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The Right Size Accounting Firm
919 Eastern Avenue
Malden, MA 02148
420 Bedford Street
Lexington, MA 02420
7 Main Street
Atkinson, NH 03811
T: 781-321-6065
F: 781-321-7747
On September 27, President Obama signed into law the Small Business Jobs and Credit Act of 2010, which includes a number of important tax breaks and incentives for business. Several of these provisions apply to the 2010 tax year – which means that if you own a business, now is the time to evaluate the new rules and to use those that apply to your advantage.
Here is a brief overview of the tax changes in the new law:
Enhanced small business expensing (Section 179 expensing). To help small businesses quickly recover the cost of capital outlays, small business taxpayers can elect to write off these expenditures in the year they are made instead of recovering them through depreciation. Under the old rules, taxpayers could generally expense up to $250,000 of qualifying property—generally, machinery, equipment and software—placed in service during the tax year. This annual limit was reduced by the amount by which the cost of property placed in service exceeded $800,000. Under the Small Business Jobs Act, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment limit to $2,000,000.
The new law also makes certain real property eligible for expensing. Thus, for property placed in service in any tax year beginning in 2010 or 2011, the $500,000 amount can include up to $250,000 of qualified leasehold improvement, restaurant and retail improvement property.
Extension of 50% bonus first-year depreciation. Before the new law was enacted, Congress already allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property placed in service in 2008 or 2009 by permitting the first-year write-off of 50% of the cost. The Small Business Jobs Act extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (as well as 2011 for certain aircraft and long production period property).
Boosted deduction for start-up expenditures. The new law allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.
100% exclusion of gain from the sale of small business stock. Ordinarily, individuals can exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). This percentage exclusion was temporarily increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the Small Business Jobs Act, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after September 27, 2010 and held for more than five years. In addition, the new law eliminates the alternative minimum tax (AMT) preference item attributable to such sales.
General business credits of eligible small businesses for 2010 get five-year carryback. Generally, a business's unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under the Small Business Jobs Act, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years instead of just one. Eligible small businesses are sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.
General business credits of eligible small businesses not subject to AMT for 2010. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The Small Business Jobs Act allows eligible small businesses to use all types of general business credits to offset their AMT in tax years beginning in 2010.
Deductibility of health insurance for the purpose of calculating self-employment tax. The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.
Cell phones no longer listed property. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.
S corporation holding period for appreciated assets shortened to five years. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years or face a built-in gains tax at the highest corporate rate of 35%. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.
New tax break for long-term contract accounting. The Small Business Jobs Act provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation in 2010 is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.
Limitation on penalty for failure to disclose certain reportable transactions. The new law generally limits the penalty to 75% of the decrease in tax resulting from the transaction, retroactively to penalties assessed after Dec. 31, 2006. Minimum and maximum penalties apply.
Revenue raisers. Of course, these tax breaks come at a cost. To mention a few of these unfavorable provisions, information reporting will generally be required for rental property expense payments made after Dec. 31, 2010, and increased information return penalties will be imposed.
Keep in mind that the above information describes only some of the Small Business Jobs Act’s provisions. If you would like more details about any aspect of the new legislation, or need help in taking advantage of its tax benefits, please do not hesitate to call us.
Meanwhile, a host of expired and expiring tax benefits await Congressional action, ideally before year-end.
Research & experimentation credit made permanent? This tax credit expired on December 31, 2009. However, in his Fiscal Year 2011 budget proposal, President Obama called for making the credit permanent and retroactive to January 1, 2010. He also proposed simplifying the credit, and expanding it by about 20%.
In an earlier report to the Senate Finance Committee, the U.S. Government Accountability Office (GAO) also made several recommendations about expanding the R&E credit, clarifying definitions of qualifying expenses, and providing additional guidance in the form of regulations. A bill that would make the credit permanent (called the 21st Century Investment Act of 2010) is currently pending in the House of Representatives.
Tax benefits scheduled to expire. If Congress fails to take action before year-end, a number of provisions from the Economic Growth and Tax Relief Reconciliation Act of 2001(aka, the “Bush tax cuts”) are set to expire on December 31, 2010. These include:
- Personal Income Tax Rates - the 10% tax bracket disappears and the top four personal income tax brackets would revert to 28%, 31%, 36% and 39.6%.
- Dividends - would no longer be taxed at 15%; they would be taxed at the rates applicable to ordinary income.
- Long Term Capital Gains - would be taxed at a maximum rate of 20%
- Tax free distributions from Individual Retirement Plans for charitable purposes would expire
- Deduction for Educator expenses would expire
- "Above the Line" Tuition and Fees Deduction would expire
- Increased Standard Deduction for Real Estate taxes would expire
- Itemized deduction for State & Local General Sales taxes would cease
- The Repeal of the Estate Tax would expire, reinstating the top rate of 55% and $1m unified credit exemption
Again, if you would like to discuss how the above information effects your personal or business tax situation, please feel free to contact us.
RBB is uniquely suited to handle assignments from many different types of businesses. Our size and structure allows us the flexibility to deliver superior service from a team assigned to your business and headed by a partner of the firm, and yet remain within your established budget parameters for either a specific project or an ongoing engagement. To contact us, call the above number or visit our web site - www.rb-b.com.
