Small Business Jobs Act –What This Means for Your Business

Jeff Brown

CPA –Senior Manager

Eide Bailly

eidebailly.com

Topic: Accounting

The recently enacted 2010 Small Business Jobs Act, (the Act), includes a wide-ranging assortment of tax breaks and incentives for small business.  The following is an overview of the most significant tax provisions.  Businesses should review this information now, as many of the tax breaks require action before year-end. 

Enhanced small business expensing (Section 179 expensing):  In order to incent businesses to acquire capital assets, smaller businesses can elect to deduct the entire cost of these expenses in the year of acquisition, instead of via depreciation over time. For tax years beginning in 2010 and 2011, the Section 179 expensing limit has been increased from $250,000 to $500,000 of direct deduction, and the Section 179 investment ceiling increased from $80,000 to $2,000,000 before the expensing limit starts being reduced.  In addition to the expanded limits, the Act also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the above-mentioned up-to-$500,000 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).

It is important to understand that there are also taxable income limits for currently claiming the section 179 deduction, so it is important to work with your tax advisors in planning any major purchases.

Extension of 50% bonus first-year depreciation: Businesses are allowed to depreciate (and deduct) the cost of capital assets over time. Under previous law, businesses were permitted to more rapidly deduct capital expenditures of most new tangible personal property (and certain other new property) placed in service in 2008 or 2009 by directly deducting 50% of the cost and depreciating the other half over time. The Act extends the first-year 50% write-off to apply to qualifying property placed in service in 2010. Unlike the abovementioned Section 179 deduction, this benefit has no limits other than that the property is of the right type and that it is “brand new”.  Obviously the time frame for taking advantage of this accelerated deduction provision is growing short.

100% exclusion of gain from the sale of small business stock for qualifying stock acquired after Sept. 27, 2010 and before Jan. 1, 2011:  Under the Act, individuals acquiring original issue stock of a C corporation that is a Qualifying Small Business (meeting certain size of capital requirements), after Sept. 27, 2010 and before January 1, 2011and hold that stock for at least 5 years are permitted to exclude 100% of the gain from the sale of such stock, subject to maximums.  This provision is highly rule sensitive and time sensitive, so be sure to consult your tax advisor concerning specific situations.

General business credits of eligible small businesses for 2010 allowed to be carried back five years:  Under the Act, the carryback period for General Business Credits has been extended from one year  to five years for eligible small business credits incurred in 2010.  Eligible small businesses consist of sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

S corporation holding period:  Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 full years following its conversion or pay tax on the “built-in gain” at the highest corporate rate of 35%. The 10 year period was temporarily reduced where the seventh tax year in the holding period preceded the tax year beginning in 2009 or 2010. The Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the fifth tax year in the holding period precedes the tax year beginning in 2011.

The Small Business Jobs Act includes numerous other provisions that may be beneficial for your company.  Please contact your tax advisor to discuss how the provisions of this Act may impact your specific situation.