- Tax Breaks in the Small Business Jobs Act of 2010
- November 3, 2010 | Authors: Cory Jacobs; Alan L. Zeiger
- Law Firm: Blank Rome LLP - Philadelphia Office
On September 27, President Obama signed into law the Small Business Jobs Act of 2010 (the “Act”) which provides an array of tax breaks and incentives for small businesses under the Internal Revenue Code of 1986 (the “Code”).
Increase in Annual Expense Limitation for Capital Costs
In order to help small businesses quickly recover the cost of certain capital expenses, the Code permits small business taxpayers to elect to write off the cost of these expenses in the year of acquisition instead of recovering these costs over time through depreciation. From 2008 through 2010, a taxpayer could expense up to $250,000 of certain property such as machinery, equipment and certain software (“Qualifying Property”), but this $250,000 annual expense limit was reduced by the amount in which the cost of Qualifying Property placed in service exceeded $800,000.
For tax years beginning in 2010 and 2011, however, the Act permits a taxpayer to expense up to $500,000 of Qualifying Property and the $500,000 expense limit is reduced by an amount in which the cost of Qualifying Property placed in service exceeds $2 million.
The Act also allows certain real property to be treated as Qualifying Property. Generally, the $500,000 annual expense limit can include up to $250,000 of qualified real property that was placed in service in a tax year beginning in 2010 or 2011 (e.g., a qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property).
Extension of 50% Additional First-Year Depreciation
Previous legislation generally allowed a business to accelerate the deduction of a capital expenditure of most new tangible personal property (e.g., machinery and equipment) and other new property (e.g., most computer software and certain types of leasehold improvements) that was placed in service in 2008 or 2009 by permitting a first-year write-off of 50% of the cost.
The Act extends this first-year 50% write-off to similar types of property placed in service in 2010. The Act also provides that additional depreciation is not taken into account as a cost under the percentage of completion method of accounting, effectively preventing the acceleration of income.
Increased Deduction for Start-Up Expenditures
Prior to the Act, a taxpayer was able to deduct up to $5,000 of any trade or business start-up expenditure. This $5,000 limit was reduced by the amount that the startup expenditure exceeded $50,000.
The Act now allows a taxpayer to deduct up to $10,000 of any trade or business start-up expenditure with the $10,000 limit being reduced by the amount that the startup expenditure exceeds $60,000.
100% Exclusion of Gain on Qualified Small Business Stock Acquired between September 28, 2010 and December 31, 2010
Prior to the Act, an individual could generally exclude 50% of the gain on the sale of qualified small business stock (“QSBS”) held for at least five years and 75% of the gain for any QSBS acquired between February 18, 2009 and December 31, 2010. QSBS is generally stock that meets a number of conditions specified in the Code. (e.g., it must be stock of a corporation that has gross assets of $50 million or less, the corporation must meet active business requirements).
Under the Act, an individual can exclude 100% of the gain on the sale of QSBS held for at least five years that was acquired between September 28, 2010 and December 31, 2010. The Act also eliminates the alternative minimum tax (the “AMT”) preference item attributable for that sale.
General Business Credits of an Eligible Small Businesses for 2010 Allowed to be Carried Back Five Years
Generally, the Code provides for a general business credit (“GBC”) that can be applied against a taxpayer’s tax liability subject to certain limitations. To the extent that the GBC cannot be completely utilized because of the limitations, the Code permits a taxpayer to carry back the GBC to offset any tax paid in the previous year, and the remaining amount can be carried forward for 20 years to offset any future tax liability.
Under the Act, for the taxpayer’s first tax year beginning in 2010, an eligible small business (i.e., a sole proprietorship, partnership or non-publicly traded corporation with $50 million or less in average annual gross receipts for the prior three years) can carry back any unused GBC for five years.
Reduction of Holding Period for Built-in-Gain of a S Corporation
Generally, a C corporation converting to an S corporation will recognize a 35% corporate-level tax if it disposes of an asset that was appreciated at the time of conversion and such appreciated asset is sold within 10 years following the conversion.
The Act temporarily shortens the holding period of assets subject to the 35% corporate-level tax to five years if the fifth tax year following conversion to a S corporation is in the 2010 tax year or earlier (i.e., the S corporation converted in the 2005 tax year or earlier).
Cost of Health Insurance Can be Deducted for the Purpose of Calculating the Self-Employment Tax
In calculating the 2010 self-employment tax, the Act permits a business owner to deduct the cost of health insurance incurred in 2010 for themselves and any family member.
Cell Phones Removed from Listed Property category
Generally, a taxpayer is not allowed a deduction for an item of “listed property” unless certain record-keeping requirements are met. Prior to the Act, a cell phone (e.g., a Blackberry device) was considered listed property so that an employer had to meet the recordkeeping requirements in order to deduct a cell phone that was provided to an employee.
The Act removes cell phone from the definition of listed property so that a cell phone can be deducted or depreciated without onerous recordkeeping requirements.
To ensure compliance with IRS Circular 230, you are hereby notified that any discussion of federal tax issues in this letter is not intended or written to be used, and it cannot be used by any person for the purpose of: (A) avoiding penalties that may be imposed on them under the Code, and (B) promoting, marketing or recommending to another party any transaction or matter addressed herein. This disclosure is made in accordance with the rules of Treasury Department Circular 230 governing standards of practice before the Service.