Small Business Tax Relief
The bill, which passed the Senate last week, expands loan programs through the Small Business Administration (SBA), strengthens small business preference programs for federal government projects, provides incentives for exporters, offers a variety of small business tax breaks and includes some revenue raisers.
Many provisions are targeted to assist small business operations through additional tax deductions and tax credits or exclusions. The bill would exclude from taxes certain capital gains on sales of small-business stock, and accelerate business tax write-offs for purchases of new equipment and other expenses.
Section 179 expensing and bonus depreciation.
The bill increases the maximum amount a taxpayer may expense under IRC § 179 to $500,000 and increases the phaseout threshold amount to $2 million for tax years beginning in 2010 and 2011. The first-year 50% bonus depreciation available under IRC § 168(k) is extended for one year to apply to property acquired and placed in service in 2010 (or 2011 for certain long-lived and transportation property). The bill also allows taxpayers using the percentage-of-completion method to take into account the cost of qualified property as if bonus depreciation had not been enacted.
Qualified small business stock.
The bill amends IRC § 1202 to increase the exclusion from gross income of gain from the sale or exchange of qualified small business stock from 50% to 100%, and the minimum tax preference does not apply. This provision applies to eligible stock acquired after the date of enactment and before Jan. 1, 2011.
Business credits.
The carryback period for eligible small business credits under IRC § 38 is extended from one to five years. The bill also allows taxpayers to use eligible small business credits to offset both regular and alternative minimum tax liability. Both provisions are effective for credits determined in tax years beginning after 2009.
Built-in gains tax.
For tax years beginning in 2011, the bill provides that for purposes of computing the section 1374 built-in gains tax, the recognition period is the five-year period beginning with the first day of the first tax year for which the corporation was an S corporation.
Self-employed individuals’ health insurance.
The bill allows self-employed individuals who deduct the cost of health insurance for themselves and their spouses, dependents, and children under 27 years old as of the end of the tax year to take the deduction into account in calculating net earnings from self-employment for purposes of SECA taxes. This provision applies to the taxpayer’s tax years beginning after 2009.
Startup expenses.
The bill increases the section 195 deduction for trade or business startup expenses from $5,000 to $10,000 for tax years beginning in 2010 and 2011. The start of the limitation on the deduction is increased from $50,000 to $60,000. So for 2010 and 2011 the amount of the deduction is the lesser of (1) the amount of the startup expenses or (2) $10,000, reduced (but not below zero) by the amount by which the startup expenditures exceed $60,000.
Reportable and listed transactions.
The bill limits the section 6707A penalty for failure to disclose a reportable transaction (that is, a transaction determined by the IRS to have a potential for tax avoidance or evasion) to 75% of the decrease in tax resulting from the transaction. The maximum annual penalty allowed will be $10,000 in the case of a natural person and $50,000 for all other persons for failure to disclose a reportable transaction. For listed transactions, the maximum penalty will be $100,000 in the case of a natural person and $200,000 for all other persons. The minimum penalty is $5,000 for natural persons and $10,000 for all other persons.
The bill also requires the IRS to report to Congress by Dec. 31, 2010, and then annually, on penalties assessed for certain tax shelters and reportable transactions (under sections 6662A, 6700(a), 6707, 6707A and 6708). The penalty under section 6707A has been criticized because the penalty amounts often exceed the tax benefit of the targeted transactions. The IRS has since last July been working under a self-imposed moratorium on collection enforcement of the section 6707A penalty to give Congress time to amend the penalty amounts. The AICPA has recommended that the IRS be allowed to abate the section 6707A penalty in cases where the taxpayer has acted reasonably and in good faith. The AICPA also believes that judicial review should be allowed in cases where the IRS has assessed a penalty under section 6707A. The bill does not adopt either of these recommendations.
Cell phones.
The bill removes cell phones from the definition of listed property. Thus, the heightened substantiation requirements and special depreciation rules that apply to listed property under IRC § 280A will no longer apply to cell phones. However, the Joint Committee on Taxation notes that this change “does not affect Treasury’s authority to determine the appropriate characterization of cell phones as a working condition fringe benefit under section 132(d) or that the personal use of such devices that are provided primarily for business purposes may constitute a de minimis fringe benefit, the value of which is so small as to make accounting for it administratively impracticable, under section 132(e).”
Revenue Raisers
The bill also contains several revenue-raising provisions.
Reporting rental income.
The bill makes recipients of rental income from real estate generally subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to the IRS and to the service provider. This provision will apply to payments made after Dec. 31, 2010.
Information returns.
The bill also increases the penalties for failure to file a correct information return. The first-tier penalty increases from $15 to $30, and the calendar-year maximum increases from $75,000 to $250,000. The second-tier penalty increases from $30 to $60, and the calendar-year maximum increases from $150,000 to $500,000. The third-tier penalty increases from $50 to $100, and the calendar-year maximum increases from $250,000 to $1,500,000. For small business filers, the calendar-year maximum increases from $25,000 to $75,000 for the first-tier penalty, from $50,000 to $200,000 for the second-tier penalty, and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard increases from $100 to $250.
As always, please call us if you'd like more information or to sit down and discuss how these changes in the tax law impact your business.
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