Tax Law Changes You Should Know

The politicos have done their thing again, stitching together a patchwork of small business tax changes that aim to nudge business owners toward spending and hiring. This one’s called the Small Business Jobs Act of 2010 (SBJA) and it’s a wide-ranging mash-up of tax incentives and other changes you need to know about.  Here’s a rundown some key changes in the new law:

  • Extends bonus depreciation
  • Extends and doubles Section 179 expensing
  • Provides 100 percent gain exclusion for qualified small business stock
  • Allows five-year carry-backs of the general business credit for qualified taxpayers
  • Enhances the deduction for start-up expenses
  • Allows a self-employment deduction for 2010 health care expenses
  • Increases failure-to-file penalties on information returns
  • Establishes a new information reporting rule for rental property expense payments

Bonus Depreciation Returns

A highly-popular provision allowing first-year, 50 percent “bonus depreciation” that expired in 2009 is back.  The SBJA reinstates bonus depreciation for most property through 2010, and for certain longer-lived property and specific types of transportation property through 2011. Eligible property generally includes new depreciable property with a recovery period of 20 years or less; computer software, and; qualified leasehold improvements. The new law also extends the $8,000 increase in luxury auto depreciation limits on property eligible for bonus depreciation.

With only weeks left in the year, tax experts at the accounting firm CBIZ question how much additional investment this provision will create.  But for business owners who’ve already made eligible investments during 2010, it’s a windfall.

Expensing Election Extended

Under prior law, the Section 179 expensing election allowed businesses to immediately expense (write off) up to $250,000 of tangible personal property placed into service in the 2010 tax year. The deduction would begin to phase out when eligible purchases exceed $800,000. SBJA enhances this deduction in several ways for assets placed in service in tax years beginning in 2010 and 2011:

  • The maximum amount subject to the election is increased from $250,000 to $500,000;
  • The phase-out starting point is increased from $800,000 to $2 million, and;
  • Businesses may elect to expense up to $250,000 of qualified leasehold improvement property, restaurant property, and retail improvement property.

According to CBIZ, this provision marks the first time that the expensing election has been extended to any type of real property.

Gain on Sale of Small Business Stock:

Historically, 50 percent of the gain from the sale of qualified small business stock held at least five years could be excluded from income, but remained subject to the alternative minimum tax. The remaining 50 percent of such a gain was taxed at 28 percent. The exclusion percentage increased from 50 percent to 75 percent for qualified small business stock acquired after February 17, 2009 and before 2011.

SBJA increases the exclusion from 75 percent to 100 percent for qualified small business stock acquired after the enactment date and before 2011. In addition, there is no alternative minimum tax imposed on any gains eligible for the 100 percent exclusion.

While the 100 percent exclusion is a significant tax benefit, taxpayers must act quickly because they only have until the end of the year to acquire the qualifying stock.

Startup Expense Deduction Increased

Generally, taxpayers may deduct only $5,000 of startup costs, subject to a phase-out threshold of $50,000, and the remainder must be amortized over 15 years. The new law increases the maximum deduction to $10,000 and the phase-out threshold to $60,000. But this provision only applies to startup costs incurred in 2010.

Self-employment Tax Break on Health Insurance

Under prior law, individuals subject to self-employment tax could not deduct health insurance for purposes of computing net earnings subject to self-employment tax. But for the 2010 tax year only, taxpayers will be allowed to reduce their net self-employment income by the cost of their health insurance.

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Filed Under: BizTaxes

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About the Author:

Daniel Kehrer, Founder and Chief Content Officer of BizBest Media, is a senior-level leader in digital media, content development and online marketing with special expertise in startups, SMB, social media and generating traffic, engagement and leads. He holds an MBA from UCLA/Anderson and is a passionate entrepreneur (started 4 businesses), syndicated columnist, blogger, thought leader and author of 7 business and financial books.

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