Big Breaks for Small Businesses

Big Breaks for Small Businesses

 

by Karen E. Hobson and Darin Christensen

The recently enacted 2010 Small Business Jobs Act (the "Act") includes a wide-ranging assortment of tax breaks and incentives for small business. Below is a summary of some of the key tax breaks and incentives provided by the Act:

Extension of 50% first-year bonus depreciation. The Act extends bonus depreciation for one more year. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law retroactively extends the first-year 50% write-off to apply to qualifying property placed in service in 2010. The remaining cost is spread out over the normal life of the equipment.

Increase in Section 179 deduction. To help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition rather than recovering these costs over time through depreciation deductions. The maximum section 179 deduction for 2010 and 2011 has been increased to $500,000. The $500,000 that can be expensed is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during 2010 or 2011 exceeds $2,000,000. This means, for property placed in service in tax years beginning in 2010 or 2011, the Section 179 deduction phases out completely when the cost of the property exceeds $2,500,000. The types of property that can be expensed have been expanded to include certain real property-specifically, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.

Shortened S Corp built-in gain holding period extended for 2011. Historically, an S corporation that converted from a C corporation was required to pay built-in gains tax at the highest corporate rate of 35% on any assets disposed of within the first ten years of converting to S corporation status. The new law reduces the holding period on these assets in 2011 to five years. This means that C corporations that filed S elections for the 2006 tax year will not have built-in gains corporate level tax when selling built-in gains property.

100% exclusion of gain from the sale of small business. Under the Act, 100% of the gain from the sale of qualified small business stock acquired after September 27, 2010 and before January 1, 2011 (and held for more than five years) is excluded from income. If the stock is not "qualified" small business stock, then 100% of the gain must be reported. In addition, the Act eliminates the alternative minimum tax preference item attributable to that sale.

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. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.

Cell phones removed from listed property category. Cell phones can now be deducted or depreciated like other business property, without onerous recordkeeping requirements. Prior law required businesses to substantiate the business use of a cell phone device by a full accounting of the business purpose of all the minutes used.

If you are interested in learning how the Small Business Jobs Act affects you or your small business, contact the Tax Group at Bullivant Houser Bailey.

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