On September 27, President Barack Obama signed into law the Small Business Jobs Act of 2010, P.L. 111-240. The act expands loan programs through the Small Business Administration, strengthens small business preference programs for federal government projects, provides incentives for exporters, offers a variety of small business tax breaks, and includes some revenue raisers.
Small Business Tax Relief
The act includes several tax relief measures aimed at businesses.
Sec. 179 expensing and bonus depreciation: The act increases the maximum amount a taxpayer may expense under Sec. 179 to $500,000 and increases the phaseout threshold amount to $2 million for tax years beginning in 2010 and 2011. It also expands the definition of eligible property to include qualified leasehold improvements, restaurant property, and retail improvement property. The first-year 50% bonus depreciation available under Sec. 168(k) is extended for one year to apply to property acquired and placed in service in 2010 (or 2011 for certain long-lived and transportation property). The 2010 maximum first-year depreciation amount for automobiles that are qualified property is increased to $11,060 (from $3,060). The act also allows taxpayers using the percentage-of-completion method to take into account the cost of qualified property as if bonus depreciation had not been enacted.
Qualified small business stock: The act amends Sec. 1202 to increase the exclusion from gross income of gain from the sale or exchange of qualified small business stock from 50% to 100%, and the minimum tax preference does not apply. This provision applies to eligible stock acquired after September 27, 2010, and before January 1, 2011.
Business credits: The carryback period for eligible small business credits under Sec. 38 is extended from one to five years. The act also allows taxpayers to use eligible small business credits to offset both regular and alternative minimum tax liability. Both provisions are effective for credits determined in the taxpayer’s first tax year beginning after 2009.
Built-in gains tax: For tax years beginning in 2011, the act provides that for purposes of computing the Sec. 1374 built-in gains tax, the recognition period is the five-year period beginning with the first day of the first tax year for which the corporation was an S corporation.
Self-employed individuals’ health insurance: The act allows self-employed individuals who deduct the cost of health insurance for themselves and their spouses, dependents, and children who have not attained age 27 as of the end of the tax year to take the deduction into account in calculating net earnings from self-employment for purposes of SECA taxes. This provision applies to the taxpayer’s first tax year beginning after 2009.
Startup expenses: The act increases the Sec. 195 deduction for trade or business startup expenses from $5,000 to $10,000 for tax years beginning in 2010. The start of the limitation on the deduction is increased from $50,000 to $60,000. So for 2010 the amount of the deduction is the lesser of (1) the amount of the startup expenses or (2) $10,000, reduced (but not below zero) by the amount by which the startup expenditures exceed $60,000.
Reportable and listed transactions: The act limits the Sec. 6707A penalty for failure to disclose a reportable transaction (that is, a transaction determined by the IRS to have a potential for tax avoidance or evasion) to 75% of the decrease in tax resulting from the transaction. The maximum annual penalty allowed will be $10,000 in the case of a natural person and $50,000 for all other persons for failure to disclose a reportable transaction. For listed transactions, the maximum penalty will be $100,000 in the case of a natural person and $200,000 for all other persons. The minimum penalty is $5,000 for natural persons and $10,000 for all other persons.
The act also requires the IRS to report to Congress by December 31, 2010, and then annually, on penalties assessed for certain tax shelters and reportable transactions (under Secs. 6662A, 6700(a), 6707, 6707A, and 6708). The penalty under Sec. 6707A has been criticized because the penalty amounts often exceed the tax benefit of the targeted transactions.
The IRS has since July 2009 been working under a self-imposed moratorium on collection enforcement of the Sec. 6707A penalty to give Congress time to amend the penalty amounts. The AICPA had recommended that the IRS be allowed to abate the Sec. 6707A penalty in cases where the taxpayer has acted reasonably and in good faith. The AICPA also believes that judicial review should be allowed in cases where the IRS has assessed a penalty under Sec. 6707A. The act does not adopt either of these recommendations.
Cell phones: The act removes cell phones from the definition of listed property. Thus, the heightened substantiation requirements and special depreciation rules that apply to listed property under Sec. 280A will no longer apply to cell phones. However, the Joint Committee on Taxation notes that this change
does not affect Treasury’s authority to determine the appropriate characterization of cell phones as a working condition fringe benefit under section 132(d) or that the personal use of such devices that are provided primarily for business purposes may constitute a de minimis fringe benefit, the value of which is so small as to make accounting for it administratively impracticable, under section 132(e). [Joint Committee on Taxation, Technical Explanation of the Tax Provisions in Senate Amendment 4594 to H.R. 5297, the “Small Business Jobs Act of 2010” (JCX-47-10) at 25, n. 90 (September 16, 2010)]
The AICPA had previously recommended this statutory change in comments to the IRS.
The act also contains several revenue-raising provisions.
Sec. 457 plan Roth contributions: The act allows participants in government Sec. 457 plans to treat elective deferrals as Roth contributions, effective for tax years beginning after 2010.
Rollovers to Roth accounts: The act also allows rollovers from elective deferral plans to Roth-designated accounts. If a Sec. 401(k) plan, Sec. 403(b) plan, or government Sec. 457(b) plan has a qualified designated Roth contribution program, a distribution to an employee (or a surviving spouse) from an account under the plan that is not a designated Roth account is permitted to be rolled over into a designated Roth account under the plan for the individual. This provision is effective for distributions made after September 27, 2010.
Annuitization: The act permits a portion of an annuity, endowment, or life insurance contract to be annuitized while the balance is not annuitized, provided that the annuitization period is for 10 years or more or is for the lives of one or more individuals. The annuitized portion will be treated as a separate contract for purposes of Sec. 72. This provision is effective for amounts received in tax years beginning after December 31, 2010.
Reporting rental income: The act makes recipients of rental income from real estate generally 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 in the course of earning rental income are required to provide an information return (typically Form 1099-MISC, Miscellaneous Income) to the IRS and to the service provider. This provision will apply to payments made after December 31, 2010.
Information returns: The act also increases the penalties for failure to file a correct information return. 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.
Federal contractor levies: The act allows the IRS to issue levies prior to a collections due process hearing for federal tax liabilities of federal contractors identified under the Federal Payment Levy Program, effective for levies issued after September 27, 2010.
Cellulosic biofuel: The act excludes so-called crude tall oil from the definition of cellulosic biofuel for purposes of the Sec. 40 tax credit for alcohol used as fuel. Crude tall oil is a byproduct of the paper-making industry. Earlier this year, the Health Care and Education Reconciliation Act of 2010, P.L. 111-152, removed another paper byproduct—black liquor—from the definition of cellulosic biofuel.
Income from guarantees: This act overrides the Tax Court’s recent decision in Container Corp., 134 T.C. No. 5 (2010), by amending the Sec. 861 and Sec. 862 source rules to address income from guarantees issued after September 27, 2010. Under new Sec. 861(a)(9), income from sources within the United States includes amounts received, whether directly or indirectly, from a noncorporate resident or a domestic corporation for the provision of a guarantee of indebtedness of such person. This applies to guarantees issued after September 27, 2010.
Corporate estimated taxes: Finally, the act increases the required corporate estimated tax payments factor for corporations with assets of at least $1 billion for payments due in July, August, or September 2015.