referred to as Section 280F “listed property”.   The Section 280F rules apply to certain assets, such as luxury vehicles, computer equipment, cell phones and other assets which lend themselves to personal use and which the IRS treats more strictly because of the potential for abuse.  In general, the depreciation deduction on Section 280F listed property is limited unless certain substantiation (documentation) and use requirements are met.  The Act removes the substantiation requirement that exists under current law related to employer provided cell phones.

Limitation on Listed Transaction Penalties:  The Act revises the calculation of the penalty for failing to report listed transactions.  Under the Act, the penalty will be calculated as 75% of the tax benefit from the transaction, with a corporate maximum of $200,000 and an individual maximum of $100,000.

Health Care Expense Deduction for Self Employed:  The Act introduces a new deduction against self-employment income for the health insurance expense incurred by self-employed individuals. The provision will allow self-employed individual to deduct the cost of health insurance in 2010 for themselves and their family members in calculating their self-employment taxes. 

Commentary:  While the Small Business Jobs and Credit Act of 2010 contains tax provisions that may benefit businesses regardless of their size, certain provisions, such as the GBC carryback and capital gain exemption on dispositions of QSB stock, will help small businesses in particular.  The Section 179 deduction and bonus depreciation provisions can provide a significant deduction for businesses that increase their capital spending, but businesses must make their purchases soon to benefit from these provisions.  Note also, that the bill contains other tax provisions which are not covered in this post, such as the beneficial treatment on certain S corporation conversions and provisions impacting retirement accounts.  Additionally, keep in mind that the above is only an overview and certain of the provisions may be further impacted by other limitations set by the tax laws.  For instance, the Section 179 expense deduction is also limited by the amount of taxable income of the business claiming the deduction, and where property is placed in service by a flow-through entity (partnership, limited liability company, S corporation), the taxable income limitation must be calculated at both the entity level and again, at the owner level (the partner, LLC or S corporation owner who ultimately takes the Section 179 deduction).  Finally, note that the state tax laws may differ from federal tax law. For instance, some states have “decoupled” from the federal law and do not allow the federal bonus depreciation to enter into the calculation of state taxable income, while other states may not adopt new federal tax law changes until a subsequent year.  The point is, the tax laws are indeed complex, therefore, readers should consult their own CPA or tax advisor to gain a complete understanding of how these tax provisions may benefit their business.

 

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The information contained in this post of the AllBusiness.com-Business Tax Advisor blog is not intended to be, and should not be construed as legal, accounting or tax advice to the reader. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. Readers interested in the subject this post should contact their personal tax advisor to discuss the potential application of the subject matter to their particular facts and circumstances.

IRS Circular 230 Notice. The information contained in this post is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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 Sylvia F. Dion, MPA, CPA is a tax consultant based near Boston, Massachusetts.  She can be reached at sylviadion@verizon.net