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Small Business Jobs Act
Jim Brandenburg, CPA - Shareholder for Kolb+Co. email | bio
October 2010
The Small Business Jobs Act of 2010 (H. R. 5297) worked its way through Congress over the summer and was signed into law today, September 27, 2010. The bill aims to establish more favorable economic conditions for small businesses by seeking to provide incentives for investment, access to capital, and support of innovation and entrepreneurship through a number of tax, loan, and other provisions.
The following analysis covers selected tax and loan provisions in the Small Business Jobs Act of 2010 (with cost estimates from the Joint Committee on Taxation in Congress). This update provides some of the bill's details that will help you plan accordingly over the remainder of the year. Please note that there may be other tax bills enacted this year including tax legislation on extending the "Bush tax cuts" beyond 2010 and estate tax changes. We will provide updates as warranted.
INVESTMENT: New Tax Provisions in the Bill to Encourage Investment
Extension of "Bonus Depreciation:" Businesses are allowed to recover the cost of capital expenditures for machinery and equipment and other fixed assets generally over five to fifteen years according to tax depreciation schedules. For the tax years 2008 and 2009, however, the "50 percent bonus depreciation" provisions allowed businesses to recover the costs of certain capital expenditures more quickly than under ordinary depreciation schedules by permitting an immediate 50 percent deduction of the cost of depreciable property placed in service in those years. This new bill extends this additional first-year 50 percent write-off for qualifying property placed in service in 2010. Thus, any qualifying additions made since January 1, 2010 will qualify for additional tax depreciation in 2010. [This provision is estimated to cost $5.5 billion over ten years]
Increase of "Section 179 Expensing" and Expansion to Certain Real Property: Under current law, taxpayers may elect to write-off in the year acquired the cost of certain tangible personal property that is purchased for use in the active conduct of a trade or business in lieu of recovering these costs over time through depreciation. Earlier this year Congress modified this Section 179 expensing for tax years beginning in 2010 to permit taxpayers up to a $250,000 immediate write-off of capital expenditures, subject to a phase-out once these capital expenditures exceed $800,000. After 2010, the thresholds were scheduled to revert to $25,000 and $200,000, respectively. This new small business jobs bill, however, makes a significant increase in these thresholds to $500,000 (amount of annual expensing limitation) and $2,000,000 (limitation for annual additions) for the taxable years beginning in 2010 and 2011. Further, within these higher thresholds, this new bill allows taxpayers to expense up to $250,000 of the cost of qualified leasehold improvement property; qualified restaurant property; and qualified retail improvement property. [This provision is estimated to cost $2.2 billion over ten years.]
CAPITAL: New Tax Provisions in the Bill to Provide Access to Capital
General Business Credit Not Subject to AMT: Under the Alternative Minimum Tax (AMT), taxpayers may generally only claim allowable general business credits (e.g., R & D credit, Welfare-to-Work credit) against their regular tax liability, but only to the extent that their regular tax liability exceeds their AMT liability. This new bill allows certain small businesses to use all types of general business credits against their AMT. This new rule applies to general business credits for those sole proprietorships, partnerships, and non-publicly traded corporations with $50 million or less in average annual gross receipts over the prior three years. [This provision is estimated to cost $977 million over ten years.]
General Business Credit Carried Back Five Years: Under prior law, unused general business credits generally were carried back one year to offset taxes paid in the previous year, and the remaining unabsorbed credits are then carried forward twenty years to offset future tax liabilities. This bill extends the one year carryback for general business credits to five years for certain small businesses. This applies to general business credits for those sole proprietorships, partnerships, and non-publicly traded corporations again with $50 million or less in average annual gross receipts over the prior three years. [This provision is estimated to cost $107 million over ten years.]
BIG Tax Holding Period for S Corporations Shortened to Five Years: Generally, a "C Corporation" that makes an election to convert to S Corporation status must monitor the disposal of any appreciated assets for ten years following its conversion. If the assets are disposed of, a corporate-level tax could be triggered on the "built-in gain" at the highest corporate rate of 35 percent. This ten-year holding period was reduced to seven years for the tax years 2009 or 2010. This new small business jobs bill further shortens the holding period to five years in 2011 for assets subject to the built-in gains tax, if the 5th taxable year in the holding period precedes the taxable year beginning in 2011. [This provision is estimated to cost $70 million over ten years.]
100% Exclusion of Small Business Capital Gains: Generally, non-corporate taxpayers may exclude 50 percent of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 and before January 1, 2011, the exclusion is increased to 75 percent. At the time of sale, however, 28% of the excluded gain will be treated as a tax preference item subject to the alternative minimum tax (AMT). "Qualifying small business stock" is from a C Corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and who meet a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of: (1) ten times the taxpayer's basis in the stock; or (2) $10 million of gain from stock in that corporation. This new legislation temporarily increases the amount of the exclusion to 100 percent of the gain from the sale of qualifying small business stock that is acquired after September 27, 2010 (the date of enactment of the bill) and that is held for more than five years. Additionally, the bill eliminates the AMT preference item attributable for that sale. [This provision is estimated to cost $518 million over ten years.]
Increase Small Business Administration (SBA) Loan Limits: This provision increases 7(a) loan limits from $2 million to $5 million; 504 loans from $1.5 million to $5.5 million; and "micro-loans" from $35,000 to $50,000. It also increases the government guarantee on 7(a) loan limits, while providing the elimination of borrower fees on 7(a) and 504 loans through December 31, 2010. Further, the bill increases the 7(a) Express Loans from $300,000 to $1 million to increase working capital to small businesses. The package also includes the "Intermediary Lending Pilot" program, which allows the SBA to make direct loans to eligible non-profit lending intermediaries, in turn allowing them to make loans to new or growing small businesses. The SBA has estimated that the loan increase would expand lending to small businesses by $5 billion in the first year. [This provision is estimated to cost $26 million over two years.]
Small Business Lending Fund: The small business bill authorizes the creation of the "Small Business Lending Fund" to provide the Treasury Department with the ability to purchase preferred stock and other debt instruments from eligible financial institutions with less than $10 billion in total assets. Eligible institutions include insured depositories, bank and savings and loan holding companies, and certain community development loan funds. Eligible institutions with less than $1 billion in total assets can apply to receive investments of up to five percent of their risk-weighted assets. Eligible institutions between $1 billion and $10 billion in total assets can receive investments of up to three percent of risk-weighted assets. Participating institutions will pay a five percent dividend rate on the preferred stock, but this rate can be reduced to as low as one percent if a bank demonstrates a 10 percent increase in small business lending relative to a baseline set using the four quarters prior to enactment. The dividend rate is increased to seven percent after two years, if the bank does not increase its small business lending. To encourage timely repayment, the rate increases to nine percent after four and a half years. The Treasury Department's authority to make capital investments under the program is terminated one year after the date of enactment.
OTHER: Selected Tax Provisions in the Bill
Allow Rollovers from Elective Deferral Plans to Roth Designated Accounts: The bill would allow Section 401(k), Section 403(b), and governmental Section 457(b) plans to permit participants to roll their pre-tax account balances into a "Roth account." The amount of the rollover would be includible in taxable income except to the extent it is the return of after-tax contributions. If the rollover is made in 2010, the participant can elect to pay the tax in 2011 and 2012. Plan amendments are likely to be required prior to permitting such ROTH conversions, and additional IRS guidance on the format and process of these conversions may also be may be needed. Plan amendments and IRS guidance will be needed soon, as these new rules are effective for ROTH conversions made after enactment of the bill, September 27, 2010. [This provision is estimated to raise $5.1 billion over ten years.]
NOTE: State tax laws may differ from federal on the tax treatment of these Roth 401(k), 403(b), and 457(b) conversions. For example, Wisconsin previously had differences in its treatment of Roth IRAs and needed special tax legislation earlier this year to remedy the differences, and it is uncertain whether Wisconsin may need another legislative fix for these Roth-type conversions. So please proceed carefully as you analyze the possibility of making a Roth 401(k)-type conversion.
Allow Participants in Governmental Section 457 Plans to Treat Elective Deferrals as Roth Contributions: Beginning in 2011, the bill allows retirement savings plans sponsored by state and local governments (referred to as "governmental Section 457(b) plans") to include Roth accounts, which are currently available only in 401(k) and 403(b) plans. These Section 457(b) plans will be handled in the federal Thrift Savings Plan in 2011. You may recall that contributions to Roth accounts are made on an after-tax basis; however, distributions of both principal and earnings from a Roth account are generally tax-free. [This provision is estimated to raise $506 million over ten years.]
Require Information Reporting for Rental Property Expense Payments: The bill requires lessors of real property to file information returns (Form 1099 series) with the IRS and for any to service providers receiving payments of $600 or more during the year for certain rental property expenses (maintenance, plumbing, custodial work, etc.). In general, there is an exception for individuals renting their principal residences, including active members of the military, from the reporting requirements. [This provision is estimated to raise $2.5 billion over ten years.]
The above covers selected items found in The Small Business Jobs Act of 2010. Please contact your Kolb+Co. adviser if you have any questions, or if you need further information regarding any of these provisions. For your reference, please click on this link for a more detailed description of this bill as proved by the Staff of the Joint Committee on Taxation in Congress: http://www.jct.gov/publications.html?func=startdown&id=3707.
IRS Circular 230 Notice: According to IRS Circular 230, the communication contained in this e-mail and any related attachments are not intended to be considered as a "covered opinion," and therefore cannot be relied upon as a defense against any tax penalties which may be imposed by the Internal Revenue Service ("IRS").