On Monday September 27th, the President is expected to sign into law the Small Business Jobs Act of 2010. Once codified into law, this legislation will provide many benefits to businesses for tax years 2010 and 2011. Interestingly enough, other provisions of the legislation will help pay for these tax cuts beyond the life of the cuts. Understanding this legislation is important in knowing the benefits and consequences for the tax years 2010 and forward.

The benefits of the Small Business Jobs Act of 2010 include the following:

1. Section 179 Expense: The election to expense the purchase of new equipment is increased to $500,000 with a phase-out beginning at $2 million for 2010 and 2011. Previous §179 expense was capped at $250,000 and was set to revert to $25,000.

2. Real Property Expense: This is a first in the history of the §179 expense elction. Now qualified real property up to $250,000 can now be fully expensed in tax years 2010 and 2011. Qualified real property includes (a) qualified leasehold improvements, (b) qualified restaurant property and (c) qualified retail improvement property. Qualified real property is normally depreciated over 15 years.

3. Bonus Depreciation: Fifty percent first-year bonus depreciation on new assets was extended through 2010.

4. Start-up Expense: New business start-up expense deductions are increased to $10,000 from $5,000. Normally any start-up expense over $5,000 is amortized over 15 years.

5. “BIG” Tax Holding Period: The period in which the built-in-gains tax is subject to a previously converted corporation is shortened to five years beginning after 2010. This affects any corporation that was converted to an S from a C corporation before 2006, which holds appreciated property and who may be ready to sell those assets; it is advisable to wait until 2011 to sell any assets.

6. Self-employed Health Insurance: Health insurance paid for self-employed individuals can now be used to offset self-employment income. Previously, health insurance paid by self-employed individuals could only be used as a deduction for adjusted gross income, and consequently did not offset earnings subject to self-employment taxes. This deduction is eligible for 2010.

7. Cell Phone Use: Cell phones no longer fall under the definition of “listed property.” Listed property is that which is governed by §280F, which mandates strict business-use substantiation. Furthermore, §280F requires depreciation recapture if business use of the listed property falls below 50%. Now business cell phones can be depreciated like any other normal business equipment without the exhaustive substantiation requirements.

These are some major changes that help small business in the tax years 2010 and 2011. Other changes include a five-year carry-back of general business credits, increased first-year auto deduction, and a relaxed penalty for failure to include reportable transaction information with your tax return. These are the good things in the Small Business Act. Since the Act must be revenue neutral what is the downside to the new rules?

To pay for the tax breaks in the Small Business Act, Congress increased certain penalties. Penalties for failing to file an information return have at least doubled, and the maximum penalty that can be assessed has increased three, four, and five times depending on the “tier” your information return falls under. Information returns are those that do not assess tax, but simply report certain business transactions to the IRS. Examples of information returns include pass-through S corporation and partnership returns, trust and estate returns, W2’s, and 1099’s.

Another unfortunate consequence of this new legislation is an added requirement of landlords, starting in 2011, to report expense payments to service providers of $600 or more to the IRS. This means that every landlord, whether passive or active, will be required to get pertinent information of certain service providers, i.e. name, address, and identification number. Note that failure to comply with this new requirement will result in the increased penalties discussed above, and the filing of an incorrect 1099 can also result in large penalties.

We recommend a Form W-9 be used in collecting service provider information. A service provider is legally obligated to complete a Form W-9.

As you can see, there are many great tax breaks that have been created and extended. Increased §179 maximum expense deductions and bonus depreciation make adding new equipment attractive, and greater start-up and qualified real property expense elections incentivize starting or expanding a business.

Relaxed requirements and penalties in some areas are traversed with greater penalties and requirements in other areas, but overall this new law will help business owners willing to take advantage of it. Just make sure your recordkeeping is updated and organized to make sure information reporting is adequately met.

To set up an review of the planning opportunities for your business, please call us at 480-517-0988.

Tyler Anderson

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