The Small Business Jobs and Credit Act (H.R.5297)

The Small Business Jobs and Credit Act (H.R.5297) passed in the senate and signed into law by President Obama on September 27, 2010 is projected to provide $12 billion in tax breaks to small businesses and creates a $30 billion lending fund. The act extends and enhances a number of the tax incentives included in both the Economic Stimulus act of 2008 and the American Recovery and Reinvestment Act of 2009. Many of the provisions within the bill require taxpayer action before the end of the year to receive the tax incentives. The following is a summary of the items included in the act.

The Small Business Jobs and Credit Act extends and greatly expands the availability of Code Section 179 depreciation. This provision allows eligible taxpayers to claim a 100% expense deduction on the purchase price of qualifying Code Sec. 179 property, such as furniture, fixtures, machinery and equipment. The maximum allowable deduction increases to $500,000 from $250,000 and the investment limit from $800,000 to $2 million for tax years beginning in 2010 and 2011. The new law also temporarily expands the definition of Code Sec. 179 qualifying property to include qualified leasehold improvements. Up to $250,000 of the total $500,000 Code Sec. 179 expense can be qualified real property, and is subject to carryover limitations.

The Small Business Jobs and Credit Act retroactively extends bonus depreciation for one year as of January 1, 2010. Bonus depreciation, the 50 percent depreciation deduction for certain qualified property acquisitions, was set to expire December 31, 2009. Unlike Code Section 179 there is no limitation on total purchases with bonus depreciation. The new law also extends through 2011, the additional year of depreciation allowed for property with a recovery period of 10 years or longer, as well as transportation property. The limitation under (Code Sec. 280F) for certain passenger automobiles also increases under the new law. The deduction allowed in the first year goes to $8,000 for qualifying autos bringing the maximum first year depreciation deduction to $11,060.

In 2010 only, the Small Business Jobs and Credit Act doubles the deduction limit for qualified trade or business start-up expenses from $5,000 to $10,000. The $10,000 deduction is reduced (but not below zero) by the amount of total start-up costs that exceeds $60,000. Qualifying trade or business start-up expenses include costs related to investigating, creating, or acquiring an active trade or business. Qualifying costs are not directly related to capital or equipment.

Beginning in 2010, the Small Business Jobs and Credit Act allows self-employed individuals to deduct health insurance costs in calculating net earnings from self-employment for the purpose of determining self-employment taxes. In 2009 and prior years a self-employed individual could take a deduction for health insurance costs paid for the individual and his or her immediate family for income tax purposes. However, in determining the self-employment income subject to self-employment taxes, the self-employed individual could not deduct any health insurance costs.

The Small Business Jobs and Credit Act extends the carryback period for qualifying small business credits from one to five years. Eligible small business credits are the sum of the general business credits (e.g., investment tax credits, R&D credits, work opportunity credits) each tax year for a qualifying small business. As defined in the new law, a qualifying small business is a corporation without publicly traded stock, a partnership, or a sole proprietorship, and has average annual gross receipts of $50 million or less for the prior three tax year periods. The credit can also be used to offset both the taxpayer's regular and AMT liabilities. These provisions are effective for credits determined in tax years beginning after 2009.

The Small Business Jobs and Credit Act also further shortens the holding period for S Corp built-in gains from seven years down to five for dispositions in tax years beginning in 2011, if the fifth year in the recognition period precedes the year beginning in 2011. This provision benefits corporations that were initially C Corps, but elected to be taxed as S Corps and had net built-in gains when they made the S Corp election. A built-in gain is the difference between the fair market value of an asset and its tax basis at the time the election is effective. The 2009 Recovery Act temporarily shortened the traditional 10-year holding period to seven years for dispositions in tax years beginning in 2009 and 2010.

The Small Business Jobs and Credit Act raises the gain exclusion on qualifying small business stock to 100 percent, effectively eliminating all capital gains taxes on qualifying small business investments, for stock acquired after September 27, 2010 and before January 1, 2011. Prior to the new law the 2009 Recovery Act increased the exclusion of gain on the sale of certain small business stock held for more than five years from 50 percent to 75 percent for stock issued after February 17, 2009 and before January 1, 2011.

The Small Business Jobs and Credit Act provides a measure of relief to certain taxpayers liable for penalties assessed after December 31, 2006 under Code Sec. 6707A. Under the new law, a taxpayer that fails to disclose participation in a reportable transaction is subject to a penalty equal to 75 percent of the decrease in tax shown on the return as a result of the transaction or which would have resulted if the transaction was respected for federal tax purposes. The penalty cannot exceed $10,000 for an individual taxpayer who fails to disclose a reportable transaction or $50,000 for all other taxpayers. The penalty cannot exceed $100,000 for an individual taxpayer who fails to disclose a listed transaction or $200,000 for all other taxpayers. The new law also sets a minimum penalty of $5,000 for an individual taxpayer that fails to disclose a reportable transaction or a listed transaction, or $10,000 for all other taxpayers.

The Small Business Jobs and Credit Act offers taxpayers some new options for retirement savings, including a first-time opportunity that allows participants in 401(k) and other plans to roll over existing balances to certain Roth accounts within their plans.

In addition to the new retirement savings incentives, which will produce some tax revenue, the Small Business Jobs and Credit Act includes some notable new requirements and penalty increases.

The Small Business Jobs and Credit Act significantly increases the penalties assessed on taxpayers who fail to file information returns with the IRS in a timely manner. The new law also increases the penalties for failing to file information returns to payees. The minimum penalty for each intentional instance increases from $100 to $250 effective for returns required to be filed on or after January 1, 2011.

Under the Small Business Jobs and Credit Act, recipients of rental income from real estate are now generally subject to the same information reporting requirements as taxpayers engaged in a trade or business. Taxpayers will be required to file 1099 information returns with the IRS to report certain payments to service providers. The new provision will apply to payments made after December 31, 2010, and is triggered if the individual receiving rental income pays a service provider $600 or more in any tax year. Certain exceptions and exemptions apply.

This relatively short summary of the Small Business Jobs and Credit Act is by no means a comprehensive review of the new law. Look for more details and updates from your tax professionals at Dawson & Associates in the months ahead regarding the Small Business Jobs and Credit Act along with additional upcoming and pending tax provision changes that impact you and your business and provide opportunities to maximize tax savings.