With the economy still struggling and lawmakers looking to take some sort of pro-business action before the November elections, Congress passed the Small Business Jobs Act in September, a $42 billion measure to provide tax breaks and loan assistance to small businesses. President Obama signed the bill on Sept. 27, 2010. Here are the highlights of this legislation that affect businesses:
Higher expensing for Section 179. For tax years beginning in 2010 and 2011, businesses can immediately write off up to $500,000 of qualifying assets (including purchased software). The new $500,000 maximum allowance doubles the previous $250,000 maximum deduction.
More good news: The threshold for the Section 179 deduction phase-out rule jumps from $800,000 to $2 million, for tax years beginning in 2010 and 2011. Therefore, bigger businesses are now eligible for Section 179 deductions.
In addition, for tax years beginning in 2010 and 2011, up to $250,000 of qualified real property costs (for eligible buildings and improvements) can be deducted under Section 179. Before the new law, real property costs did not qualify for Section 179 deductions.
Bonus depreciation reinstated. The new law retroactively reinstates 50% first-year bonus depreciation for qualifying new (not used) assets placed in service by Dec. 31, 2010. This tax break had officially expired after 2009, but it's now been resurrected for qualified assets placed in service by year-end.
Retirement account transfers just got easier. Several provisions help facilitate transfers from 401(k), 403(b) and 457 retirement plans to designated Roth accounts.
The new rules allow participants in 401(k) and other defined contribution retirement plans to roll over their account balances into Roth accounts that are provided under the plans—such as Roth 401(k) plans.
Those rollovers can be done without any penalties, but income taxes on the distribution must be paid. For retirement plan owners in the top tax brackets, it could be wise to convert a 401(k) to a Roth 401(k) this year because tax rates are expected to rise in 2011 if the Bush tax cuts are not extended. Contact your plan provider for more details.
BIG tax whittled down to five years. When a C corporation converts to an S corporation, it may be liable for a "built-in gains" (BIG) tax on gains recognized in its first 10 years of operation. First, the 10-year recognition period was reduced to seven years for built-in gains recognized in tax years beginning in 2009 and 2010. Now, the new law cuts the recognition period down to five years for gains recognized in tax years beginning in 2011.
Maximum deduction for start-ups doubles. The new law increases the maximum deduction for qualified start-up expenditures to $10,000 (up from $5,000) for tax years beginning in 2010.
The threshold for the start-up deduction phase-out rule increases from $50,000 to $60,000 for tax years beginning in 2010. For tax years beginning in 2011 and beyond, the parameters are scheduled to return to $5,000 and $50,000, respectively.
Small business AMT offset. Normally, general business credits can't offset the Alternative Minimum Tax. But the new law allows eligible small businesses an AMT offset for general business credits arising in tax years beginning in 2010. Also, eligible small businesses can carry back general business credits arising in tax years beginning in 2010 for up to five years.
Special one-year health insurance deduction. For 2010 only, a self-employed individual can reduce his or her self-employment income by deductible health insurance premiums when calculating the self-employment tax.
Cell phone recordkeeping relaxed. Cell phones and similar devices used for business will no longer be subject to super-strict record-keeping requirements to keep track of business versus personal use. This favorable change is retroactive to tax years beginning after 2009.
Read more about the law and the new lending provisions at: