On September 27, 2010, President Obama signed the Small Business Jobs Act of 2010 (the “Act”). The Act includes a number of important tax provisions, including among others, liberalized and expanded expensing for 2010 and 2011, revived bonus depreciation for 2010, the creation of a five-year carryback opportunity for unused general business credits generated by eligible small businesses and the liberalization of the deducting of cell phone costs. The following is a brief summary of the key business tax changes in the Act.
Expensing Under Code Section 179. The Code Section 179 expensing limit for tax years beginning in 2010 is $250,000, and the maximum expensing amount is reduced (i.e., phased out, but not below zero) by the amount by which the cost of Code Section 179 property placed in service exceeds $800,000 (the beginning-of-phase-out amount). For tax years beginning after 2010, these amounts were to revert to $25,000 and $200,000, respectively. The Act for tax years beginning in 2010 and 2011 increases the maximum Code Section 179 expensing amount to $500,000 and the beginning-of-phase-out amount to $2,000,000. Additionally, for any tax year beginning in 2010 or 2011, a taxpayer can elect to treat up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property) as expensing-eligible property. The dollar cap applies to the aggregate cost of qualified depreciable real property.
Bonus Depreciation. The Act extends 50 percent bonus first-year depreciation for one additional year (i.e., makes it available for qualifying property acquired and placed in service in 2010). Generally, taxpayers must depreciate the cost of certain capital over a number of years (the number of years depends on the asset). The Act extends provisions under Code Section 168(k) allowing for an immediate deduction of 50 percent of the cost of the depreciable property acquired in 2010.
Deduction for Startup Expenses. For tax years beginning after December 31, 2009 and before January 1, 2011, the deduction for startup expenses under Code Section 195 is increased from $5,000 to $10,000, and the phaseout threshold is increased from $50,000 to $60,000.
100% Gain Exclusion for Qualified Small Business Stock. Under the Act there is a 100 percent exclusion of gain (rather than the 75 percent allowed currently for 2010) from the sale of certain qualified small business stock (i) acquired after September 27, 2010 and before January 1, 2011 and (ii) held for at least five years.
Five-year Carryback of Unused General Business Credits. Prior to the Act, general business credits in excess of the allowable limitation could generally be carried back one year and forward up to 20 years. Under the Act, the carryback period for eligible small business credits is extended from one to five years. Eligible small business credits include all of the component credits of the general business credit, but only as determined with respect to eligible small businesses. Eligible small businesses are businesses that (i) are non-publicly traded corporations, partnerships or sole proprietorships and (ii) have average annual gross receipts, for the three-year tax period preceding the tax year, of no more than $50 million. For tax years beginning after December 31, 2009, eligible small businesses can use general business credits to offset alternative minimum tax.
Reduced Recognition Period for S Corp with Built In Gains Tax. Generally, the recognition period with respect to built in gain of a C Corporation that converts to an S Corporation is the first 10 S Corporation years. For tax years beginning in 2009 and 2010, no tax is imposed on the net unrecognized built-in gain of an S Corporation if the seventh tax year in the recognition period preceded the 2009 and 2010 tax years. The Act, for any tax year beginning in 2011, shortens the holding period of assets subject to the built-in gains tax to five years if the fifth year in the recognition period precedes the tax year beginning in 2011.
Cell Phones. Cell phones (and similar telecommunications equipment) have been removed under the Act from the definition of listed property under Code Section 280F for tax years beginning after December 31, 2009, enabling the cost of the use of cell phones to be deducted without burdensome extra documentation to substantiate business purpose.