Small Business Jobs Act of 2010

By: Jennifer L. Pysnack, CPA (Oct, 2010)

On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (2010 Jobs Act). This package, thought to spur job growth through $12 billion in tax incentives and business lending initiatives, has been touted by President Obama as “a great victory for entrepreneurs.” Much of the measure involves extending or modifying tax breaks that were in place under the much-maligned Bush Administration. Political affiliations aside; however, anything that spurs U.S. economic growth in a sustainable and responsible manner is welcome relief. In this article we will take a look at some of the significant tax provisions under Title II of the 2010 Jobs Act.

After much negotiation, the 2010 Jobs Act includes:

  1. Extension of Bonus Depreciation through December 31, 2010.
  2. Extension and doubling of Code Section 179 expensing for 2010 and 2011.
  3. Self-employment tax deduction for self-employed individuals’ health insurance costs.
  4. Extension of the general business credit carry back period for eligible small businesses from one to five years. Additionally, these credits for eligible small businesses are not subject to alternative minimum tax in 2010.
  5. Relaxation of the S Corp built in gain conversion rules. The S Corp holding period is now shortened to five years in certain situations.
  6. 100% capital gain exclusion related to qualified small business stock. The gain on qualified small business stock is also excluded from alternative minimum tax. On stock acquired after 9/27/10 and before 2011 and held for more than 5 years.
  7. Removal of cell phones from listed property documentation requirements.
  8. Enhanced deduction for start-up expenses, up to $10,000 for 2010 & 2011
  9. Retroactive Code Sec.6707A penalty relief

The most expensive tax break included in the legislation is the extension of bonus depreciation through December 31, 2010 and retroactive to January 1, 2010. As in the past, an additional first year depreciation deduction is allowed equal to 50% of the cost of qualifying property. Generally, qualifying property must be purchased and placed into service on or before December 31, 2010. The 2010 Jobs Act extends the placed in service date for certain property with a recovery period of ten years or longer and certain transportation property to December 31, 2011. The 2010 Jobs Act increases the maximum Code Section 179 deduction to $500,000 and the investment limit to $2 million for tax years beginning in 2010 and 2011. This change increases the availability of the tax break to more businesses as the deduction does not phase out completely until the cost of eligible property purchased and placed in service exceeds $2.5 million. The Act also expands the definition of qualified Code Section 179 property to include certain real property, specifically, qualified leasehold improvement property, qualified restaurant property, and qualified real improvement property. Up to $250,000 of such qualified real property can be applied to the Code Section 179 limit for tax years beginning in 2010 and 2011.

Prior to this legislation, self-employed individuals could take a deduction for health insurance costs paid on behalf of the individual and his or her immediate family for income tax purposes, but not for self-employment tax purposes. For tax years beginning after December 31, 2009, self-employed individuals can deduct the cost of health insurance in arriving at self-employment income for purposes of calculating self-employment taxes.

The cost of the above tax benefits are expected to be off-set by the following revenue raisers:

  1. A first time opportunity to roll over certain 401k and other pension plan existing balances to a designated Roth account.
  2. Increased failure to file penalties on information returns (1099s).
  3. New 1099 reporting for rental property expenses.
  4. Tightened U.S. sourcing on guarantee fees.
  5. Streamlined tax levies on federal contractors.
  6. Accelerated estimated tax payments by certain large corporations.

Promoting retirement savings appears a win-win as it provides taxpayers with more options for their retirement plan dollars and facilitates contributions to designated Roth accounts. Participants in 401(k) and 403(b) and 457(b) governmental plans are allowed to roll over qualified distributions into a designated Roth account within their plans effective September 27, 2010. There are some caveats, though: 

  1. Governmental 457(b) plans are not authorized to allow participants to contribute deferrals to designated Roth accounts until 2011. Consequently, the roll over provision will not take effect for these plans until 2011.
  2. Not-For-Profit 457(b) plans are not authorized to offer Roth accounts at all under current legislation.
  3. The roll over will be taxable to participants in eligible plans, except for any after tax contributions.
  4. Pension plans must be amended to permit these rollovers.
  5. Lastly, participants can delay the tax effect of the roll over, reporting 50% in 2011 and 2012, respectively, but only if the roll over occurs in 2010.

The measure also made changes related to the filing of information returns (1099s). Prior to this enactment, only entities engaged in an active trade or business were required to file annual information returns with the IRS. This reporting requirement has now been expanded to include entities engaged in the rental of real property (generally considered a passive activity) to report aggregate payments to vendors of $600 or more for rental property expenses. Certain exceptions do apply to this reporting requirement. 

  1. From $15 to $30 per return, with a calendar year maximum penalty increase from $75,000 to $250,000 for information returns filed after the deadline but not more than 30 days after the due date (tier 1).
  2. From $30 to $60 per return, with a calendar year maximum penalty increase from $150,000 to $500,000 for returns filed more than 30 days after the due date, but not later than August 1 (tier 2).
  3. From $50 to $100 per return, with a calendar year maximum penalty increases from $250,000 to $1.5 million for failure to file before August 1 penalty (tier 3).
  4. The penalty for intentional failure to file will increase from $100 to $250 per return.
  5. The increases are less severe for qualified small businesses with not more than $5 million in average gross receipts. The calendar year maximums for qualified small business will not exceed $75,000 (tier 1), $200,000 (tier 2), and $500,000 (tier 3).

In addition to the tax provisions noted above, the 2010 Jobs Act contains numerous amendments to the Small Business Investment Act of 1958 and various other regulations aimed at increasing the flow of credit and easing the burdens associated with international trade for small business. The business world and related tax laws are as complicated as ever. Please contact your Dermody, Burke, and Brown tax advisor for more information regarding how this legislation affects you and your business.

 

The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.

 

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