Significant Business Tax Savings

Published:

by Marie Jett, CPA | Manager, Tax Services Group

On September 16 the Senate passed its version of the Small Business Jobs Act of 2010. As of September 21, the House has yet to pass the bill, but the House is expected to pass the bill later this week without modifications, then it heads to the President for signature. We’ll keep you updated on any changes. The following describes a few key features that are in the Senate passed bill. This bill may be called the Small Business Jobs Act, but it affects both large and small businesses, as well as individuals. First, a number of tax law changes in this bill affect depreciable property.

  • Section 179 expensing – Under this bill for 2010 and 2011, the Section 179 accelerated depreciation expensing amounts increase to $500,000 for qualified assets placed in service with a phase out limitation beginning with purchases over $2,000,000. Off-the-shelf computer software will continue to qualify for Section 179 expensing through 2011.
  • Qualified real property expensing – For 2010 and 2011, a taxpayer can place into service qualified leasehold improvement property, restaurant property, or retail improvement property and may be able to claim up to $250,000 as Section 179 expensing.

  • Bonus depreciation – Companies can claim 50% bonus depreciation for qualifying property placed in service in 2010.

  • Listed vehicles – Listed vehicles placed in service in 2010 with 50% or more for business use will get an additional $8,000 in allowable depreciation expense. This increases the first-year depreciation limit to $11,060 for autos and $11,160 for light trucks and vans. A listed vehicle is a passenger vehicle, light truck, or van that is less than 6,000 lbs gross vehicle weight. The IRS limits the amount of depreciation that can be claimed during a year for listed vehicles.

  • Cell phones – For tax years after December 31, 2009, cell phones are removed from the definition of listed property.

  • Startup expenses – For 2010, the deduction for start up expenses increases from $5,000 to $10,000 with the phaseout threshold increase from $50,000 to $60,000.

Second, an eligible small business will be able to extend the carryback period for general business credits to 5 years and the credits can be used to offset alternative minimum tax. An eligible small business will be a non-publicly traded corporation, partnership, or sole proprietorship that doesn’t average more than $50 million in annual gross receipts for the 3 preceding tax years. This is an especially important provision.

Third, for tax years beginning in 2011, the recognition period for S corporation built in gains tax is reduced to 5 years, if the fifth year in the recognition period precedes the tax year beginning in 2011 – i.e. a corporation that elected S corporation status in 2006.

A final key tax benefit in this bill is for self employed individuals. Self employed individuals may have the ability to include the deduction of health insurance costs in computing their self-employment taxes. This change would only be applicable to the 2010 tax year.

Unfortunately with the new tax benefits mentioned above, there are also new revenue raisers in this act. First, are rental income information reporting changes. Beginning after December 31, 2010, taxpayers who receive rental income from real property will need to issue Form 1099s to IRS and service providers that provide $600 or more for rental property expenses. There are a few exceptions – for individuals temporarily renting their personal residence, taxpayers whose rental income doesn’t exceed IRS determined amounts, or those for whom the information reporting would be considered a hardship under IRS regulations.

Second, there will be increased penalties on information returns filed after December 31, 2010. There are three tiers of penalties and all tier penalties will double. For example, the third tier penalty, which is the highest penalty level, is currently $50 for each return not filed. Beginning in 2011, the penalty for this tier will increase to $100. The calendar year maximum penalties are also increasing with the third tier maximum increasing from $250,000 to $1,500,000. The penalty for intentionally not filing will increase from $100 to $250 per return. In addition to this, there will be penalties using the same tiered system for failure to provide the payee with a statement.

Finally, for retirement distributions (401(k), 403(b), and governmental 457(b) plans) made after the enactment date, participants can roll their pre-tax amounts into a Roth account. If the rollover is made in 2010, the tax can be paid in 2011 and 2012.

This article is intended to highlight some, but not all, of the potential tax law changes proposed in the Small Business Jobs Act. Just to reiterate, the House has not passed the bill, nor has the President signed it into law. The Tax Services Group of Greenwalt CPAs will keep you abreast of any significant changes to the bill when it becomes actual law.