Congress finally did something, only it wasn’t all of what we all have been waiting on. There still is no estate tax fix, no AMT patch, no reinstatement of Bush tax cuts, no decision on capital gains taxes and other tax breaks such as teacher’s supplies, college tuition etc. Look for these issues to be addressed one way or the other in the post-election lame duck session.
Anyway, on September 27, the Small Business Jobs Act was signed into law by President Obama. It is supposed to provide $12 billion in tax breaks for small businesses-but the “small” businesses that will benefit from these tax breaks are probably NOT considered “small” business by your average Mom & Pop operation.
What are the provisions (and offsets) of this act?
- An increase in the deduction for startup costs from $5,000 to $10,000 & the startup expense maximum, before dollar for dollar decrease in the deduction begins, is bumped from $50,000 to $60,000. Needless to say this is not of any benefit to businesses that were in existance at the beginning of 2010.
- The write off of up to $500,000 in new equipment purchased in 2010, and the limit before dollar for dollar reduction occurs raised to $2 million. Special 50% Bonus depreciation is also extended for 2010. Certain real property is eligible for expensing as well. For larger small businesses these extensions of expensing benefits may be useful. If a business is truly “small,” or a service-based business, it is not heavily invested in equipment; the increase in Section 179 and extending 50% Bonus depreciation for another year isn’t too helpful.
- A 5-year carryback period for unused General Business Credits. Of course the benefit requires a business to have unused General Business Credits and have profitable years to carry them back to. An eligible small business for purposes of this tax break is one with average gross receipts of less than $50 million dollars over the last three years.
- In 2010 the General Business Credit can offset AMT.
- The holding period for Built-In-Gains tax for a C-corporations that converted to S-corporation is reduced from 10 years if the 7th year of the holding period precedes 2009 or 2010, and or the 5th year of the holding period precedes 2011.
- Reduction of net earnings from self-employment tax for insurance premiums paid by the self-employed. It is a good tax break. Of course the small business owner must be paying health insurance premiums to take advantage.
- The act does have several ways to increase money available to borrowers, including a $30 billion fund to increase lending by community banks, and reduced fees for certain SBA loans, but it has not changed lending standards, which have tightened up considerably since the recession began. Mom & Pop’s ability to borrow tends to be predicated on their individual FICO scores. Also lending tends to be predicated on growth-Mom & Pop would have to produce a business plan, showing how they intend to use the money to grow (and provide jobs perhaps), but growth is not something happening in many small businesses right now. Lenders could change their standards, but they don’t have to… However a small business may be able to benefit from these loans if they can move forward with a coherent SBA loan application.
- For years 23% of federal contracts have been supposed to go to small business. The act is supposed to reduce the red tape for getting a federal contract and periodically check on the size of federal contractors to make sure they still qualify as a small business.
- Investors have a very limited window of opportunity to invest in small businesses and get a 100% tax break from capital gains taxes down the road. However this tax break is for businesses organized as C-Corporations only-those that issue Qualified Small Business Stock. For S-Corporations, LLCs, partnerships and sole proprietorships there is no similar incentive for investors.
- Businesses get relief from the Tax Code requirement that they account for how much of their employees’ company-issued cell phone use is for personal calls in order to deduct the full cost of the phones. Removing cell phones from listed property is a welcome change.
- Limitation of penalty for failure to disclose certain reportable transactions on a return; the penalty is limited to 75% of the reduction in tax from the transaction-there are minimum and maximum penalties as well. The change in penalties is retroactive to 2007.
- The IRS can levy a federal contractor before a CDP hearing, although taxpayers would still have a reasonable time for a CDP hearing after the levy is issued.
- Starting in 2011, participants in 457 plans are allowed to treat elective deferrals as Roth IRA contributions
- Rollovers from elective deferral plans 403(b), 401(k) and 457(b) are allowed to be treated as rollovers into Roth IRAs.
- There is also a provision for more favorable treatment of nonqualified annuity contracts
- Guarantee Fees paid by US taxpayers to foreign persons will be subject to withholding tax.
- Any fuel with an acid number greater than 25 (crude tall oil, a waste production from paper manufacturing) is excluded from the definition of “cellulosic biofuel” for purposes of the tax credit for alcohol used as fuel.
- Starting in 2011 there is an increase in the penalty for failure to report payments via 1099s from $50 to $250 and businesses receiving rental income are required to report payments of more than $600 on Forms 1099-MISC and Form 1096 (with some exceptions such as military personnel temporarily renting out their principal residences etc.). This regulation is on top of the expanded 1099-MISC information reporting that was buried in the health care legislation.
Some of these provisions are not pro-Mom & Pop moves and do not “help Main Street businesses compete with large corporations.” Whereas a moderate-sized business probably has resources to handle regulatory red tape — the average Mom & Pop does not; responding to red tape takes valuable time and money away from their business, resources they can ill afford in the current economic climate. It is very hard for Mom & Pop to respond on the fly to continuously changing rules for employees, enviromental regulations and tax laws.
Small business creates most jobs, but right now there is no consumer demand. Few small businesses are in a position to take advantage of the pro-growth provisions in the Small Business Jobs Act. It is hard to see how this act actually will create jobs. For the average Mom & Pop there aren’t many provisions that benefit them.
Of course we can always hope the Small Business Jobs Act accomplishes it goals…
As always, small business services and taxation are our business. If you need help Please give Art & Business Consulting a call. We would love to engage you as a client.
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