On Sept. 27, 2010, President Barack Obama signed into law H.R. 5297, the Small Business Jobs and Credit Act of 2010.
In summary, the law will establish a $30 billion lending fund for small businesses, provide $12 billion in tax breaks and make changes to federal small business programs to address the ongoing effects of the financial crisis on small businesses.
“This new legislation also provides incentives targeted to small business owners,” says John T. Alfonsi, CPA, ABV, CFF, CFE, CVA, a shareholder at Cendrowski Selecky Professional Corp.
Smart Business spoke with Alfonsi about the Small Business Jobs and Credit Act of 2010 and how it could affect your business.
What are key provisions of the legislation?
Depreciation deductions are a key component of the legislation. Specifically, the expensing election under IRC Section 179 was enhanced. In addition, bonus depreciation was restored and start-up expense deductions were increased.
How will the new depreciation rules work?
Under IRC Section 179, businesses are allowed to deduct the cost of qualifying property placed in service during the year rather than capitalize the cost and depreciate it. Prior to the new legislation, the maximum amount a business could deduct under IRC Section 179 for 2010 was $250,000. This deduction amount was phased out, however, when the total cost of qualifying property acquired in the year was greater than $800,000.
The new law increases the maximum deduction amount to $500,000 for 2010 and 2011, with the phase-out threshold of $2 million. This will allow businesses to directly expense a large portion of fixed assets acquired in 2010 and 2011 rather than depreciate them over time.
What is happening with bonus depreciation?
Bonus depreciation expired in 2009. The legislation reinstates the bonus depreciation rules for 2010, whereby a business can claim a deduction equal to 50 percent of the cost of qualified assets, including vehicles. These assets generally must be placed in service by Dec. 31, 2010. The Section 179 deduction and bonus depreciation deductions can be combined to offset a large portion, if not all, of a business’s fixed asset acquisitions for 2010.
How does the legislation affect start-up expenses?
Prior to the law, taxpayers were allowed to deduct up to $5,000 of qualified business start-up expenditures for new businesses. This amount was phased out, however, for expenditures over $50,000. This legislation doubles the maximum amount that may be deducted in 2010 to $10,000 and increases the phase-out threshold to $60,000.
What other provisions of the act benefit small businesses?
The legislation authorized a $30 billion fund that will provide local community banks with capital to lend to small business owners. The purpose is to provide capital to new businesses and small enterprises that want to expand and hire new workers. To make sure the money creates jobs, Congress, the U.S. Government Accountability Office and the Inspector General will oversee the program. It should be noted, however, that while the legislation provides access to capital, it does not require banks to actually lend the funds.
What tax breaks are included for business owners?
The legislation includes a number of tax breaks for individual business owners. For instance, an investor could normally exclude 50 percent of the gain from the sale of qualified small business stock. This was increased to 75 percent with the 2009 tax act for stock acquired after Feb. 17, 2009, and before Jan. 1, 2011. The new law allows 100 percent exclusion for acquisitions from the date of enactment through Dec. 31, 2010. In addition, for 2010, self-employed individuals can deduct health insurance premiums from self-employment income.
Finally, cell phone recordkeeping rules were eased. Prior to the legislation, cell phone usage was required to be tracked for purposes of documenting the business and personal use. No documentation meant no deduction. The new legislation removes the recordkeeping requirement and treats employer-provided cell phones as a tax-free fringe benefit.
What revenue-raising provisions were included in the legislation?
To offset the cost of the tax incentives, the legislation includes provisions that will increase tax collections. For instance, beginning in 2011, landlords will now have to file Form 1099s for service providers such as plumbers, painters and landscapers to the extent that such payments are $600 or more. Penalties for the failure to file information returns were increased. Also, penalties for failure to make estimated tax payments by large corporations (those with taxable income of at least $1 million in any of the three preceding years) are increased beginning in 2015.
How should business owners address this new legislation?
Many of the provisions are effective only for 2010. Business owners and other individuals should review their financial operations for 2010 and, based on these and the other provisions included in the legislation, contact their tax adviser and plan for the remainder of the year.