Tax Relief for Businesses
The Small Business Jobs and Credit Act of 2010 (“The Act”) was signed by President Obama earlier this week. Among other things, the Act attempts to stimulate small business growth through various tax law changes, including:
For All Businesses
- Increases Section 179 expensing
- Extends bonus depreciation (through 2010)
For Eligible Small Businesses
- Allows general business credits to offset Alternative Minimum Tax (AMT) for 2010 or prior years
- Increases the carry-back of general business credits to five years (previously allowed one year carry-back)
- Increases capital gain exclusion for Section 1202 stock purchases
Who will achieve the most benefit from these changes:
- Businesses purchasing equipment in 2010 or 2011 that can benefit from accelerated expensing. Generally the business will need to be profitable to benefit.
- Eligible Small Businesses (defined below) that expect to generate 2010 general business credits and are currently profitable and/or paid AMT in one of the prior five years. If full utilization of 2010 credits was expected under old law, the credit provisions will not be beneficial.
Highlights of the Act are discussed below:
Section 179 Expensing Increased
Under the old law (Internal Revenue Code (IRC) § 179), businesses could write-off the cost of certain property in the year acquired rather than depreciating the cost over the life of the asset. In 2010, these capital expenditures write-offs were limited to $250,000, subject to a phase-out of purchases exceeding $800,000. In 2011, these amounts would have reverted to $25,000 and $200,000, respectively. The Act increases the 2010 and 2011 write-off to $500,000 with the phase out of purchases exceeding $2 million. Within these thresholds, the Act allows taxpayers to expense up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
Bonus Depreciation Extended
In 2008 and 2009 taxpayers were allowed to claim a 50% accelerated depreciation deduction for fixed assets purchased during the year. The Act extends the first-year 50% bonus depreciation available under IRC § 168(k) for one year to apply to property acquired and placed in service in 2010. For five-year property, the first year total deduction is typically 60% as opposed to 20% without bonus depreciation.
Eligible Small Business Credits Not Subject to AMT Limitations
An “Eligible Small Business” is a sole proprietorship, partnership, or a non-publicly traded corporation with $50 million or less in average annual gross receipts for the prior three years.
Eligible small business credits are the sum of the general business credits determined in 2010 for an Eligible Small Business. Prior to the Small Business Act, general business credits such as R&D Credits were not allowed to reduce tax below a minimum tax. The Act allows Eligible Small Businesses to utilize eligible small business credits generated in 2010 against their entire tax liability.
General business credits include the research and development credit (§41), the orphan drug credit (§45C(a)), investment credits (§46), various energy credits and other miscellaneous credits. As of the date of this article, the §41 research and development credit had not been extended for 2010, although an extension is reasonably expected.
Five-year Carry-Back for Eligible Small Business Credits
Previously, a business’ unused general business credits were allowed to be carried back to offset tax paid in the previous year. The Act allows Eligible Small Business’ a five-year carry-back of any unused 2010 eligible small business tax credits. These eligible small business credits may be used to offset AMT in the prior year.
Capital Gain Exclusion for Sale of Qualified Small Business Stock
Generally 50% of the gain on the sale of qualified small business stock (also known as § 1202 stock) is deemed to be taxable capital gain. The Act amends IRC § 1202 to increase the amount that taxpayers can exclude from capital gain income to 100%. The Act also eliminates the AMT preference attributable for the sale. This provision is only valid for purchases of qualified small business stock during a limited time period: from September 27, 2010 (when the President signed the Act into law) to January 1, 2011.
Business owners should talk with their tax advisors to find out whether they will benefit from the changes listed above, or from any of the bill’s provisions.