The Small Business Jobs Act of 2010 (SBJA) was signed into law by President Obama on September 26th. Despite its name, the $42 billion Act benefits more than just small businesses. It also provides tax-saving opportunities for larger businesses and individuals — including small-business investors, the self-employed and employees saving for retirement.
Changes affecting businesses
Section 179 expensing
SBJA helps small-business owners invest in their own businesses by increasing the Internal Revenue Code Sec. 179 expensing election limit. For tax years beginning in 2010 and 2011, the limit will now be $500,000, with a dollar-for-dollar phaseout starting when purchases for the year exceed $2 million. SBJA also temporarily expands the definition of eligible property to include qualified leasehold-improvement, restaurant and retail-improvement property. The maximum amount of such property that can be expensed is $250,000.
Another depreciation-related provision extends the special allowance for certain property, generally if acquired in calendar year 2010. Businesses can recover the costs of qualifying depreciable property more quickly by immediately deducting 50% of the cost. Bonus depreciation is not subject to any asset purchase limits, so businesses ineligible for Sec. 179 expensing can take advantage of it. Property that qualifies for bonus depreciation includes tangible property with a recovery period of 20 years or less, computer software purchased by the business, water utility property, and qualified leasehold improvement property.
SBJA expands 1099 reporting to require most renters of real estate to report payments of more than $600.
Information return penalties
The legislation also increases information return failure-to-file penalties:
- First-tier increase from $15 to $30 and maximum increase from $75,000 to $250,000
- Second-tier increase from $30 to $60 and maximum increase from $150,000 to $500,000
- Third-tier increase from $50 to $100 and maximum increase from $250,000 to $1.5 million
- Small filer maximum increase from $25,000 to $75,000 (first tier), $50,000 to $200,000 (second tier) and $100,000 to $500,000 (third tier)
- Intentional disregard of penalty increases from $100 to $250
Other key changes
Here are some additional changes of which businesses should be aware:
- New five-year carryback of the general business credit
- Increase in the start-up expenditures deduction
- Shortening of the S corporation built-in gains period
- Removal of cell phones from the definition of “listed property” that is subject to tighter substantiation requirements and special depreciation rules
Changes affecting individuals
Exclusion on small business stock gains
To make investing in certain small businesses more attractive, SBJA temporarily increases the qualified small business (QSB) stock gain exclusion. The exclusion will be 100% for stock acquired after SBJA’s enactment date (Sept. 26) and before Jan. 1, 2011 that is held for at least five years. Additionally, the act eliminates the alternative minimum tax (AMT) preference item on such gain, making it tax free for AMT purposes as well.
If you are self-employed, SBJA permits you to deduct for 2010 self-employment tax purposes any costs incurred in 2010 for health insurance for you and your spouse, dependents and children age 26 or under.
Roth 457(b) plans
If you are a government employee who participates in a 457(b) plan, be aware that SBJA may allow your employer to start providing you the option to designate some or all of your contributions as Roth contributions. The contributions will not reduce your taxable income, but you will not have to pay any tax on qualified distributions.
401(k), 403(b) or 457(b) rollovers to Roth accounts
Under SBJA, your 401(k), 403(b) or 457(b) plan may allow (but isn’t required to allow) you to roll any portion of your pretax account balance into a Roth account. The amount of the rollover would be includible in your taxable gross income — except to the extent it is the return of any after-tax contributions. If the rollover is made in 2010, you can elect to pay the tax during a two-year period in 2011 and 2012.
How you can benefit
Whether or not you are a small-business owner, you may be able to reap significant tax savings by taking advantage of the opportunities SBJA offers. Elliott Davis is pleased to help you determine exactly how you can benefit. Please contact us for more information.
This publication is for informational purposes and does not contain or convey tax advice. The information should not be used or relied upon in regard to any particular situation or circumstances without first consulting a tax advisor.