New Breaks for Small Businesses

The 2010 Small Business Jobs Act enacted September 27, 2010 includes an assortment of incentives and tax breaks for small businesses. The following is a brief overview of some of the key provisions included in the new law. Watch for additional details in future newsletters.

o 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.

o 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.

o 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).

o 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.

For tax years beginning in 2010 and 2011, the new law allows a taxpayer to expense up to $500,000 (up from $250,000 under prior law) of qualifying property which includes machinery, equipment and certain software placed in service during the year. For 2010 and 2011, the annual expensing limit is reduced by the cost of qualifying property that is placed into service during the year exceeding the $2 million (was $800,000) investment limit.

o 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).

o 50% Bonus First-Year Depreciation Extended – 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 first-year 50% write-off to qualifying property placed in service in 2010 (2011 for certain property).

o 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.

o 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.

o Other Provisions With Limited Application – Calculations of the built-in gains tax on S-Corporations converted to C-Corporations, special rules for long term contract accounting and limitation on the penalty for failure to disclose certain reportable transactions (including listed transactions) on a return.

If you have questions related to any of these new tax benefits or wish to schedule a tax planning appointment to see how your business might benefit, please give this office a call.

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