September 30, 2010
On Monday, September 27, president Barack Obama signed into law the Small Business Jobs Act; a $42 billion revenue generating bill aimed at helping small businesses. According to the Senate summary of the bill, the measure is expected to create 500,000 new jobs by providing small businesses with more availability to capital.
What Changes are in the Bill?
Grants one-year extension of 50% bonus depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, businesses were allowed to more rapidly deduct capital expenditures of most new personal property placed in service in 2008 or 2009 by permitting the first-year write-off of 50% of the cost. For 2011, 50% bonus depreciation will apply to asset lives 10 years or more.
Allows taxpayers using the percentage of completion method to exclude bonus depreciation from PCM computations with regard to depreciable property placed in service in 2010. This prevents bonus depreciation from having the effect of accelerating income.
Removes cell phones from the category of listed property. Cell phones can now be deducted or depreciated like other business property, without the burden of recordkeeping requirements.
Enhancements of small business expensing. Increases IRC 179 expension limits to $500,000 for 2010-2011. Under previous law, small business taxpayers could expense up to $250,000 of qualifying property placed in service in tax years beginning in 2010, and the annual expensing limit could be reduced by the amount of total qualifying property cost (placed in service in 2010) exceeding $800,000 (the investment ceiling). Under the new legislation, the previous $250,000 expensing limit for qualifying property was increased to $500,000 for tax years beginning in 2010 and 2011, and the investment ceiling was increased to $2,000,000. Also, the new law makes certain real property eligible for expensing. The new limit of $500,000 of expensed property can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property), beginning in 2010 and 2011.
Permits partial annuitizations of annuity contracts. Holders of nonqualified annuities can now elect to receive part of the annuity contract in the form of a stream of annuity payments. The remainder of the contract can accumulate income on a tax-deferred basis.
Increases auto depreciation limits. The new legislation increases passenger automobile depreciation limits by $8,000. For 2010, the maximum first-year depreciation for passenger vehicles is $11,060.
Allows health insurance premiums as a deduction in computing self-employment taxes for 2010. With the new legislation, business owners can deduct health insurance costs incurred in 2010 for themselves and their family members when calculating their 2010 self-employment tax.
Subjects persons who receive rental income from real estate (payments received after 12/31/10) to the same information reporting requirements as tax payers engaged in a trade or business. The new law requires persons receiving rental income from real property to file information returns with the IRS. Real property is defined as qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. There are exceptions for taxpayers with rental income under the IRS-determined minimal amount, individuals renting their principal residences temporarily and those for whom the reporting requirements would create a hardship. In addition, the legislation also increases penalties for failure to file normal form 1099 Misc and other information returns (effective for returns to be filed in 2011).
Extends carryback period for general business credit to five years for small taxpayers with average annual gross receipts of $50 million or less. Under the previous law, businesses could only carry back unused general business credits to offset taxes paid in the previous year. The new law grants eligible small businesses the option to carry back unused business credits for up to 5 years prior, beginning in the 2010 tax year.
Reduces built-in period for S corporations to five years for 2011. When converting from a C corporation to an S corporation, businesses were previously required to hold onto appreciated assets for 10 years (recently reduced to 7 years) without being subjected to a 35% business-level tax imposed on the built-in gain. With the new 2010 Small Business Jobs Act, the assets holding period has further been reduced to 5 years if the 5th tax year precedes the tax year beginning in 2011.
Increases amount of start-up expenditures that can be deducted to $10,000. The new legislation allows taxpayers to deduct up $10,000 in legitimate start-up expenditures for 2010. A business’s deduction amount is reduced by the amount by which the start-up expenditures exceed $60,000. The previous deduction limit was $5,000 for start-up expenditures less than $50,000.
If you think this legislation could affect your business, or for more details related to the Small Business Jobs Act, please contact Mountjoy Chilton Medley LLP for more information.
Mountjoy Chilton Medley LLP offers expertise in audit and assurance services, tax planning, business valuation, litigation support, fraud examination, business start-up and consulting for non-profit, public and privately-held organizations. The firm offers further guidance in healthcare business consulting, payroll and bookkeeping services and wealth management services. The company has offices in Louisville, Lexington, Covington, Frankfort and Bowling Green. www.mcmcpa.com.
