On September 27, 2010, President Obama signed into law the Small Business Jobs Act (H.R. 5297) (the Act ). The Act includes a number of tax incentives for business, such as bonus depreciation, Section 179 expensing and other targeted incentives for small business. The Act also includes several revenue raising provisions with broader application.
Bonus Depreciation and Expensing Provisions
The Act extends 50 percent bonus depreciation under Section 168(k) by one year for qualified property placed in service during 2010 (or 2011 in the case of certain long-lived property, transportation property and aircraft). This provision applies equally to large and small businesses.
In addition, the Act increases the maximum amount a taxpayer may expense under Section 179 from $250,000 to $500,000 for property placed in service during tax years beginning in 2010 and 2011. Similarly, the threshold for the total amount of property placed in service during the tax year where the phase-out of Section 179 expensing begins is increased from $800,000 to $2,000,000. Finally, the provision temporarily expands the types of property that qualify for Section 179 expensing to include certain leasehold improvement property, certain restaurant property and certain retail improvement property.
The Act contains other deduction and expensing provisions that:
- Increase the amount of start-up expenses that can be deducted when a Section 195(b) election is made from $5,000 to $10,000, and raise the phase-out threshold from $50,000 to $60,000; and
- Provide that the income tax deduction for health insurance costs of self-employed individuals is also allowed for the purposes of Self-Employment Contributions Act taxes on net earnings from self-employment.
Small Business Gain Exclusion and Tax Credit Provisions
The Act also contains targeted small business tax provisions that:
- Increase the exclusion under Section 1202 on the sale of qualified small business stock from 75 percent to 100 percent when qualifying stock is acquired at original issue between September 27, 2010 and January 1, 2011 and is held for at least five years. The maximum amount of gain eligible for the exclusion by an individual remains the greater of $10 million or 10 times the taxpayer’s basis in the stock.
- Extend the carryback period for general business tax credits of eligible small businesses from one year to five years under the Act. Eligible small businesses are also able to offset alternative minimum tax liability with general business tax credits. In the case of a business conducted through a C corporation or a sole proprietorship, eligibility requires that the average annual gross receipts of such corporation or proprietor for the prior three tax years not exceed $50 million. In the case of a partnership or an S corporation, the eligibility requirements are applied at the partner and shareholder levels, respectively.
- Provide that the recognition period during which an S corporation that was formerly a C corporation is subject to corporate-level tax on realized built-in gains is reduced from seven years to five years.
Revenue Raising Tax Provisions
The revenue raising provisions in the Act include:
- A new requirement that recipients of rental income provide the IRS with an information return with respect to each service provider paid $600 or more during the tax year;
- An increase in information return penalties under Section 6721;
- Denial of the cellulosic biofuel producer credit under Section 40(b)(6) for crude tall oil; and
- A legislative overturning of the result in Container Corp. v. Commissioner, 134 T.C. 5 (2010), such that amounts received, directly or indirectly, from a non-corporate US resident or a domestic corporation for a guarantee of indebtedness are treated as US source.