On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (the “SBJA”). The SBJA, attempting to provide a boost to the economy, eases credit lending, extends certain SBA loan provisions and provides billions in lending support and provides tax incentives for small business owners and entrepreneurs. And, for business clients who occupy their own buildings, very shortly they may be able to refinance their commercial mortgages for those properties using the SBA’s 504-loan program.
- SBA Enhanced Loan Provisions
- The SBJA extends SBA loan provisions (with the 90% guarantee and reduced fees) through Dec. 31. The $505 million in subsidies for SBJA loans will support about $14 billion in overall small business lending.
- Higher Loan Limits
- The SBJA permanently increases 7(a) and 504 limits from $2 million to $5 million (for manufacturers in the 504-loan program, up to $5.5 million).
- The SBJA permanently increases microloan limits from $35,000 to $50,000, helping larger entrepreneurs with start-up costs and small business owners in underserved communities.
- Increased Business Eligibility
- The SBJA expands the number of small businesses eligible for SBA loans by increasing the alternate size standard to those businesses with less than $15 million in net worth and $5 million in average net income.
- Temporary Assistance for Working Capital and Commercial RE Refinancing
- The SBJA temporarily increases the maximum amount of SBA Express Loans from $350,000 to $1 million (expires on September 27, 2011).
- Within a few months, the SBJA will allow some small businesses to refinance their owner-occupied commercial real estate mortgages into the 504-loan program (expires on September 27, 2012).
- Small Business Intermediary Lending Pilot
- Within a year, the SBJA will provide funding for as much as $20 million per year in small business loans over the next three years for a loan program targeting small businesses with loans of up to $200,000.
- The small business expensing limit is increased to $500,000
For 2010 and 2011 small businesses can immediately write off $500,000 in capital investments (reduced by the amount of the cost above $2 million). For taxable years beginning after 2011, the amount is $25,000, with a phase out reduced by the amount of the cost above $200,000.
The SBJA provides an election, available for tax years beginning in 2010 or 2011, to treat (1) qualified restaurant property, (2) qualified retail improvement property, and (3) qualified leasehold improvement property, as IRS Code Sec. 179 property that may be expensed in the year it is purchased, instead of depreciated over a period of years.
The cost of qualified real property that may be expensed is limited to $250,000 per year, and excess amounts would not be carried over to tax years beginning after 2011. Sec. 179 expensing makes it cheaper for small businesses to invest in new equipment because expensing in the current year decreases the net cost to the business compared to long-term depreciations.
- General business credits carried back five years
Eligible small businesses will be able to carry back eligible small business credits five years, instead of only one year. Only corporations whose stock is not publicly traded, or partnerships whose average annual gross receipts do not exceed $50 million, are eligible. In the case of a sole proprietorship, the gross receipts test is applied as if it were a corporation. A partner or shareholder does not treat credits determined with respect to a partnership or S corporation as eligible small business credits unless the partner or shareholder meets the gross receipts test for the taxable year in which the credits are treated as current year business credits. This credit carry back allows the small business owner to use the credit to offset both regular and alternative minimum tax liability.
- Accelerated special depreciation allowance
The SBJA extends for one year the IRS Code Sec. 168(k) special allowance of first-year depreciation equal to 50% of the adjusted basis of qualified property to include qualified property acquired before January 1, 2011, or acquired pursuant to a written binding contract which was entered into after December 31, 2007, and before January 1, 2011. Generally, qualified property would have to be placed in service before January 1, 2011.
- Increased deductions for start-ups
For 2010, entrepreneurs can deduct $10,000 of start-up expenses (but the deduction is reduced by the amount by which the cumulative cost of start-up expenditures exceeds $60,000). This means that the deduction, which was $5,000, is increased to $10,000 for small 2010 start-ups. Unless it is extended, this increased deduction only applies to the 2010 tax year.
- Reduced capital gains for small business investors
The SBJA allows individuals to exclude 50% of the gain from the sale of certain small business stock, if it was acquired at original issue and held for at least five years. The percentage exclusion for qualified small business stock acquired after February 17, 2009, and before January 1, 2011, is increased to 75%. And for qualified small business stock acquired the rest of 2010 (after September 27, 2010), the percentage exclusion is increased to 100%. To qualify as a small business, when the stock is issued, the gross assets of the corporation may not exceed $50 million. The business also must meet certain active trade or business requirements.
Therefore, if you start a new business, or invest in an existing small business, between September 27, 2010, and January 1, 2011, and hold the stock for more than 5 years, when you sell your stock you will not have to pay any capital gains on the sale – your profit will not be taxed either as ordinary income or taken into AMT (up to $10 million or 10 times your investment).
- It must be stock of a corporation, only, not an LLC or a partnership;
- You must purchase the stock from the corporation, for cash, property, or services;
- The corporation has to be an active business; it can’t be a holding company; and
- Certain businesses are excluded – banking, farming, hotels, mining and resources.
Also, any of the following types of transactions could benefit from this 100% exclusion if they are completed by the end of the year:
- Exercising a stock option, warrant, convertible note or other convertible security;
- Granting stock or warrants for compensation;
- Converting a partnership or LLC into a corporation; or
- Converting debt to stock.
- Deductions for employer-provided cell phones
The SBJA changes the rules for cell phones so that they can be deducted without excessive documentation and complicated depreciation rules.
- Deductions for health insurance costs for the self-employed
The SBJA permits self-employed taxpayers to deduct the cost of health insurance for themselves and their family members in calculating their self-employment taxes.
- Limitations on penalties for errors in tax reporting
The SBJA limits the penalty on small businesses for errors in tax reporting, changing the penalty from a fixed dollar amount to a percentage of the tax reduction achieved by the error, with a minimum ($5,000 for individuals, and $10,000 for businesses) and a maximum penalty ($100,000 for individuals, and $200,000 for businesses).
The SBJA is major piece of legislation with many provisions that may impact your small business. Therefore, as always, it is advisable to consult with your attorney and/or your tax accountant before you make any decisions relative to the SBJA.
Circular 230 Disclosure
The following disclosure is provided in accordance with the Internal Revenue Service's Circular 230. Any tax advice contained in this alert is intended to be preliminary, for discussion purposes only, and not final. Any tax advice is not intended to be used for marketing, promoting or recommending any transaction or for the use of any person in connection with the preparation of any tax return. THE TAX INFORMATION IN THIS ARTICLE MAY IS NOT INTENDED TO BE USED, AND MAY NOT BE USED, BY ANY TAXPAYER, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER BY THE INTERNAL REVENUE SERVICE. FOR INFORMATION ABOUT THIS STATEMENT CONTACT REAGER & ADLER, PC. (The foregoing legend has been attached pursuant to U.S. Treasury Regulations governing tax practice.