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On September 23, the House by a vote of 237 to 187 passed without change H.R. 5297, the Small Business Lending Funding Act, as approved by the Senate on September 16. On September 27, President Obama signed the measure into law. The tax title of this bill is the “Small Business Jobs Act of 2010” (the Act) but is generally referred to as the “2010 Small Business Act” The name is a bit of a misnomer because the legislation carries many tax provisions affecting large as well as small businesses, plus changes that affect individuals, such as eased Roth IRA rules.
The 2010 Small Business Act includes a number of important tax provisions, including liberalized and expanded expensing for 2010 and 2011, revived bonus depreciation for 2010, five-year carryback of unused general business credits for eligible small businesses, removal of cell phones from the listed property category, and liberalized Code Sec. 6707A penalty rules. Of particular interest is the new reporting requirements for owners of rental real estate.
Here are the highlights of the tax and pension changes in the 2010 Small Business Act.
Dollar amounts for expensing liberalized. For tax years beginning in 2010, the 2010 Small Business 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. For tax years beginning in 2011, the same $500,000 maximum expensing amount and $800,000 beginning-of-phaseout amount will apply even though, under pre-2010 Small Business Act law, those amounts had been scheduled to revert to $25,000 and $200,000, respectively.
Virtually all small businesses and many medium sized businesses that do not have heavy machinery and equipment needs would be able to use expensing. For property placed in service in tax years beginning in 2010 or 2011, the Code Sec. 179 deduction will not phase out completely until the cost of expensing-eligible property exceeds $2,500,000 ($2,000,000 beginning-of-phaseout amount) + $500,000 (dollar limitation)).
The 2010 Small Business Act provides a welcome tax-saving windfall to taxpayers that already have placed in service Code Sec. 179 eligible property at a cost that exceeded the pre-2010 Small Business Act dollar amount limits.
Qualified real property expensing. For any tax year beginning in 2010 or 2011, a taxpayer can elect to treat up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) as expensing-eligible property. (Certain types of property, such as that used for lodging, would not be eligible.) (Code Sec. 179(f)(1)) The dollar cap applies to the aggregate cost of qualified real property. This change applies to property placed in service after December 31, 2009, in tax years beginning after that date.
Note that this is the first time that Code Sec. 179 expensing can be claimed for realty. Under pre-2010 Small Business Act law, the expensing election was limited to depreciable tangible personal property purchased for use in the active conduct of a trade or business, including “off-the-shelf” computer software.
However, no amount attributable to qualified real property can be carried over to a tax year beginning after 2011, but to the extent that any amount cannot be carried over to a tax year beginning after 2011, the Code will be applied as if no Code Sec. 179 expensing election had been made for that amount.
Other expensing changes. The 2010 Small Business Act also provides that a taxpayer's ability to revoke a Code Sec. 179 election without IRS consent applies to any tax year beginning after 2002 and before 2012 (instead of before 2011, as under pre-2010 Small Business Act law). (Code Sec. 179(c)(2)) Additionally, computer software is qualifying property for purposes of the Code Sec. 179 election if it is placed in service in a tax year beginning after 2002 and before 2012 (instead of before 2011, as under pre-2010 Small Business Act law). ( Code Sec. 179(d)(1)(A)(ii))
Bonus first-year depreciation extended through 2010. The 2010 Small Business Act extends 50% 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). (Code Sec. 168(k)(2)(A)(iv) and Code Sec. 168(k)(2)(A)(iii))
Bonus depreciation provides an extra writeoff to all businesses, large or small, and a windfall to taxpayers that already have bought and placed in service bonus-depreciation-eligible property in 2010.
First year dollar cap for autos increased by $8,000. Under Code Sec. 280F, depreciation deductions (including Code Sec. 179 expensing) that can be claimed for passenger autos is subject to dollar limits that are annually adjusted for inflation. The 2010 Small Business Act boosts the first year business-auto write-off by $8,000 (i.e., from $3,060 to $11,060 for autos and from $3,160 to $11,160 for light trucks or vans) for vehicles that are qualified property for bonus depreciation purposes (i.e., are new and acquired and placed in service in 2010). (Code Sec. 168(k)(2)(A)(iv)) Special long-term contract accounting rule for bonus depreciation. 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. More specifically, for property placed in service after December 31, 2009, solely for purposes of determining the percentage of completion under Code Sec. 460(b)(1)(A), the cost of qualified property will be taken into account as a cost allocated to the contract as if bonus depreciation had not been enacted. (Code Sec. 460(c)(6)) Qualified property is property otherwise eligible for bonus depreciation that has a MACRS recovery period of 7 years or less and that is placed in service after December 31, 2009, and before January 1, 2011 (January 1, 2012, in the case of Code Sec. 168(k)(2)(B) property (certain longer-lived property)).
Deduction for startup expenses increased. For tax years beginning in 2010, 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. Code Sec. 195(b)(3))
100% exclusion for gain from qualified small business (QSBS) stock. There is a 100% exclusion of gain from the sale of QSBS stock (a) acquired after the enactment date of the 2010 Small Business Act and before January 1, 2011, and (b) held for at least five years. (Code Sec. 2012)
Five-year carryback of small business unused general business credits. The general business credit (GBC) generally can not exceed the excess of the taxpayer's net income tax over the greater of the taxpayer's tentative minimum tax or 25% of so much of the taxpayer's net regular tax liability as exceeds $25,000. Credits in excess of this limitation may be carried back one year and forward up to 20 years. The 2010 Small Business Act extends the carryback period from one to five years for eligible small business (ESB) credits determined in tax years beginning in 2010. (Code Sec. 39(a)(4))
ESB credits, for a tax year beginning in 2010, include all of the component credits of the GBC, but only as determined with respect to eligible small businesses (ESBs). ESBs are businesses that (1) are corporations the stock of which is not publicly traded, partnerships or sole proprietorships and (2) have average annual gross receipts, for the three-tax-year period preceding the tax year, of no more than $50 million.
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). (Code Sec. 38) 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. Where 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% 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 2010 Small Business 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. (Code Sec. 1374(d)(7))
One year self-employment tax break. For tax years beginning after December 31, 2009, but before January 1, 2011, when calculating self-employment taxes, the deduction for health insurance costs of a self-employed taxpayer under Code Sec. 162(l) can be taken into account (i.e., can be deducted) in computing net earnings from self-employment. (Code Sec. 162(l)(4))
The Joint Committee on Taxation's Technical Explanation of H.R. 5297 says that it is intended that earned income within the meaning of Code Sec. 401(c)(2) be computed without regard to the deduction for the cost of health insurance.
Cell phones no longer listed property. For tax years beginning after December 31, 2009, cell phones (and similar telecommunications equipment) are removed from the definition of listed property under Code Sec. 280F (Code Sec. 280F(d)(4)(A))
Relaxed penalty for failure to include reportable transaction information with return. Retroactively effective to penalties assessed after December 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. Thus, under the 2010 Small Business Act, the penalty is 75% of the tax benefit received, with a minimum penalty of $10,000 for corporations and $5,000 for individuals. For listed transactions, the maximum penalty is $200,000 for corporations and $100,000 for individuals, while for other reportable transactions, the maximum penalty is $50,000 for corporations and $10,000 for individuals). (Code Sec. 6707A(b))
The 2010 Small Business Act pays for its tax breaks with the following revenue raisers:
Information reporting for rental income. For payments made after December 31, 2010, persons receiving rental income from real property will have to file information returns to IRS and to service providers 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 does not exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regulations). (Code Sec. 6041(h))
Increased penalty for failure to timely file information returns. For information returns required to be filed after December 31, 2010, the 2010 Small Business Act increases the Code Sec. 6721 penalties for failure to timely file information returns to IRS. The first-tier penalty increases from $15 to $30, and the calendar year maximum increases from $75,000 to $250,000. The second-tier penalty increases from $30 to $60, and the calendar year maximum increases from $150,000 to $500,000. The third-tier penalty 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 penalty for failure to furnish a payee statement. The Code Sec. 6722 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. 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.
Exception to pre-levy CDP hearing rule for Federal contractors. For levies issued after the enactment date of the 2010 Small Business Act, IRS may issue levies before a CDP hearing with respect to Federal tax liabilities of Federal contractors identified under the Federal Payment Levy Program. When a levy is issued before a CDP hearing, the taxpayer will have an opportunity for a CDP hearing within a reasonable time after the levy. (Code Sec. 6330(f)(4))
Code Sec. 457(b) plans could include Roth accounts. For tax years beginning after December. 31, 2010, retirement savings plans sponsored by state and local governments (i.e., governmental Code Sec. 457(b) plans) will be able to include Roth accounts. (Code Sec. 402A(e)(1), Code Sec. 402A(e)(2))
Certain retirement plans can rollover distributions into Roth accounts. For distributions after the enactment date of the 2010 Small Business 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. If the rollover is made in 2010, the participant may elect to pay the tax in 2011 and 2012. (Code Sec. 402A(c)(4))
Annuitization of nonqualified annuity allowed. For amounts received in tax years beginning after December 31, 2010, the 2010 Small Business Act will permit a portion of an annuity, endowment, or life insurance contract to be annuitized while the balance is not annuitized, if the annuitization period is for 10 years or more, or is for the lives of one or more individuals. (Code Sec. 72(a))
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