On September 27, 2010, the President signed into law the “Small Business Jobs Act of 2010” (“Act”) which includes a number of important tax provisions for business.
Increased Section 179 Expensing Limits
Prior to the Act, for tax years after 2010, capital costs for property like machinery, equipment and software put into service during the tax year could be expensed up to a limit of $25,000. Amounts not able to be expensed would be subject to normal depreciation rules. This $25,000 limit would be reduced for each dollar in excess of $200,000 that the business spent on these capital assets. This means that no expense deduction would be available for businesses spending more than $225,000 for these capital assets.
For 2010, prior to the Act, the amount that could be expensed under Section 179 was $250,000. This amount would be reduced for each dollar in excess of $800,000 that the business spent on these capital assets.
The Act changes the law for 2010 and 2011 so that businesses can expense up to $500,000 of qualifying property placed in service during the tax year. The amount will be reduced dollar for dollar to the extent amounts spent exceed $2,000,000. The $25,000 and $200,000 limits return for tax years after 2011.
The Act also makes certain real property eligible for expensing. The $500,000 amount can include up to $250,000 of qualified leasehold improvement, restaurant and retail improvement property.
Extension of Bonus Depreciation
Prior to the Act, businesses had the opportunity to write off 50 percent of the cost of certain capital assets for property placed in service in 2008 or 2009. The Act extends the “bonus depreciation” another year through 2010. The prior rules that applied to certain aircraft and long production period property in 2010 have been extended to 2011 as well.
Boosted Deduction for Start-up Expenditures
The Act has increased the amount of start-up costs that you can expense in 2010 by double. Generally, expenses incurred before a business begins don’t generate any deductions or other current tax benefits. Prior to the Act, taxpayers were permitted to expense up to $5,000 of start-up costs in the year business began. The remainder of the start-up costs would be deducted over 15 years. The $5,000 figure was reduced dollar for dollar to the extent that the start-up costs exceed $50,000.
The Act doubles the amount that can be expenses off for 2010 to $10,000. The “phase out” amount is increased from $50,000 to $60,000. This ability to expense start-up costs only applies to years beginning in 2010. If you do not want this deduction to apply for your business, you have to “opt-out” of the deduction.
Start-up costs include expenses incurred to investigate creating or buying a business, creating the business, or otherwise engaging in an activity with the expectation of that activity being “for profit” and becoming an active business. An expense must be one that would be deductible if it were incurred after the business began. An example of a startup expense is the cost of analyzing the potential market for a new product.
Sale of Small Business Stock
An opportunity has been created in years past to exclude a portion of the taxable gain on the sale of “qualified small business stock” in certain circumstances. This means that the owner is not required to pay tax on the full amount of the gain. The Act has created an ability to exclude, from regular tax and alternative minimum tax, 100 percent of the gain from the sale of qualifying small business stock that is acquired between September 27, 2010, and December 31, 2010, and held for more than five years.
Five-Year Carryback for Unused Business Credits
Generally, a business’s unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. The Act, for the first tax year of the taxpayer beginning in 2010, allows eligible small businesses to carry back unused general business credits for 5 years instead of just 1. Eligible small businesses are sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.
In addition, the Act allows eligible small businesses to use all types of general business credits to offset their alternative minimum tax in tax years beginning in 2010.
Health Insurance and Self-Employment Tax
The Act allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax. However, there are certain stipulations about the deduction. The taxpayer must not qualify for subsidized insurance from an employer. In addition, a spouse or dependent having insurance available from an employer will impact the deduction.
Cell Phones Just Got Easier
Cell phones are no longer “listed property.” This means that the cost of cell phones may be deducted by your business (or depreciated) like other business property without the heavy recordkeeping requirements that have been required.
S Corporation Built In Gains Tax
If you own an S corporation that was previously a C corporation, you may have gotten a BIG break. As you know, there is a tax on the gains that were “built in” at the time your corporation made its S election. That tax exists for 10 years after your corporation elects S status.
The Act has changed that. If your corporation elected to be taxed as an S corporation in 2005 or before, so that your fifth tax year as an S corporation happens before 2011, your “built in gains period” has been reduced from 10 years to 5.
Percentage of Completion Accounting
The Act states that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation in 2010 is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income. Keep this in mind in your year end planning.
Content provided by Wishart, Norris, Henninger & Pittman, P.A., which partners with owners of closely-held businesses to provide comprehensive legal services in all areas of business, tax, estate planning, succession planning, purchases and sales of businesses, real estate, family law, and litigation. For more information, contact Robert Norris at 704-364-0010 or visit www.wnhplaw.com.