By Kenneth H. Bridges, CPA, PFS March 2010
In September 2010, a $12 billion tax incentives package titled The Small Business Jobs Act of 2010 was enacted. Highlights of the tax provisions include:
Bonus first-year depreciation – For most new depreciable assets (other than buildings) placed in service during 2010, 50% of the cost can be expensed immediately, with the balance recovered under the regular depreciation rules. This special first-year deduction applies both for regular tax and alternative minimum tax. For autos and light trucks, for which first-year depreciation would otherwise be limited under the so-called “luxury automobile rules”, bonus depreciation of $8,000 may be taken (bringing the total deduction to approximately $11,000).
Increased section 179 expense amount – The amount of furniture and equipment purchases that businesses can elect to immediately expense is increased to $500,000 for purchases made during 2010 and 2011, and the level of purchases at which this benefit begins to be phased out is increased to $2,000,000. This benefit is also now extended to cover the cost of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.
Increased deduction for start-up expenses – For tax years beginning in 2010, the amount of start-up expenses which can be immediately expensed is increased to $10,000.
Increase in exclusion for gain on sale of Qualified Small Business Stock – For “qualified small business stock” which is purchased between September 23, 2010 and December 31, 2010 and held at least 5 years, gain from the sale of such will be free from Federal tax.
More favorable treatment of small business tax credits – “Eligible small businesses” (those with average annual revenue of less than $50 million) will be able carry general business credits generated in 2010 back 5 years. Further, such credits will be able to offset both regular tax and alternative minimum tax.
Shortening of the “built-in gains tax” period for S-corps – C-corporations which make a Subchapter S election and then sell their assets within 10 years of electing S status are subject to a corporate level tax (the “built-in gains tax”) on any unrealized gains that existed at the effective date of the S election. For asset sales which occur during 2009 or 2010, legislation enacted last year shortened this period to 7 years. For asset sales which occur during 2011, the new legislation further shortens the period to 5 years.
Deduction of health insurance in computing self-employment tax – For 2010, self-employed persons may deduct their health insurance premiums not only in computing income tax, but also for purposes of the self-employment tax.
Cell phones no longer listed property – For tax years beginning after 2009, cell phones and similar telecommunications equipment will no longer be subject to the strict substantiation-of-use requirements which apply to “listed property”.
Information reporting by owners of rental property – Under the new legislation, owners of rental real estate will generally be subject to the same information reporting requirements as businesses, which means that they will need to file Form 1099s with respect to payments of $600 or more to service providers.
Increased penalties for late filing of information returns – Consistent with recent trends, the legislation seeks to offset some of the cost of its favorable tax provisions with increased penalties for late filing of information returns such as 1099s.
Roth conversions within employer plans – Participants in employer-sponsored retirement plans which include a Roth feature, will be able to convert pre-tax balances to Roth status, provided the funds are otherwise eligible for distribution at the time of conversion. The conversion is a taxable event.
Sourcing of guarantee fees for foreign corporations – Foreign corporations which receive fees from their U.S. subsidiaries for guaranteeing their debt will be required to treat such fees like interest under the sourcing rules, which will generally mean that such fees are subject to U.S. withholding tax, unless otherwise exempt under an income tax treaty.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
In December 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Relief Act”). Highlights of the tax provisions include:
Ordinary income tax rates – Absent this legislation, the highest individual rate was scheduled to rise to 39.6% effective January 1. With this legislation, it remains at 35%. The current rates for the lower income brackets are retained as well (i.e. 10%, 15%, 25%, 28%, and 33%, rather than increasing to 15%, 28%, 31% and 36%).
Qualified dividend income – Effective January 1, the highest rate on “qualified dividends” (which includes most dividend income other than interest income equivalents like money market mutual fund dividends) was scheduled to go to 39.6%. This legislation retains the current 15% rate.
Long-term capital gains – Currently, long-term capital gains enjoy a historically low Federal rate of 15%. Effective January 1, the rate was scheduled to rise to 20%. This legislation retains the 15% maximum rate.
Estate tax – For persons dying in 2009, there was a $3.5 million exemption from the estate tax and a maximum rate of 45%. For those dying in 2010, there is no estate tax. Effective January 1, 2011, the exemption was scheduled to revert to only $1,000,000 and the top rate to revert to 55%. Instead, the exemption will be $5,000,000 and the top rate will be 35%.
Extenders – A number of favorable tax provisions expired at the end of 2009. Amongst them were the higher alternative minimum tax exemptions, research tax credit, deduction of sales tax in lieu of state income tax, charitable distributions from IRAs, and above-the-line deductions for college tuition and educator expenses. These favorable provisions have been extended retroactively.
Payroll tax reduction– For 2011, the employee’s portion (but not the employer’s portion) of the social security tax will be reduced by 2 percentage points (from 6.2% to 4.2%). This applies for self-employed persons as well, and represents a potential tax savings of up to $2,136.
Bonus first-year depreciation – For most new depreciable assets (other than buildings) placed in service after September 8, 2010 and before January 1, 2012, 100% of the cost can be expensed immediately, with the balance recovered under the regular depreciation rules. For qualifying assets placed in service during 2012, 50% of the cost can be expensed immediately. This special first-year deduction applies both for regular tax and alternative minimum tax. For autos and light trucks, for which first-year depreciation would otherwise be limited under the so-called “luxury automobile rules”, bonus depreciation of $8,000 may be taken (bringing the total deduction to approximately $11,000).
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.