On September 27, 2010, the President signed into law the Small Business Jobs Act of 2010. Key provisions of the legislation are summarized below.
The Small Business Jobs Act contains several provisions designed to provide credit to small businesses, including:
Section 179 of the Internal Revenue Code allows businesses to elect to deduct the cost of depreciable tangible personal property acquired for use in the business in the year of purchase, rather than through depreciation deductions.
Since 2003, several pieces of legislation have temporarily expanded the limits that apply to Section 179. Most recently, the Economic Stimulus Act of 2008, the American Recovery and Reinvestment Act of 2009 and the Hiring Incentives to Restore Employment (HIRE) Act of 2010 increased the maximum amount that can be expensed to $250,000 for tax years beginning in 2008, 2009, and 2010. This amount was reduced by the amount by which the cost of qualifying property placed in service during the year exceeded $800,000. For 2011 the dollar limit amount and phase-out threshold level were scheduled to drop to $25,000 and $200,000, respectively.
Effective for tax years beginning in 2010 and 2011, the Small Business Jobs Act increases the maximum amount that may be expensed under section 179 to $500,000 and increases the phase-out threshold amount to $2 million.
The provision also temporarily expands the definition of property qualifying for Section 179 expensing to include certain real property; specifically, qualified leasehold improvement property, qualified retail improvement property, and qualified restaurant property. However, the maximum Section 179 expense limit that applies to real property is $250,000.
Qualified leasehold improvement property is defined under IRC Section 168(e)(6), qualified restaurant property is defined under IRC Section 168(e)(7) and qualified retail improvement property is defined under IRC Section 168(e)(8) (without regard to section 168(e)(8)(E)). The language of the legislation specifically excludes from the definition of qualifying real property any property described in IRC Section 50(b), as well as air conditioning and heating units.
The amount eligible to be expensed under IRC Section 179 for a taxable year may not exceed the taxable income for a taxable year that is derived from the active conduct of a trade or business. Any amount that is not allowed as a deduction because of this income limitation may be carried forward to succeeding taxable years. Section 179 deductions attributable to qualified real property that are disallowed because of this income limitation may only be carried over to taxable years in which the definition of eligible section 179 property includes qualified real property (2010 and 2011). Therefore, 2010 Section 179 deductions relating to qualified real property that are disallowed because of the income limitation may be carried over only to 2011. Section 179 deductions disallowed in 2011 because of the income limitation cannot be carried forward.
Amounts carried forward from 2010 to 2011 that are not used in 2011, and 2011 Section 179 deductions disallowed because of the income limitation are treated as property placed in service in 2011 for purposes of computing depreciation.
The Small Business Jobs Act permits a taxpayer to elect to exclude real property from the definition of Section 179 property.
The Act also extends for one year (through 2011) the ability to revoke a Section 179 election without IRS permission, and the ability to treat off-the-shelf computer software as qualifying Section 179 property.
The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 allowed an additional 50 percent depreciation deduction for qualifying property placed in service during 2008 and 2009. This additional depreciation deduction was allowed for purposes of the alternative minimum tax (AMT) calculation, as well as regular tax.
To have qualified for the first-year “bonus” depreciation in 2008 or 2009, property had to be (1) property to which MACRS applied with an applicable recovery period of 20 years or less; (2) water utility property; (3) computer software other than computer software covered by Section 197; or (4) qualified leasehold improvement property. Second, the original use of the property had to have commenced with the taxpayer after December 31, 2007. Third, the taxpayer must have purchased the property within the applicable time period. Finally, the property must have been placed in service after December 31, 2007, and before January 1, 2010. An extension of the placed in service date of one year (i.e., to January 1, 2011) was provided for certain property with a recovery period of ten years or longer and certain transportation property.
The Small Business Jobs Act extends the additional first-year depreciation deduction for one year to apply to qualified property acquired and placed in service during 2010 (or placed in service during 2011 for certain long-lived property and transportation property).
As a result of the one-year extension of the additional first-year depreciation deduction, the $8,000 increase in the amount of depreciation deduction allowed for a passenger automobile that was available in 2009 is also extended for one year.
The Small Business Jobs Act provides that, for purposes of calculating taxable income from a long-term contract under the percentage-of-completion method, the cost of qualified property with a MACRS recovery period of 7 years or less is allocated to the contract as if bonus depreciation had not been enacted.
Noncorporate investors may generally exclude 50 percent of any capital gain from the sale or exchange of qualified small business stock (generally, stock issued by domestic C corporations whose assets do not exceed $50 million) issued after August 10, 1993 (if a five-year holding period requirement and other requirements are met).
The portion of the gain includible in taxable income is generally taxed at a maximum rate of 28 percent under the regular tax, and a percentage of the excluded gain is an alternative minimum tax preference item. Gain from the sale of qualified small business stock is therefore generally taxed at effective rates of 14 percent (28 percent maximum rate multiplied by 50 percent exclusion) under the regular tax and (i) 14.98 percent under the alternative minimum tax for dispositions before January 1, 2011; (ii) 19.88 percent under the alternative minimum tax for dispositions after December 31, 2010, in the case of stock acquired before January 1, 2001; and (iii) 17.92 percent under the alternative minimum tax for dispositions after December 31, 2010, in the case of stock acquired after December 31, 2000.
The American Recovery and Reinvestment Act of 2009 increased the 50 percent exclusion percentage to 75 percent for stock issued after February 17, 2009 and before January 1, 2011. As a result of this increased exclusion, gain from the sale of this qualified small business stock held at least five years is taxed at effective rates of seven percent under the regular tax and 12.88 percent under the alternative minimum tax.
The Small Business Jobs Act temporarily increases the exclusion percentage for qualified small business stock acquired during 2010 to 100 percent, and does not treat the excluded gain as an alternative minimum tax preference. Therefore, no regular tax or alternative minimum tax is imposed on the sale of qualified small business stock issued and acquired after September 27, 2010, and before January 1, 2011, and held at least five years.
The general business credit is generally limited to the excess of net income tax over the greater of (1) tentative minimum tax or (2) 25 percent of regular tax liability exceeding $25,000. General business credits in excess of this limitation can generally be carried back one year and forward up to 20 years.
The Small Business Jobs Act extends the general business credit carryback period from one to five years for eligible small businesses, for one year only–the first taxable year beginning after December 31, 2009 (the 2010 year for calendar year taxpayers).
An eligible small business is a non-publicly traded corporation, partnership, or sole proprietorship with gross receipts of $50 million or less.
Credits determined with respect to a partnership or S corporation are not treated as eligible small business credits by a partner or shareholder unless the partner or shareholder meets the gross receipts test for the taxable year in which the credits are treated as current year business credits.
The Small Business Jobs Act also provides that the tentative minimum tax is treated as being zero for eligible small business credits. Thus, an eligible small business credit may offset both regular and alternative minimum tax liability.
While self-employed individuals are generally able to deduct the cost of health insurance for themselves and family members in calculating adjusted gross income, the cost of health insurance was not considered in calculating self-employment tax (Self-Employment Contributions Act “SECA” tax).
For one year only–the first taxable year beginning after December 31, 2009 (the 2010 year for calendar filers), the Small Business Jobs Act provides that the deduction allowed to self-employed individuals for the cost of health insurance for themselves, their spouses, dependents, and children who have not attained age 27 as of the end of the taxable year is taken into account not only for income tax purposes, but in calculating net earnings from self-employment for purposes of SECA taxes.
According to the Joint Committee on Taxation (JCX-47-10), it is intended that although this deduction reduces net earnings from self-employment for purposes of SECA taxes, it does not change the calculation of earned income for purposes of IRC Section 401(c)(2), which defines “earned income” for self-employed individuals, and is used in determining the income limitation applicable to the general health insurance deduction for purposes of the income tax (the deduction generally may not exceed the earned income derived from the trade or business).
Cellular telephones have historically been included in the definition of listed property under IRC Section 280F. This classification results in heightened substantiation and depreciation rules.
Effective for taxable years ending after December 31, 2009, the Small Business Jobs Act removes cell phones from the definition of listed property. Cell phones are therefore no longer subject to the substantiation and depreciation rules that apply to listed property.
Health-care reform legislation enacted in 2010 expanded Form 1099 information reporting requirements. Under the legislation, a business will generally have to issue a Form 1099 to any company or individual to whom the business pays $600 or more in aggregate payments beginning in 2012. An exception applies to individuals engaged in passive investment activity.
Effective starting in 2011, the Small Business Jobs Act provides that recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return to the IRS and to the service provider.
Exceptions to this reporting requirement are made for:
The Small Business Jobs Act allows governmental 457(b) plans (eligible deferred compensation plans maintained by a State, a political subdivision of a State, an agency or instrumentality of a State, or an agency or instrumentality of a political subdivision of a State) to allow participants to make Roth contributions, effective in 2011.
Effective September 28, 2010, the legislation authorizes 401(k) plans, 403(b) plans, and governmental 457(b) plans to allow participants to roll over pretax dollars into a designated Roth account under the plan. A participant who rolls over funds to a designated Roth account must include the rollover amount in gross income (except to the extent it represents a return of after-tax contributions) in the same manner as if the distribution were rolled over into a Roth IRA. The special rule for 2010 Roth conversions applies–a participant is allowed to include half the amount of income that results from the rollover on his or her 2011 tax return, and half on his or her 2012 tax return. The special recapture rule for the 10-percent early distribution tax also applies if distributions are made from the designated Roth account in a five year period.
A plan that does not otherwise have a designated Roth program is not permitted to establish designated Roth accounts solely to accept rollover contributions. In other words, the Roth accounts must be part of general qualified cash or deferred arrangement that allows participants to make ongoing contributions to the Roth accounts. Further, the distribution to be rolled over must be otherwise allowed under the plan. For example, an amount that is subject to distribution restrictions cannot be rolled over to a designated Roth account under this provision.
Beginning in 2011, the Small Business Jobs Act permits a portion of a nonqualified annuity (an annuity that is not held by a qualified retirement plan or IRA), 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. Essentially, the portion of the annuity or contract that is annuitized is treated as a separate contract for purposes of federal income taxation, and the investment in the contract is allocated on a pro rata basis.
The Small Business Jobs Act: