On September 27, 2010, President Obama signed the Small Business Jobs Act of 2010 into law. The Act is much heralded as providing small businesses with $12 billion of tax cuts, creating 500,000 new jobs, increasing small business lending and helping small business owners accessing private capital. The price tag of $12 billion takes into consideration a number of revenue raisers.
Reporting Requirement Amendments in the Senate Rejected
The Act was hung up in the Senate over an amendment to eliminate the reporting requirements scheduled to go into effect in 2012 under the healthcare reform law that would require businesses to file Form 1099s if they purchased at least $600 in goods from a vendor. Numerous amendments were proposed ranging from eliminating the provision altogether limiting it to businesses with at least 26 employees that purchase at least $5,000 in goods from a vendor. As a result of two Republican Senators joining the Democrats to move the Small Business Jobs Act along, cloture was reached on the amendments.
General-Tax Provisions of the Act
The small business tax cuts in the Act are:
- The extension of bonus depreciation;
- Extension and expansion of expensing capital improvements;
- One hundred percent gain exclusion for qualified small business stock;
- Holding period reduction for S corporation built-in gain recognition rules;
- Simplification for cell phone deductions;
- Increase of the deduction for start-up expenses;
- Retroactive relief from Code Section 6707A penalty;
- Allowance of a deduction for healthcare insurance costs from self employment income subject to Federal Insurance Contributions Act (FICA) tax;
- Extension of the carry-back period for eligible small business credits to five years; and
the use of all general business credits to offset both regular and alternative minimum tax liability.
Most of these provisions are short lived, with some expiring at the end of 2010 period.
Explanation of Tax Provisions in the Act
The major tax provisions in the Act intended to help foster investment in small businesses and to create jobs are:
- 100 percent Exclusion of Small Business Capital Gains. The amount of exclusion of gain from the sale of qualifying small business stock is increased from 75 percent to 100 percent, and such gain is not subject to the alternative minimum tax. For these purposes a qualifying small business is a C corporation whose gross assets do not exceed $50 million and whose stock is acquired after the date of enactment through the end of 2010 and held for five years. The amount of gain eligible for exclusion is limited to the greater of 10 times the taxpayer’s basis in the stock or $10 million.
- S Corp. Holding Period for Built-in Gains. The holding period for appreciated assets held by an S Corp that converted from a C Corp is shortened to five years in the case of a disposition in any tax year beginning in 2011, if the fifth year of the holding period precedes the tax year beginning in 2011.
- Increase of Section 179 Expensing and Application to Certain Real Property. For taxable years beginning in 2010 and 2011, a taxpayer may write-off up to $500,000 of capital expenditures for tangible personal property for use in an active trade or business, subject to a phase-out once capital expenditures exceed $2 million. This is an increase of the thresholds for 2010 from $250,000 and $800,000 and for 2011 from $25,000 and $200,000. In addition $250,000 of qualified leasehold improvements, restaurant property and retail improvement property may be expensed under this provision.
- Extension of Bonus Depreciation to 2010. The additional, first-year 50 percent depreciation has been extended to qualifying property purchased and placed in service in 2010.
- Increase Deduction for Start-up Expenditures. The amount deductible for 2010 as start up expenditures is increased to $10,000 subject to a $60,000 phase-out threshold.
- Modification of Section 6707A Penalty. The penalty for the failure to disclose a reportable transaction is revised to make it proportionate to the underlying tax savings, with a minimum and maximum penalty for corporations of $10,000 and $200,000 and for individuals of $5,000 and $100,000.
- Deductibility of Health Insurance Costs From Self-Employment Income. Self-employed individuals will be able to reduce self-employment income for the cost of health insurance for themselves and family in computing their self-employment tax, but only for their first taxable year beginning after December 31, 2009.
- Removal of Cellular Phones From ‘Listed Property’. For years beginning after December 31, 2009, cell phones will no longer be subject to the strict substantiation requirements to be depreciated and cell phones and other similar devises provided to an employee predominately for business purposes will be excludible from gross income.
Revenue Raisers in the Act
To offset the cost of the tax breaks for small businesses and to close unintended tax “loopholes,” the Act includes a number of revenue raisers:
- Require Information Reporting for Rental Property Expense Payments. For payments made after December 31, 2010, individuals receiving rental income from real property are required to file information returns with the Internal Revenue Service IRS and with service providers reporting payments of $600 or more for rental property expenses.
- Increase Penalties for Failure to File Information Returns. The penalty for failing to file an information return timely is increased:
- From $15 to $30 for each return that is not more than 30 days late, with the calendar-year maximum increased from $75,000 to $250,000;
- From $30 to $60 for each return filed more than 30 days after due but before August 1, with the calendar-year maximum increased from $150,000 to $500,000; and
- From $50 to $100 for each return not filed prior to August 1, with the calendar-year maximum increased from $250,000 to $1.5 million.
Similar increases in the penalty apply to the failure to supply a payee an information return. Reduced maximum calendar-year penalties apply to filers with $5 million or less gross receipts.
- Rollover From Elective Deferral Plans to Roth Accounts. Participants in qualified retirement plans, including not-for-profit employer plans and governmental plans, will be able to rollover pretax account balances into a designated Roth account under their plans after the date of enactment of the Act. According to the legislative history, the IRS will make available to employers a remedial amendment period allowing employers to offer this option in 2010 to employees and sufficient time to amend their plans to reflect this option.
- Provisions to Provide Loans to Small Businesses. The Act includes a number of provisions directed at making loans available to small businesses. The major provision establishes a Small Business Lending Fund of $30 billion to make investments in small community banks, those that hold less than $10 billion in assets, to increase small business lending. The Lending Fund program has been criticized as another Troubled Asset Relief Program (TARP), judged universally as a failed initiative.
The Act includes numerous tax breaks aimed at small businesses and a number of provisions designed to give small businesses access to credit. Most of the tax breaks are short lived and may expire before small businesses can fully take advantage of them. The Act adopts supply-side economics, which will only create jobs if the demand side is stimulated. As noted by the National Federation of Independent Business, the largest small business association, “[the Act] falls short of addressing the most significant problems facing small business owners — lack of sales and uncertainty.” Without addressing these two problems, the initiatives in the Act may fail to stimulate small business job growth and lending.
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