ABC Taxes, Tips & Tools

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. 

The usual dis­claimers: Although ABC has made every effort to insure the accu­racy of Taxes, Tips and Tools, mis­in­for­ma­tion, dis­in­for­ma­tion, changes, mis­takes, typos and hack­ers hap­pen, there­fore Art & Busi­ness Con­sult­ing LLC takes no respon­si­bil­ity for any action taken or results based on the infor­ma­tion sup­plied here in. The con­tent of this blog gen­er­ally applies to busi­ness and indi­vid­ual tax­a­tion in the United States of Amer­ica.  Inter­nal Rev­enue Ser­vice Cir­cu­lar 230 Dis­clo­sure:  As pro­vided for in Trea­sury reg­u­la­tions, advice (if any) relat­ing to fed­eral taxes that is con­tained in this com­mu­ni­ca­tion (includ­ing attach­ments) is not intended or writ­ten to be used, and can­not be used for the pur­pose of (1) avoid­ing penal­ties under the Inter­nal Rev­enue Code or (2) pro­mot­ing, mar­ket­ing or rec­om­mend­ing to another party any plan or arrange­ment address herein.  Art & Busi­ness Con­sult­ing LLC cur­rently does not have a cer­ti­fied pub­lic accoun­tant, human resource spe­cial­ist, cer­ti­fied finan­cial plan­ner or an attor­ney on staff; this infor­ma­tion is purely for edu­ca­tional pur­poses and not to be con­strued as legal or finan­cial advice. Art & Busi­ness Con­sult­ing LLC and its employ­ees, mem­bers and asso­ciates are not engage to prac­tice law; you always should dis­cuss legal mat­ters with your attor­ney before talk­ing to any­one else.