Small Business Jobs Act Signed Into Law
September 28, 2010

On Monday, September 27, 2010, President Obama signed into law the Small Business Jobs Act, which is designed to stimulate the economy by providing incentives aimed at small to medium sized businesses. The bill's main focus is on a number of small business lending and tax incentives. Following is a summary of key items within the law:

Key Small Business Tax Provisions

The new law provides a number of tax incentives targeted predominately at small businesses:

Extension of bonus depreciation for 2010

The Act extended the first year 50% bonus depreciation allowance for certain types of assets placed in service in 2010. Previous law, providing for this extra depreciation, had expired at the end of 2009. This provision will allow businesses to take additional depreciation in the first year of 50% of the cost of assets placed in service in 2010. Bonus depreciation is in addition to the normal depreciation schedule that is applied to assets.  The rules on who can take the bonus depreciation and which assets qualify have not changed from previous law. While this is a significant benefit, it is important to point out that this only an acceleration of depreciation expense that would otherwise be taken in future years.    

Enhanced up-front expensing of qualifying capital asset purchases in 2010 and 2011

The new law enhances the Section 179 expensing for assets placed in service in 2010 and 2011. This tax break allows companies to write off at least a portion of certain capital expenditures during the year acquired, rather than capitalizing the entire cost and depreciating the asset over time. Specifically, the new law allows taxpayers to expense the first $500,000 of assets placed in service in 2010 and 2011 (instead of the current $250,000 limit). Taxpayers are eligible for the $500,000 expense as long as total capital expenditures of the business are less than $2 million.  Beyond this level, the $500,000 expense is reduced dollar-for-dollar.   The benefit of this provision would, therefore, be fully phased out if capital expenditures for the year reach $2.5 million.

Without this legislation, the Section 179 expensing amount in 2010 was $250,000, limited to $800,000 of asset purchases during the year.  The expense was to be further reduced in 2011 to $25,000 on a $200,000 asset limitation.

Section 179 and bonus depreciation combined

The Section 179 expense increase, along with the 50% bonus depreciation extension, can be combined to provide tax deductions on qualifying assets that equal the majority of the asset cost for eligible purchases.  For example, assume that a business places $2 million of qualifying assets in service in 2010. Under Section 179, the business would be able to expense $800,000 of the assets' cost. In addition, the business would be able to claim bonus depreciation equaling $600,000 (50% of the remaining asset cost, after reducing it for Section 179 expensing).  Thus, the first year deductions in 2010, in this example, would be 70% of the asset cost.  Further, the remaining 30% of asset cost would be eligible for the normal depreciation amount on the remaining amount, as yet another allowable depreciation deduction in 2010.

Increased amount of limitation on depreciation deductions allowed for automobiles

Automobiles used in a trade or business, like other capital assets, are allowed to be depreciated over a specified life. Unfortunately, there are additional dollar amount limitations imposed on the depreciation expense otherwise allowed. Prior to the Small Business Jobs Act, the dollar limitation for the first year of depreciation was $3,060. The Act increases the first year limitation amount to $11,060 for qualified automobiles.

Reduction in S corporation built in gain period to five years

A C corporation that converts to an S corporation generally must hold appreciated assets for a number of years following the conversion date. If it fails to hold these assets for that period, the S corporation must pay an additional tax on the appreciation (up to the conversion date) at the highest corporate tax rate in force at the time of the sale. Prior law required the S corporation to hold such assets at least 10 years in order to avoid this tax.  Legislation in 2009 had already reduced the 10 year period to 7 years for 2009 and 2010. The new law further shortens the time frame from 7 years down to 5 years starting in 2011. This change provides further incentive for C corporation owners to consider converting the company to an S corporation.

Cell phone expenditure substantiation burden reduced

The new law removes cell phones from a certain type of property described in the tax law as "listed property." This means that the value of the personal use of employer provided cell phones does not need to be included in an employee's gross income. This also effectively eliminates the need for strict expenditure substantiation requirements that the IRS had previously imposed to document the segregation between business and personal use.

Five year carryback of tax credits for small businesses extended

Many, if not most, businesses are eligible for one or more tax credits.  In order to benefit from tax credits, a business must have a current year tax liability to offset.  If a business cannot use a credit in the current year, it generally can carry forward the remainder to future years.

The Act extends a favorable provision allowing eligible small businesses to take advantage of a carry back period of up to five years. As a result, if there is not sufficient income to use a credit in the current year, taxpayers can use the credit against taxes paid in the previous five years before considering a carryforward of the credit.

This carryback provision can provide immediate refund opportunities if a business paid tax in the prior five years.

Eligible small businesses are defined under the act as businesses with gross revenue of less than $50 million in the prior three tax periods.

Increased the exclusion for gain on sale of certain types of small business stock

The Act increases the exclusion of capital gain income from 50% to 75% on the sale of qualified small business stock acquired after February 17, 2009 and before September 28, 2010, if it was held for at least 5 years. Further, for sales after September 27, 2010 and before January 1, 2011, the exclusion increases to 100%. There are a number of requirements necessary for stock to be qualified under this provision.

Increased deduction for start up expenditures

Previously, taxpayers were able to currently deduct the first $5,000 of start up expenses. Such expenses were reduced for each dollar that total start up costs exceeded $50,000. The new Act increases the deduction to $6,000 and increases the phaseout amount to $60,000. This benefit is only available in 2010.

Health insurance cost deduction for self employment tax computation

While prior tax law allowed self-employed persons to deduct health insurance costs for income tax purposes it did not allow for a similar deduction for self employment tax computations. Beginning in tax years after December 31, 2009, taxpayers will be able to deduct health insurance costs as an expense that reduces both regular taxable income and self employment tax income.

Key Lending Initiatives

The other major component of the new law was designed to make it easier for small businesses to obtain financing. The following briefly highlights the major items in the legislation.

Creation of the Small Business Lending Fund

The new law creates a $30 billion fund that will deliver lower cost capital to banks that have less than $10 billion in assets. The fund will be run by the Treasury Department with an effort to support and enhance the lending capabilities of smaller, "community-based" banks, whose lending portfolio is dominated by small businesses.

Grants to state lending programs

The Act will provide $1.5 billion in grants to state lending program. This initiative is aimed at supporting state lending programs that have shown effectiveness in small business lending, but are struggling economically in the midst of state budget crunches.

Small Business Administration (SBA) loan sweeteners

In addition to other SBA provisions in the legislation, the Act provided the much anticipated extension of "sweeteners" under the SBA lending programs.  Included in this extension is the reduction in loan origination fees that are charged to borrowers and an increase in the amount of guarantees that bank and non-bank lenders receive on agency loans. The Act also increased the maximum loan amount from $2 million to $5 million.

Retirement Savings Promotions

457(b) plans allowed to have Roth accounts

The Act allows state and local government employees participating in retirement savings plans to make pre-tax contributions of wages to designated Roth accounts starting in 2011. This provision gives these employee plans the same Roth contribution flexibility available to the similar 401(k) plans widely used in the private sector. Thus, a state/local government employee will have the option to contribute to a traditional pre-tax retirement account or a Roth account. Similar treatment was not extended to employees of non-profit organizations with 457(b) plans.

Participants in certain retirement plans are allowed to rollover account balances to Roth accounts

Participants in 401(k), 403(b) and 457(b) governmental plans will be allowed to roll over balances within their plans into Roth accounts beginning on September 27, 2010.  Like IRA conversions to Roth IRAs, such rollovers will be immediately taxable. If the rollover takes place in 2010, the taxable income can be deferred and split in two equal amounts to be reported in 2011 and 2012 (which also mirrors IRA conversions to Roth IRAs in 2011).

Information Reporting Provisions

The following two provisions have been included in the law as a means to help finance the favorable provisions above.   

Rental income from real estate will now require information returns

Certain qualified individuals receiving rental income from real property will have to file information returns to the IRS and to the service provider reporting payments of $600 or more during the year for rental property expenses. Taxpayers can apply for certain hardship provisions to obtain an exception to this requirement.

Increased information return penalties for failure to file

Penalties for failure to file information returns are scheduled to increase for returns required to be filed after January 1, 2011. These penalties can accumulate on a daily basis to a very significant amount. As such, care should be taken to ensure that all required information returns are being filed.

Future Tax Rate Reductions and Other Legislation

We continue to wait (and hope!) for additional tax legislation that will reduce the tax increases that are scheduled to occur in 2011. These increases are the result of former taxpayer friendly provisions enacted nearly a decade ago that reduced tax rates up until their scheduled "sunset" on December 31, 2010. These include, but are not limited to: 

• An increase in the individual ordinary income tax rates
•  An increase in the capital gain tax rates
•  Qualified dividends being taxed at higher ordinary rates rather than capital gain rates
• The return of higher estate tax rates and smaller exemptions that existed back in 2002

Please contact your account director or Paul Parish, Director of Tax Services, with any questions on this information at 800-236-2246. We will continue to keep you informed on a timely basis as further tax changes take place. Or, join us for our Year-End Tax Planning seminars to be held in several locations in October. To register, visit www.schencksc.com/events.