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New Breaks for Small Businesses

The 2010 Small Business Jobs Act, enacted September 27, 2010, and the Tax Reform Act of 2010, signed into law December 17, 2010, include an assortment of incentives and tax breaks for small businesses.  The following is a brief overview of some of the key provisions included in these new laws. 

• Cell Phones No Longer Listed Property - This means that cell phones can be deducted or depreciated like other business property, without the complicated recordkeeping required for listed property.  This is effective for tax years beginning after Dec 31, 2009.
  
  
• Business Owners’ Health Insurance Deduction Reduces Self-Employment Tax - The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax. Previously the deduction could only be used as an above-the-line deduction from gross income on the self-employed individual’s income tax return.
  
  
• Boosted Deduction for Start-Up Expenditures – For 2010, businesses can deduct up to $10,000 (was previously $5,000) in trade or business start-up expenditures. However, the $10,000 limit is reduced by the amount by which start-up expenditures exceed $60,000 (was previously $50,000). The $5,000/$50,000 amounts return for tax years beginning in 2011.
  
  
• Increased Small Business Section 179 Expensing – Small business taxpayers can elect to write off the cost of certain capital expenses in the year of acquisition in lieu of recovering these costs over a period of years through depreciation.

• Certain Real Property Can Be Expensed – The new law also makes certain real property eligible for Sec 179 expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 deduction of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
  
  
• Bonus First-Year Depreciation Extended and Expanded - Businesses normally can only deduct the cost of capital expenditures over time through depreciation—most commonly at the rate of about 14% or 20% of the cost of machinery or equipment for the first year. For 2008 and 2009, businesses were permitted to write off 50% of the cost of new machinery and equipment placed in service during those years.  In the new law, Congress extends the 50% rate for qualifying property purchased through September 8, 2010, and doubles the first-year bonus rate to 100% for qualifying property placed in service after September 8, 2010 and before January 1, 2012 (before Jan. 1, 2013 for certain property). The bonus rate for 2012 (through 2013 for certain property) will again be 50%.
  
  
• Lower SE Tax Rate - The Making Work Pay credit, which provided a credit in years 2009 and 2010 of up to $400 ($800 for married couples filing jointly), subject to income limitations, was available for both employees and self-employed taxpayers. The credit expired after 2010 and has been replaced for one year only (2011) with a 2 percentage point reduction in the employee’s portion of the payroll tax (OASDI) and a corresponding reduction in the SE Tax for self-employed individuals.  Thus the overall SE tax rate will drop from 15.3% to 13.3% for 2011.
  
  
• Research Credit - The research tax credit expired at the end of 2009.  As part of the 2010 Tax Relief Act Congress has reinstated the credit for 2010 and extended it through 2011.
  
  
• General Business Credits for 2010 Can Be Carried Back 5 Years – Under the new law, for the first tax year beginning in 2010 (2010 for calendar year taxpayers), eligible small businesses (ESB) (generally one with $50 million or less in average annual gross receipts for the prior three years) can carry back unused general business credits for five years. ESBs include sole proprietorships, partnerships and non-publicly traded corporations.
  
  
• General Business Credits of Eligible Small Businesses in 2010 Aren't Subject to AMT - Under the Alternative Minimum Tax (AMT) rules, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The new law allows eligible small businesses, as defined above, to use all types of general business credits to offset their AMT in tax years beginning in 2010.
  
  
• Other Provisions With Limited Application – Calculations of the built-in gains tax on C-Corporations converted to S-Corporations, special rules for long term contract accounting, extension of certain business energy credits, and limitation on the penalty for failure to disclose certain reportable transactions (including listed transactions) on a return.

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