The Small Business Jobs Act of 2010 (SBJA), signed into law in September, adds or renews several attractive tax incentives for small business, and makes other important tax changes (including beefed up penalties) you need to know about. This is the last in our three-part series explaining key provisions of the SBJA with tax experts from CBIZ.
100% Exclusion of Gain on Sale of Qualified Small Business Stock: Historically, 50 percent of the gain from the sale of qualified small business stock held at least five years could be excluded from income, but remained subject to the alternative minimum tax. The remaining 50 percent of such gain was taxed at 28 percent. The exclusion percentage increased from 50 percent to 75 percent for qualified small business stock acquired after February 17, 2009 and before 2011.
SBJA increases the exclusion from 75 percent to 100 percent for qualified small business stock acquired after the enactment date and before 2011. In addition, there is no alternative minimum tax imposed on any gains eligible for the 100 percent exclusion.
While the 100 percent exclusion is a significant tax benefit, taxpayers must act quickly because they only have until the end of the year to acquire the qualifying stock. The stock must be original issue stock in a C corporation held by a non-corporate investor, the gross assets of the corporation may not exceed $50 million at the time of issue, and the corporation must actively conduct a trade or business.
Shortened Built-in Gain holding period for S Corporations: Historically, an S corporation that had converted from a C corporation generally was required to pay built-in gains tax on any assets disposed of within the first ten years of converting to S corporation status. This preserved the C Corporation “double taxation” model for appreciated assets held at the time of conversion. In 2009 and 2010, an S corporation could sell built-in gain property without paying a corporate level tax as long as the corporation had held the property for seven years. The new law reduces the holding period on these assets in 2011 from seven years to five years. This means that C corporations that filed Subchapter S elections effective for the 2006 tax year (or earlier) can sell built-in gain property without paying the built-in gains corporate level tax.
Startup Expense Deduction Increased: Generally, taxpayers may deduct up to only $5,000 of startup expenditures, subject to a phase-out threshold of $50,000, and the remainder must be amortized over 180 months. The new law increases the maximum deduction to $10,000 and the phase-out threshold to $60,000. This provision only applies to startup expenditures incurred in the 2010 tax year.
Self-employment Tax Break on Health Insurance: Individuals subject to self-employment tax may not deduct health insurance for purposes of computing net earnings subject to self-employment tax. For the 2010 tax year only, taxpayers will be allowed to reduce their net self-employment income by the cost of their health insurance.
Cell Phones No Longer Listed Property: Under prior law, cell phones (and similar telecommunications devices) were considered “listed property,” and thus were subject to strict substantiation requirements for the business use of the property. Recognizing that employer-provided cell phones are now commonplace, the new law removes cell phones from the definition of listed property leaving it open for the IRS to determine that the personal use of cell phones provided primarily for business purposes constitutes a de minimis or working condition fringe benefit that can be provided tax free to employees.
Increased Information Reporting: The health care reform act imposed onerous new reporting requirements on taxpayers beginning in 2012 by requiring 1099 reporting on all payments of $600 or more for both goods and services, and extended the reporting to corporations. While there is broad support in Congress to scale back or even repeal that provision, in the meantime Congress has piled it on by imposing even more information reporting requirements on taxpayers. Taxpayers who receive rental real estate income, traditionally exempted from the reporting requirements, will now be required to report payments of $600 or more to a service provider beginning in 2011. Individuals who only receive a minimal amount of rental income (as defined by the Treasury Department) will be exempt from these requirements.
Penalties: Congress increased the penalties that apply to the failure to file correct information returns (e.g., Form 1099 or Schedule K-1). The increases apply to both the penalties applicable to each such failure ($100 up from $50 unless corrected immediately), and to the maximum annual limitation ($1,500,000 up from $250,000 unless corrected immediately).
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100% Exclusion of Gain on Sale of Qualified Small Business Stock: Historically, 50 percent of the gain from the sale of qualified small business stock held at least five years could be excluded from income, but remained subject to the alternative minimum tax. The remaining 50 percent of such gain was taxed at 28 percent. The exclusion percentage increased from 50 percent to 75 percent for qualified small business stock acquired after February 17, 2009 and before 2011.
SBJA increases the exclusion from 75 percent to 100 percent for qualified small business stock acquired after the enactment date and before 2011. In addition, there is no alternative minimum tax imposed on any gains eligible for the 100 percent exclusion.
While the 100 percent exclusion is a significant tax benefit, taxpayers must act quickly because they only have until the end of the year to acquire the qualifying stock. The stock must be original issue stock in a C corporation held by a non-corporate investor, the gross assets of the corporation may not exceed $50 million at the time of issue, and the corporation must actively conduct a trade or business.
Shortened Built-in Gain holding period for S Corporations: Historically, an S corporation that had converted from a C corporation generally was required to pay built-in gains tax on any assets disposed of within the first ten years of converting to S corporation status. This preserved the C Corporation “double taxation” model for appreciated assets held at the time of conversion. In 2009 and 2010, an S corporation could sell built-in gain property without paying a corporate level tax as long as the corporation had held the property for seven years. The new law reduces the holding period on these assets in 2011 from seven years to five years. This means that C corporations that filed Subchapter S elections effective for the 2006 tax year (or earlier) can sell built-in gain property without paying the built-in gains corporate level tax.
Startup Expense Deduction Increased: Generally, taxpayers may deduct up to only $5,000 of startup expenditures, subject to a phase-out threshold of $50,000, and the remainder must be amortized over 180 months. The new law increases the maximum deduction to $10,000 and the phase-out threshold to $60,000. This provision only applies to startup expenditures incurred in the 2010 tax year.
Self-employment Tax Break on Health Insurance: Individuals subject to self-employment tax may not deduct health insurance for purposes of computing net earnings subject to self-employment tax. For the 2010 tax year only, taxpayers will be allowed to reduce their net self-employment income by the cost of their health insurance.
Cell Phones No Longer Listed Property: Under prior law, cell phones (and similar telecommunications devices) were considered “listed property,” and thus were subject to strict substantiation requirements for the business use of the property. Recognizing that employer-provided cell phones are now commonplace, the new law removes cell phones from the definition of listed property leaving it open for the IRS to determine that the personal use of cell phones provided primarily for business purposes constitutes a de minimis or working condition fringe benefit that can be provided tax free to employees.
Increased Information Reporting: The health care reform act imposed onerous new reporting requirements on taxpayers beginning in 2012 by requiring 1099 reporting on all payments of $600 or more for both goods and services, and extended the reporting to corporations. While there is broad support in Congress to scale back or even repeal that provision, in the meantime Congress has piled it on by imposing even more information reporting requirements on taxpayers. Taxpayers who receive rental real estate income, traditionally exempted from the reporting requirements, will now be required to report payments of $600 or more to a service provider beginning in 2011. Individuals who only receive a minimal amount of rental income (as defined by the Treasury Department) will be exempt from these requirements.
Penalties: Congress increased the penalties that apply to the failure to file correct information returns (e.g., Form 1099 or Schedule K-1). The increases apply to both the penalties applicable to each such failure ($100 up from $50 unless corrected immediately), and to the maximum annual limitation ($1,500,000 up from $250,000 unless corrected immediately).
link download
