On Monday, September 27, President Obama signed into law the Small Business Jobs Act of 2010 (the Act). The Act includes a number of important tax provisions that are expected to affect large and small businesses, as well as individuals.
RubinBrown has summarized the provisions for you below. Please contact us if we can assist you further.
Liberalized and expanded expensing for 2010 and 2011
For tax years beginning in 2010 or 2011, the Act increases the maximum Code Sec. 179 expensing amount from $250,000 to $500,000 and the beginning-of-phaseout amount from $800,000 to $2,000,000. As with the pre-Act law, the amount of the deduction is limited to the amount of taxable income from any of the taxpayer’s trades or businesses. Any excess amount is carried over indefinitely until it can be deducted.
Note for tax years beginning after 2011, the above expensing amounts and beginning-of-phaseout amounts revert back to $25,000 and $200,000, respectively, under pre-Act law.
In addition, the Act allows the taxpayer to elect up $250,000 of qualified real property as Code Sec. 179 property. Qualified real property is: (1) qualified leasehold improvement property, (2) qualified restaurant property and (3) qualified retail improvement property. The qualified property must be depreciable, acquired for use in the active conduct of a trade or business and can’t be certain ineligible property.
It is important to note that for purposes of applying the $500,000 expensing limitation, not more than $250,000 can be attributable to qualified real property. Additionally, notwithstanding the general carryover rule for expensing deductions, no amount attributable to qualified real property can be carried over to a tax year beginning after 2011.
Revived bonus depreciation for 2010
The Act extends 50 percent bonus first-year depreciation for one year, i.e., makes it available for qualifying property acquired and placed in service in 2010 (as well as 2011, for certain long-lived property).
In addition, bonus depreciation will be decoupled from allocation of contract costs under the percentage of completion accounting method rules for assets with a depreciable life of seven years or less.
Five-year carryback of unused general business credits for eligible small businesses
The general business credit (GBC) generally can't exceed the excess of the taxpayer's net income tax over the greater of (1) the taxpayer's tentative minimum tax or (2) 25 percent of the portion of the taxpayer's net regular tax liability that exceeds $25,000. Under pre-Act law, credits in excess of this limitation may be carried back one year and forward up to 20 years.
The Act extends the carryback period from one to five years for eligible small business (ESB) credits determined in tax years beginning in 2010. In addition, these credits may be eligible to be carried forward up to 25 years. ESBs are businesses that (1) are either corporations the stock of which isn’t publicly traded, partnerships or sole proprietorships and (2) have average annual gross receipts, for the three-year period preceding the tax year, of no more than $50 million.
Removal of cell phones from the listed property category
For tax years beginning after Dec. 31, 2009, cell phones (and similar telecommunications equipment) are removed from the definition of listed property. Thus, the heightened substantiation requirements and special depreciation rules that apply to listed property don’t apply to cell phones.
Caution: The Act doesn’t affect the IRS’ authority to determine the appropriate characterization of cell phones as a working condition fringe benefit, especially where there is personal use involved.
Rewrite of penalty rules for failure to report shelter transactions
Retroactively effective to penalties assessed after Dec. 31, 2006, the controversial Code Sec. 6707A penalty is revised so that the penalty for failure to disclose a reportable transaction (i.e., a transaction IRS has identified as a listed tax shelter or as having the characteristics of a tax shelter) to IRS is commensurate with the tax benefit received from the transaction.
Under pre-Act law, the penalty for failure to report reportable transactions was $10,000 for individuals and $50,000 for others ($100,000 and $200,000 respectively for listed transactions). The Act dramatically lowers these potential penalties.
Under the Act, the penalty is 75 percent of the tax benefit received, with a minimum penalty of $5,000 for individuals and $10,000 for others. For listed transactions, the maximum penalty is $100,000 for individuals and $200,000 for others. Failure to disclose a reportable transaction can result in a maximum penalty of $10,000 for individuals and $50,000 for others.
Other notable provisions include:
First year dollar cap for autos and trucks increased by $8,000
Depreciation deductions that can be claimed for passenger autos, light trucks and vans are subject to dollar limits that are annually adjusted for inflation. The Act boosts these first year depreciation limits by $8,000. For 2010, the maximum first-year depreciation for passenger automobiles is $11,060 ($11,160 for light trucks).
Deduction for startup expenses increased
For tax years beginning in 2010 and before 2011, the deduction for startup expenses under Code Sec. 195 is increased from $5,000 to $10,000 and the phaseout threshold is increased from $50,000 to $60,000. As with pre-Act law, any remaining amounts may be recovered ratably over 180 months, starting with the month the active trade or business began.
100% exclusion for gain from qualified small business stock (QSBS)
There is a 100 percent exclusion of gain from the sale of QSBS stock (a) acquired after the enactment date of the Act and before Jan. 1, 2011, and (b) held for at least five years. In addition, the Act provides that the treatment of a percentage of the excluded gain for QSBS as an AMT preference item (e.g., added back to income for AMT purposes) does not apply.
ESB credits not subject to AMT
For ESB credits determined in tax years beginning in 2010, ESBs, as defined above for purposes of the longer credit carryback, may use all types of general business credits to offset their alternative minimum tax (AMT).
More specifically, the tentative minimum tax will be treated as being zero for ESB credits. Thus, an ESB credit can offset both regular and AMT liability.
Reduced recognition period for S corp built in gains tax
When a C corporation elects to become an S corporation (or where an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), the S corporation is taxed at 35 percent on all gains that were built-in at the time of the election if the gains are recognized during the recognition period. The recognition period generally is the first ten S corporation years (or the ten-period after the transfer).
For tax years beginning in 2009 and 2010, no tax is imposed on the net unrecognized built-in gain of an S corporation if the seventh tax year in the recognition period preceded the 2009 and 2010 tax years.
For any tax year beginning in 2011, the Act shortens the holding period of assets subject to the built-in gains tax to 5 years, if the fifth tax year in the recognition period precedes the tax year beginning in 2011.
One year self-employment tax break
For tax years beginning after Dec. 31, 2009, but before Jan. 1, 2011, when calculating self-employment taxes, the deduction for health insurance costs of a self-employed taxpayer can be taken into account in computing net earnings from self-employment. This includes the cost of health insurance for the taxpayers, their spouses, dependents and children who haven’t attained age 27 as of the end of the tax year.
The 2010 Small Business Act also includes the following revenue raisers:
Information reporting for rental income
For payments made after Dec. 31, 2010, persons receiving rental income from real property will have to file information returns (typically Form 1099-MISC) to IRS and to service providers (e.g., plumber, painter, or accountant) reporting payments of $600 or more during the year for rental property expenses.
Exceptions are provided for individuals temporarily renting their principal residences (including active members of the military), taxpayers whose rental income doesn't exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship.
Increased penalties for information returns
For information returns required to be filed after Dec. 31, 2010, the Act increases the penalties for failure to provide timely, complete and correct information returns to IRS.
The first-tier penalty (filing an information return after the filing deadline but not more than 30 days after the due date) increases from $15 to $30, and the calendar year maximum increases from $75,000 to $250,000. The second-tier penalty (filing an information return more than 30 days after it is due but before August 1) increases from $30 to $60, and the calendar year maximum increases from $150,000 to $500,000. The third-tier penalty (failing to file before August 1) increases from $50 to $100, and the calendar year maximum increases from $250,000 to $1,500,000.
For small business filers, the calendar year maximum increases from $25,000 to $75,000 for the first-tier penalty, from $50,000 to $200,000 for the second-tier penalty, and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard increases from $100 to $250.
Increased penalties for payee statements
The penalty for failure to furnish a payee statement is revised to provide tiers and caps similar to those applicable to the penalty for failure to file the information return. These penalties may apply when there has been a failure to furnish a payee statement to the person prescribed by the required due date, a failure to include all of the required information on the payee statement or if incorrect information has been included on the payee statement.
A first-tier penalty will be $30, subject to a maximum of $250,000; the second-tier penalty will be $60 per statement, up to $500,000, and the third-tier penalty will be $100, up to a maximum of $1,500,000.
Limitations will apply on penalties for small businesses and increased penalties for intentional disregard that parallel the penalty for failure to furnish information returns.
Code Sec. 457(b) plans can include qualified Roth accounts
For tax years beginning after Dec. 31, 2010, retirement savings plans sponsored by state and local governments (but not plans of nonprofit organizations) can include designated Roth accounts.
Certain retirement plans can rollover distributions into Roth accounts
For distributions after the enactment date of the Act, 401(k), 403(b), and governmental 457(b) plans will be able to permit participants to roll their pre-tax account balances into a designated Roth account. The rollover will be taxable, except for any after-tax contributions. If the rollover is made in 2010, the participant will include the taxable income ratably in 2011 and 2012, unless the taxpayer elects otherwise.
Partial annuitization of nonqualified annuity allowed
For amounts received in tax years beginning after Dec. 31, 2010, the Act will permit a partial annuitization of a nonqualified annuity, endowment, or life insurance contract, subject to specific rules. This allows holders of nonqualified annuities to elect to receive a portion of an annuity contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis. The annuitization period must be for 10 years or more, or for the lives of one or more individuals.
Sourcing of guarantee income
Amounts received directly or indirectly for guarantees of indebtedness of the payor issued after the enactment date of the Act will be sourced like interest and, as a result, if paid by U.S. taxpayers to foreign persons will generally be subject to withholding tax.
This change prospectively overturns the holding in Container Corporation, Successor to Interest of Container Holdings Corporation, Successor to Interest of Vitro International Corporation, (2010), that fees paid by a U.S. subsidiary to its foreign parent for guaranteeing the subsidiary's debt were analogous to payments for a service and therefore were not U.S. source income.
Accelerated estimated tax payment for large corporations
Estimated taxes for large corporations (those with assets of at least $1 billion) otherwise due for July, August, or September of 2015, will be increased by 36 percent over the previous amount required under the HIRE Act.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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