A new tax package for small businesses may save you money.
By William Atkinson
It’s tax season, and as you work with your tax professional to file your 2010 return, it may be helpful to know a few details of the Small Business Jobs Act passed by Congress in 2010.
Last fall, Congress passed the $42 billion package of loan expansions and tax breaks for small business. There are four major loan expansion elements of the law:
- It provides an extension of successful Small Business Administration (SBA) recovery loan provisions, immediately supporting loans to more than 1,400 small businesses.
- It more than doubles the maximum loan size for the largest SBA programs.
- It establishes a new $30 billion small-business lending fund that provides capital to small banks with incentives to increase small-business lending.
- It creates an initiative to strengthen innovative state small-business programs, supporting more than $15 billion in lending.
The new law also creates eight new small-business tax benefits.
- One is enhanced Section 179 expensing. The maximum expensing limit has been increased to $500,000 with a maximum investment limit of $2 million. “In other words, if you have over $2 million in acquisitions in the year, this starts to phase out the benefit of the Section 179 expensing,” explains Steve Imler, managing partner with Ent-Imler, a CPA firm based in Indianapolis. In detail, this is depreciation for personal property purchases (some real property and leaseholds). The new bill increases the maximum Section 179 expensing amount to $500,000 and the beginning of the phase-out amount to $2 million for the tax years beginning in 2010 and 2011. In addition, the qualifying property expands to include certain real property – qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property (but only up to $250,000).
- A second tax cut provides an extension of the 50% bonus depreciation. “This is for new, tangible personal property placed in service during 2010, whereas the Section 179 expensing just discussed is for any acquisition of personal property,” explains Imler. In detail, the bonus depreciation is extended through 2010, allowing companies to deduct half of the purchase price of qualified assets up front. In addition, the first-year business auto write-off will be boosted by $8,000 (for example, to $11,060 for autos and $11,160 for light trucks or vans) for vehicles that are new, and were acquired and placed into service in 2010.
- A third tax benefit is an increased deduction for start-up expenditures to $10,000 (formerly $5,000). The law begins to phase out this benefit if you spend more than $60,000 (formerly $50,000).
- A fourth benefit is a 100% exclusion of gain from sale of qualified small-business stock (QSBS). This is for stock acquired after Sept. 27, 2010, and held for more than five years. That is, it can’t be sold before Sept. 28, 2015.
- A fifth benefit is that any unused 2010 general business credits for small businesses can be carried back five years (instead of just one, under the old law) in order to offset prior tax. These credits can be used to offset AMT in 2010. Eligible small businesses would be corporations (the stock of which isn’t publicly traded), partnerships or sole proprietorships; and that have average annual gross receipts for the three-year tax period preceding the current tax year of no more than $50 million. An eligible small-business credit can offset both regular tax and AMT liability. The provision is effective for credits determined in the taxpayer’s first taxable year beginning after Dec. 31, 2009. “Actually, these are kind of obscure,” notes Imler. “As a result, we don’t see many of these applying to our clients.”
- A sixth benefit is that the health insurance premiums of a self-employed person and that person’s family members can be deducted from self-employment income. In the past, a self-employed individual could deduct family health insurance (as long as certain conditions were met as outlined in Form 1040 instructions). However, the deduction was taken as an “above the line” deduction on Form 1040 to arrive at adjusted gross income (AGI). This deduction only reduced AGI to determine taxable income. It did not reduce self-employment taxable income, since the deduction was not taken on Schedule C. “With the new law, taxpayers can now deduct self-employed health insurance from self-employment income, thus reducing not only AGI and therefore taxable income, but also self-employment taxes as well,” explains Imler. “This will save 15% in FICA tax. We anticipate that this deduction will be a new line on the 2010 Schedule C. However, the 2010 tax forms have not yet been updated, so it is not certain at this time where this item will ultimately be reported.”
- A seventh benefit is that cellular phones are no longer considered to be listed property. “This means that you no longer need to keep copious notes on the use of the phones,” he explains.
- The eighth tax benefit is the penalty for failure to disclose reportable transactions is limited to 75% of the decrease in tax resulting from the transaction. This is retroactive to penalties assessed after Dec. 31, 2006. “This is probably not of a lot of concern for most of our clients,” adds Imler.
Two additional features of the new tax law may be of interest to some precast companies:
- One is that the Subchapter-S Corporation holding period for appreciated assets that were converted from a C corporation have been reduced from a 10-year look-back period to a five-year look-back period. “This is a built-in gains tax,” explains Imler. “If you had a C Corporation and then elected to an S Corporation, and then ended up selling some of the assets of that corporation, you had to pay a corporate tax on the sale. In other words, you couldn’t get out of paying the corporate tax by electing an S Corporation status.”
- The other is that a 2010 bonus depreciation is not taken into account as a cost under the “percentage of completion” method of accounting. See your tax professional for details.
Of all the tax reduction elements of the new law, what are the ones of most interest to precasters in terms of business tax cuts? Imler believes that the first two are of the most interest. “Probably the main items affecting precasters would be the Section 179 expensing and the extension of bonus depreciation for 2010,” he says. “By utilizing these two aspects of the bill, companies and their owners can accelerate the deductions of tangible personal property purchased during 2010 to significantly reduce tax liability and accelerate deductions into the same year as the expenditure.”
However, he points out, these elements of the new law become desirable and usable only for companies that are making money. “We have situations with our clients that not all of them are making money,” adds Imler. “These features don’t help someone who is losing money, unless they have the opportunity to carry it back. However, with the 179, you can’t carry it back.”
What are the implications for 2010 taxes? “Again, this goes back to Section 179 and the bonus depreciation,” says Imler. Depending on the amount of tangible personal property purchased during 2010, companies should be able to expense the majority of their machinery and equipment purchased during 2010. “However, in 2010, bonus depreciation is also allowed and can also provide additional accelerated deductions should the company purchase more than $500,000 on new tangible personal property during 2010.”
The increased Section 179 expensing is also in effect for 2011. As a result, companies can balance their purchasing within their cash flow and deduction options over the next two tax years.
NOTE: This article is not meant to provide authoritative tax advice. As always, it is important for readers to consult with their accountants, tax attorneys or other tax professionals.
William Atkinson, Carterville, Ill., is a freelance writer who covers business and safety issues.