September 30, 2010
Dear Client,
Congress recently enacted the 2010 Small Business Jobs Act (SBJA), which includes a wide-ranging assortment of tax breaks and incentives for you and your business. There are significant tax planning and saving opportunities available to businesses in the Act. Here's a brief overview of some of the tax changes in the new law that might affect you.
TAX BREAKS AND INCENTIVES
Increase in immediate expensing of property acquisitions (Section 179 expensing)
You may elect to write off the cost of certain property additions in the year of acquisition. Under the new law, for tax years beginning in 2010 and 2011, you may expense up to $500,000 of qualifying property - generally machinery, equipment and certain software - and this amount is not reduced unless qualifying property additions exceed $2,000,000.
The new law also makes certain real property eligible for immediate expensing. For real property placed in service in any tax year beginning in 2010 or 2011, up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) may be expensed.
NOTE: This new law is retroactive for property acquisitions back to January 1, 2010. It will allow businesses of most all sizes to write off expenditures for property and equipment.
Extension of 50% bonus first-year depreciation
The new law allows businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2010 or 2011, by permitting the first-year write-off of 50% of the cost.
Deductibility of health insurance for the purpose of calculating self-employment tax
Congress added a law for just 2010 which allows business owners to deduct the cost of health insurance incurred for themselves and their family members in calculating their 2010 self-employment tax. Although health insurance costs for self-employed businesses have been deductible for income tax previously, this is the first time that self-employed health insurance has been deductible in calculating self-employment tax.
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.
General business credits of eligible small businesses for 2010 can be carried back five years
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. Example of these tax credits are, the Research and Development Tax Credit; Work Opportunity Credit; Low Income Housing Credit; Disabled Access Credit; and the Distilled Spirits Credit. 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.
General business credits of eligible small businesses in 2010 aren't subject to AMT
Under the Alternative Minimum Tax (AMT), taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. The new law allows eligible small businesses, to use all types of general business credits to offset their AMT in tax years beginning in 2010.
S corporation holding period
The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.
NEW REPORTING AND RECORD KEEPING REQUIREMENTS FOR BUSINESSES
Unfortunately, the new law is not all wine and roses. The law expands reporting requirements for rental property owners and increases IRS penalties for failure to file any type of Form 1099. These new reporting requirements coupled with the onerous new reporting requirements placed on businesses from the Health Act will significantly increase the recordkeeping and accounting costs for all businesses.
Information reporting required for rental property expense payments
For payments made after December 31, 2010, the SBJA requires persons receiving rental income from real property to file information returns (typically Form 1099-Misc) with the IRS. The rental owner must also provide the Form 1099 to all service providers to whom they paid $600 or more during the tax year for rental property expenses. A service provider is a person such as a plumber, repair man, janitor, carpenter or a painter, paid for work performed on the rental property and deducted on the rental owner's income tax return.
Exceptions are provided for individuals renting their principal residences on a temporary basis (including active members of the military).
Additional information reporting required for business expense payments
After December 31, 2011, the new Health Care Act increased the information reporting for every person engaged in a trade or business or any other business. The law requires businesses to file an information return (e.g., a Form 1099) for all payments made to another person or business. The definition of payments includes all payments for services and any amounts paid in consideration for property. Thus, any payment made by a business exceeding $600 for any type or expenditure (goods, services, capital assets) will require the business to file a Form 1099.
MISCELLANEOUS PROVISIONS
Allow participants in governmental 457 plans to treat elective deferrals as Roth contributions
For tax years beginning after December 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 rollovers 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 September 27, 2010.
Nonqualified annuity contracts
The new law permits holders of nonqualified annuities (annuity contracts held outside of a qualified retirement plan or IRA) to elect to receive part of the contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis.
Please keep in mind that we've described 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 contact us at your convenience.
Very truly yours,
SOUKUP, BUSH & ASSOCIATES, P.C.
