President Obama today, September 27, signed the Small Business Jobs Act of 2010 (the Act),
legislation that aims to spur job creation in part by establishing a $30 billion fund to be lent to
small businesses. Thus, September 27 is the date of enactment.
The Act also provides $12 billion (over 10 years) of tax relief to small businesses including a
one-year extension of 50% bonus depreciation, generally for property placed in service before
2011, and an increase in the maximum amount of eligible section 179 property that may be
expensed to $500,000 with a phase-out threshold of $2 million. The Act removes cellular
phones from “listed property” subject to special expense and usage substantiation rules, and
also provides a temporary 100% exclusion of gain from the sale of eligible small business stock.
Revenue offsets include an information reporting requirement for rental income, an amendment
to the sourcing rules for income from guarantees of indebtedness, and a provision making crude
tall oil ineligible for the cellulosic biofuel producer credit.
This report provides a summary of the tax provisions in the Act.
In this report, $ = U.S. dollar and % = percent.
BUSINESS TAX RELIEF
Extension of bonus depreciation
Disregard bonus depreciation in computing percentage of completion for long-term contracts
Expansion of section 179 expensing
Temporary exclusion of gain from sale of small business stock
Five-year carryback of general business credits of eligible small business
General business credits of eligible small business not subject to AMT
Temporary reduction in recognition period for S corporation built-in gains tax
Increase in amount allowed as deduction for start-up expenditures
Remove cellular phones and similar telecommunications equipment from the definition of listed
property
Temporary deduction for health insurance costs in computing self-employment income
Limitation on penalty for failure to disclose reportable transactions
REVENUE PROVISIONS
Information reporting for rental property expense payments
Increase in information return penalties
Application of continuous levy to tax liabilities of certain federal contractors
Sourcing rules for income from guarantees
Allow participants in government section 457 plans to treat elective deferrals as Roth
contributions
Allow rollovers from elective deferral plans to Roth designated accounts
Permit partial annuitization of a nonqualified annuity contract
Crude tall oil ineligible for cellulosic biofuel producer credit
Time for payment of estimated taxes
BUSINESS TAX RELIEF
Extension of Bonus Depreciation
The Act extends “bonus” depreciation for one year to apply to qualified property acquired and
placed in service during 2010 (or placed in service during 2011 for certain long-lived property
and transportation property, including private aircraft).
Under current and prior law, an additional first-year depreciation deduction of 50% of the
adjusted basis of qualified property—bonus depreciation—is allowed for property placed in
service during 2008 and 2009 (2009 and 2010 for certain long-lived and transportation
property). The bonus depreciation deduction is allowed for both regular tax and alternative
minimum tax purposes, but is not allowed for computing earnings and profits.
Our Observation
The extension of the bonus depreciation is available to all taxpayers that could use it
previously, and there is no change in the types of property that can be qualified property,
including qualified leasehold improvements.
Effective: The provision applies to property placed in service in tax years ending after 2009.
Disregard Bonus Depreciation in Computing Percentage of Completion for Long-Term Contracts
The Act provides that solely for purposes of determining the percentage of completion for a
long-term contract under section 460, the cost of qualified property is taken into account as a
cost allocated to the contract as if bonus depreciation had not been enacted. Qualified property
is defined as property otherwise eligible for bonus depreciation that has a MACRS recovery
period of seven years or less and that is placed in service after 2009 and before 2011 (2012 in
the case of certain property with a longer production period as described in section
168(k)(2)(B)).
Effective: The provision is effective for property placed in service after 2009.
Expansion of Section 179 Expensing
The Act increases the maximum amount a taxpayer may expense for qualifying property under
section 179 to $500,000, and increases the phase-out threshold amount to $2 million for
property placed in service in tax years beginning in 2010 or 2011. The $500,000 amount would
be reduced (but not below zero) by the amount by which the cost of qualifying property placed
in service during the tax year exceeds $2 million.
The Act extends the treatment of computer software as section 179 property to computer
software placed in service in a tax year beginning before 2012 (from before 2011 under prior
law).
The Act also temporarily expands the definition of property qualifying for section 179 to include
the following types of real property:
Qualified leasehold improvement property
Qualified restaurant property
Qualified retail improvement property
The maximum amount with respect to real property that may be expensed is $250,000. In
addition, section 179 deductions attributable to qualified real property that are disallowed under
the trade or business income limitation may only be carried over to tax years in which the
definition of eligible section 179 property includes qualified real property. (Under current law, the
amount eligible to be expensed may not exceed the taxable income derived from an active trade
or business.) The carryover amount from 2010 is considered placed in service on the first day of
the 2011 tax year.
The Act permits a taxpayer to elect to exclude real property from the definition of section 179
property.
Effective: The provision is effective for tax years beginning after 2009.
Temporary Exclusion of Gain From Sale of Small Business Stock
The Act provides a 100% exclusion of gain on a sale or exchange of qualified small business
stock acquired after the date of enactment and before 2011, and the alternative minimum tax
(AMT) preference does not apply. Other limitations and requirements under current law continue
to apply, including that the stock be held for at least five years. Stock acquired after 2011 is
eligible generally for a 50% exclusion, with an AMT preference.
Effective: The provision is effective for stock acquired after the date of enactment and before
2011.
Five-Year Carryback of General Business Credits of Eligible Small Business
The Act extends the one-year carryback period for eligible small business credits to five years.
General business credits may be carried forward up to 20 years.
Eligible small business credits are defined as the sum of the general business credits
determined for the tax year with respect to an eligible small business. An eligible small business
generally is defined as a corporation, the stock of which is not publicly traded, a partnership, or
a sole proprietorship whose average gross receipts over the three preceding years did not
exceed $50 million.
A partnership or S corporation’s credits are not treated as eligible small business credits unless
the partner or shareholder also meets the gross receipts test for the tax year in which the
credits are treated as current-year business credits.
Effective: The provision is effective for credits determined in the taxpayer’s first tax year
beginning after 2009.
General Business Credits of Eligible Small Business Not Subject to AMT
business credits. Thus, eligible small business credits can offset both regular and AMT tax
liability. An eligible small business and eligible business credits are defined as above, in the
section describing the five-year credit carryback provision.
Effective: The provision is effective for credits determined in the taxpayer’s first tax year
beginning after 2009.
Temporary Reduction in Recognition Period for S Corporation Built-in Gains Tax
The Act provides temporary relief from the built-in gains tax in 2011 for certain S corporations.
Specifically, the Act provides that no built-in gains tax will be imposed on the net recognized
built-in gain of an S corporation in the case of any tax year that begins in 2011, if the fifth year
of the recognition period preceded such tax year.
Increase in Amount Allowed as Deduction for Start-up Expenditures
The Act increases to $10,000 the amount of capitalized start-up expenditures a taxpayer may
elect to deduct under section 195, at the time when the active trade or business begins, from
the prior amount of $5,000.
The Act also increases the deduction phase-out threshold such that the $10,000 limit is reduced
by the amount of capitalized start-up expenditures in excess of $60,000. Any amount that is not
deductible is amortized over a 15-year period.
Effective: The provision is effective for tax years beginning after 2009.
Remove Cellular Phones and Similar Telecommunications Equipment From the Definition of Listed
Property
The Act removes cellular phones and similar telecommunications equipment from the definition
of “listed” property. Thus, the heightened substantiation requirements and special depreciation
rules that apply to listed property do not apply to cellular phones.
No deduction is allowed for listed property unless a taxpayer adequately substantiates the
expense and business usage of the property. Listed property currently includes passenger
automobiles, property generally used for entertainment or recreation, and certain other property,
and previously included cellular phones.
Our Observation
This change does not give an automatic “pass” on the taxation of the value of cellular
phones provided by employers to employees or for cellular phone costs reimbursed by
employers. The change in the law essentially gives the IRS greater flexibility—not available
under prior law—in providing guidance on the fringe benefit and substantiation requirements
for such cellular phone use. Until the IRS provides additional guidance, existing regulations
treat cellular phones provided by an employer as a taxable fringe benefit, and allow
employee business use of a cellular phone to be excluded from income only if the business
use is properly substantiated.
Effective: The provision is effective for tax years ending after 2009.
Temporary Deduction for Health Insurance Costs in Computing Self-Employment Income
The deduction for income tax purposes allowed to self-employed individuals for the cost of
health insurance is taken into account (and therefore allowed) in calculating earnings from selfemployment
for purposes of Self-Employment Contributions Act (SECA) taxes. The cost of
health insurance that is taken into account includes the cost of coverage for the taxpayer,
spouse, dependents, and children under the age of 27 as of the end of the tax year.
Effective: The provision only applies for the taxpayer’s first tax year beginning after 2009.
Limitation on Penalty for Failure to Disclose Reportable Transactions
Taxpayers are required to disclose with their tax returns certain information with respect to each
“reportable transaction” in which the taxpayer participates. This disclosure is made on Form
8886, Reportable Transaction Disclosure Statement. There are currently five categories of
reportable transactions: listed transactions, confidential transactions, transactions with
contractual protection, certain loss transactions, and transactions of interest.
The penalty for failing to disclose a reportable transaction other than a listed transaction is
$10,000 in the case of a natural person and $50,000 in any other case. The penalty for failure
to disclose a listed transaction is $100,000 in the case of a natural person and $200,000 in any
other case.
The Act changes the general rule for determining the amount of the penalty to achieve
proportionality between the penalty and the tax savings that were the object of the transaction.
The new general rule is that a taxpayer that fails to make a proper disclosure is subject to a
penalty equal to 75% of the reduction in tax reported on the taxpayer’s tax return as a result of
participating in the transaction or that would result if the transaction were respected for federal
tax purposes. However, the Act retains the current penalty amounts as the maximum penalty
that may be imposed.
The new provision also establishes a minimum penalty with respect to a failure to disclose a
reportable transaction, including a listed transaction. The minimum penalty is $5,000 for natural
persons and $10,000 for all other persons.
Effective: The provision has retroactive effect, in that it applies to penalties assessed after
December 31, 2006.
Our Observation
This change was prompted by Congress’ failure to provide a reasonable cause exception for
the penalty and the strict liability aspect of the penalty for listed transactions. This was
especially harsh on partners in partnerships and shareholders in S corporations who were
subject to penalties that greatly exceeded any tax benefit from their participation in the listed
or other reportable transaction.
REVENUE PROVISIONS
Information Reporting for Rental Property Expense Payments
The Act requires recipients of rental income from real estate generally to be subject to the same
information reporting requirements as taxpayers engaged in a trade or business. This means
that rental income recipients making payments aggregating $600 or more in a tax year to a
service provider (such as a plumber, painter, or accountant) in the course of earning rental
income are required to provide an information return (typically a Form 1099-MISC) to the IRS
and the service provider.
The Act provides exceptions to the reporting requirement for: (1) members of the military or
employees of the intelligence community who rent their principal residence on a temporary
basis; (2) individuals who receive only minimal amounts of rental income (with the threshold
amount determined by regulations); and (3) other individuals for whom the requirements would
cause hardship (also determined by regulations).
Effective: The provision applies to payments made after 2010.
Our Observation
Reporting for payments made during calendar year 2011 are limited to amounts paid to
unincorporated service providers (with the exception that corporations providing medical or
legal services are subject to reporting). However, beginning in calendar year 2012,
information reporting on Form 1099-MISC is expanded to include: (1) payments made to
corporations (other than tax-exempt corporations); and (2) payments for goods (such as
supplies, materials, furniture, equipment, etc.). The increased scope of reporting is a result of
a provision included in health care legislation enacted in March 2010.
Increase in Information Return Penalties
The Act increases the penalty for failing to timely file correct information returns (such as Forms
1099, W-2, and 1042-S) with the IRS as well as the related penalty for failing to timely furnish
correct payee statements. In general, the penalty for each reporting failure is increased from
$50 to $100, with the maximum annual combined penalty for unintentional failures increasing
from $350,000 to $3 million. Both the failure to file and the failure to furnish penalties will be
adjusted to account for inflation every five years with the first adjustment to occur after 2012. In
addition, the minimum penalty for each reporting failure due to intentional disregard of the
reporting requirements is increased from $100 to $250.
Effective: The provision applies with respect to information returns required to be filed on or
after January 1, 2011.
Our Observation
Information returns and payee statements for calendar year 2010 are required to be filed
with the IRS and furnished to payees after January 1, 2011. Thus, the increased penalty
structure is effective for reporting related to 2010 activity.
Allow Participants in Government Section 457 Plans to Treat Elective Deferrals as Roth
Contributions
Under current law, section 401(k) plans and 403(b) plans are permitted to have qualified Roth
contribution programs under which participants may elect to make non-excludable contributions
to “designated Roth accounts,” and if certain conditions are met, to exclude from gross income
distributions from these accounts. Generally, if an “applicable retirement plan” includes a
qualified Roth contribution program, then any contribution that a participant makes under the
program is treated as an “elective deferral,” but is not excludable from gross income.
The Act amends the definition of applicable retirement plan to include eligible state or local
government deferred compensation programs as defined in section 457(b). The Act also
amends the definition of “elective deferral” in section 402A to include amounts deferred under a
governmental 457(b) plan.
Effective: The provision is effective for tax years beginning after 2010.
Allow Rollovers from Elective Deferral Plans to Roth Designated Accounts
The Act provides that a plan that includes a designated Roth program is permitted, but not
required, generally to allow employees (and surviving spouses) to make a “rollover” contribution
from the tax deferred contributions to a designated Roth account within the plan. If a plan
allows these rollover contributions to a designated Roth account, the plan would need to be
amended to reflect this feature. The amount is taxable when the contribution is made, but the
early withdrawal penalty does not apply. If the contribution is rolled over in 2010, the amount
could—at the taxpayer’s election—be taxed ratably over a two-year period beginning in 2011.
According to a Joint Committee on Taxation description (JCX-47-10, September 16, 2010) of
the provision, it is intended that the IRS would provide employers with a remedial amendment
period that would allow them to offer this option to employees (and surviving spouses) for
distributions during 2010 and then have sufficient time to amend the plan to reflect this feature.
Effective: The provision is effective for distributions made after the date of enactment.
Permit Partial Annuitization of a Nonqualified Annuity Contract
The Act permits a portion of an annuity, endowment, or life insurance contract to be annuitized
while the balance is not annuitized, provided that the annuitization period is for 10 years or
more, or is for the lives of one or more individuals.
If any amount is received as an annuity for a period of 10 years or more, or for the lives of one
or more individuals, under any portion of an annuity, then that portion of the contract would be
treated as a separate contract for purposes of section 72.
The investment in the contract must be allocated on a pro rata basis between each portion of
the contract from which amounts are received as an annuity and the portion from which
amounts are not received as an annuity. This allocation is made for purposes of applying the
rules relating to the exclusion ratio, the determination of the investment in the contract, the
expected return, the annuity starting date, and amounts not received as an annuity.
According to the Joint Committee on Taxation description (JCX-47-10, September 16, 2010) of
the legislation, the provision is not intended to change current law rules with respect either to
amounts received as an annuity, or to amounts not received as an annuity, in the case of plans
qualified under sections 401(a), plans described in 403(b), section 403(b) tax-deferred
annuities, or individual retirement accounts.
Effective: The provision is effective for amounts received in tax years beginning after 2010.
Crude Tall Oil Ineligible for Cellulosic Biofuel Producer Credit
An income tax credit is allowed for qualified cellulosic biofuel that is produced by a taxpayer.
Cellulosic biofuel is generally defined as any liquid fuel that: (1) is produced from any
lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis; and
(2) meets the registration requirements for fuel and fuel additives established by the EPA under
section 211 of the Clean Air Act.
Certain liquid byproducts derived from the processing of paper or pulp (known as “black liquor”)
is produced from lignocellulosic or hemicellulosic matter available on a renewable or recurring
basis. Although the production of black liquor was initially eligible for the credit, health care
reform legislation enacted in March 2010, includes a provision that excludes black liquor from
eligibility for the credit.
“Crude tall oil” is generated by reacting acid with “black liquor soap.” Crude tall oil is used in
various applications such as adhesives, paints, and coatings. It can also be burned and used as
fuel.
The Act excludes from the definition of cellulosic biofuel certain processed fuels with an “acid
number” of greater than 25. The acid number for crude tall oil exceeds 25; therefore, crude tall
oil no longer qualifies for the cellulosic biofuel producer credit.
Effective: The provision is effective for fuels sold or used after 2009.
Time for Payment of Estimated Taxes
The required corporate estimated tax payments due in July, August, and September 2015 for
corporations with assets of at least $1 billion would be increased by 36 percentage points to
159.25% of the payment otherwise due.
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Small Business Tax - Small Business Jobs Act of 2010
