Overview of the Tax Provisions in the 2010 Small Business Jobs Act

The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for small business paid for with various revenue raisers. Here's a brief overview of the tax changes in the new law.

Tax Breaks and Incentives

Enhanced Small Business Expensing (Section 179 Expensing)
In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation.  Under pre-2010 Small Business Jobs Act law, taxpayers could expense up to $250,000 of qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010.  Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.
 
The new law also makes certain real property eligible for expensing.  For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).

General Business Credits of Eligible Small Businesses for 2010 Allowed to be Carried Back Five Years
Generally, a business's unused general business credits can be carried back to offset taxes paid in the previous year and the remaining amount can be carried forward for 20 years to offset future tax liabilities.  Under the new law, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years.  Eligible small businesses consist of sole proprietorships, partnerships, and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

Boosted Deduction for Start-Up Expenditures
The new law allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010.  The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000.  Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.

Limitation on Penalty for Failure to Disclose Certain Reportable Transactions (Including Listed Transactions) on a Return
The new law limits the penalty to 75% of the decrease in tax resulting from the transaction.  The minimum penalty is $10,000 for corporations and $5,000 for individuals (for failure to report a listed transaction, the maximum penalty is $200,000 and $100,000, respectively).  These changes are retroactively effective to penalties assessed after Dec. 31, 2006.

Deductibility of Health Insurance for the Purpose of Calculating Self-Employment Tax
The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax
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Cell Phones Removed from Listed Property Category
This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.

Offsets (Revenue Raisers)

Information Reporting Required for Rental Property Expense Payments
For payments made after Dec. 31, 2010, the new law requires persons receiving rental income from real property to file information returns with IRS and service providers reporting payments of $600 or more during the tax year for rental property expenses.  Exceptions are provided for individuals renting their principal residences on a temporary basis (including active members of the military), and taxpayers whose rental income doesn't exceed an IRS-determined minimal amount.

Allow Participants in Governmental 457 Plans to Treat Elective Deferrals as Roth Contributions
For tax years beginning after Dec. 31, 2010, the new law will allow retirement savings plans sponsored by state and local governments (governmental 457(b) plans) to include designated Roth accounts.  Contributions to Roth accounts are made on an after-tax basis, but distributions of both principal and earnings are generally tax-free.

Allow Rrollovers From Elective Deferral Plans to Designated Roth Accounts
The new law allows 401(k), 403(b), and governmental 457(b) plans to permit participants to roll their pre-tax account balances into a designated Roth account.  The amount of the rollover will 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.  Plans will be able to allow these rollovers immediately as of date of enactment.

Please keep in mind that these are only the highlights of the most important changes in the new law.  If you would like more details about any aspect of the new legislation, please do not hesitate to call.

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