The Small Business Jobs Act 2010

The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for businesses. Here's a brief overview of the tax changes in the Small Business Jobs Act.

Enhanced small business expensing (Section 179 expensing). To help small businesses quickly recover the cost of capital outlays, small business taxpayers can elect to write off these expenditures in the year they are made instead of recovering them through depreciation. Under the old rules, taxpayers could generally expense up to $250,000 of qualifying property—generally, machinery, equipment and software—placed in service in during the tax year. This annual limit was reduced by the amount by which the cost of property placed in service exceeded $800,000. Under the Small Business Jobs Act, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment limit to $2,000,000. The Small Business Jobs Act also makes certain real property eligible for expensing. Thus, for property placed in service in any tax year beginning in 2010 or 2011, the $500,000 amount can include up to $250,000 of qualified leasehold improvement, restaurant and retail improvement property.

Extension of 50% bonus first-year depreciation. Before the Small Business Jobs Act, Congress already allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property placed in service in 2008 or 2009 by permitting the first-year write-off of 50% of the cost. The Small Business Jobs Act extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (as well as 2011 for certain aircraft and long production period property).

Boosted deduction for start-up expenditures. The Small Business Jobs Act allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.

100% exclusion of gain from the sale of small business stock Ordinarily, individuals can exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). This percentage exclusion was temporarily increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the Small Business Jobs Act, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after September 27, 2010 and held for more than five years. In addition, the Small Business Jobs Act eliminates the alternative minimum tax (AMT) preference item attributable to such sales.

General business credits of eligible small businesses for 2010 get five-year carryback. Generally, a business's unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under Small Business Jobs Act, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years instead of just one. Eligible small businesses are sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

General business credits of eligible small businesses not subject to AMT for 2010. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The Small Business Jobs Act allows eligible small businesses to use all types of general business credits to offset their AMT in tax years beginning in 2010.

Deductibility of health insurance for the purpose of calculating self-employment tax. The Small Business Jobs Act allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.

Cell phones no longer listed property. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.

S corporation holding period for appreciated assets shortened to five years. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years or face a built-in gain tax at the highest corporate rate of 35%. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.

New tax break for long-term contract accounting. The Small Business Jobs Act provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation in 2010 is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.

Limitation on penalty for failure to disclose certain reportable transactions. The Small Business Jobs Act generally limits the penalty to 75% of the decrease in tax resulting from the transaction, retroactively to penalties assessed after Dec. 31, 2006. Minimum and maximum penalties apply.

Revenue raisers. These tax breaks come at a cost. To mention a few of these unfavorable provisions, information reporting will generally be required for rental property expense payments made after Dec. 31, 2010, and increased information return penalties will be imposed.

Tax changes affecting business in the recently enacted Hiring Incentives to Restore Employment (HIRE) Act.

Payroll tax holiday and up-to-$1,000 credit for employers who hire unemployed workers. To help stimulate the hiring of workers by the private sector, the new law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer's 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010. A company could save a maximum of $6,621 if it hired an unemployed worker and paid that worker at least $106,800—the maximum amount of wages subject to Social Security taxes—by the end of the year. As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.

Workers hired after the date of introduction of the legislation (Feb. 3, 2010) are eligible for the payroll tax forgiveness and the retention bonus, but only wages paid after the date of the new law's enactment receive the exemption for payroll taxes.

Here are some additional features of the new hiring incentive:

1. The tax benefit of the new incentive is immediate. It puts money into a business' cash flow immediately, since the tax is simply not collected in the first place.

2. The tax benefit generally applies only to private-sector employment, including nonprofit organizations—public sector jobs are generally not eligible for either benefit. However, employment by a public higher education institution would qualify.

3. There is no minimum weekly number of hours that the new employee must work for the employer to be eligible, and there is no maximum on the dollar amount of payroll taxes per employer that may be forgiven.

4. For workers that would otherwise be eligible for the "Work Opportunity Tax Credit," the employer must select one benefit or the other for 2010—no double dipping.

5. An employer can't claim the new tax breaks for hiring family members.

6. A worker who replaces another employee who performed the same job for the employer is not eligible for the benefit, unless the prior employee left the job voluntarily or for cause.

7. For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employment begins.

8. The incentive is not biased towards either low-wage or high-wage workers. Under the measure, a business saves 6.2% on both a $40,000 worker and a $90,000 worker.

9. The payroll tax holiday does not apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security payroll tax would have been reduced under the payroll tax holiday provision during the fist calendar quarter is applied against the tax imposed on the employer for the second calendar quarter of 2010.

10. The Act creates a similar new set of rules permitting a payroll tax holiday for railroad retirement tax purposes. 11. The credit for retaining qualifying new hires is the lesser of $1,000 or 6.2% of the wages paid by the taxpayer to the retained worker during the 52-consecutive-week period. Thus, the credit for a retained worker will be $1,000 if, disregarding rounding, the retained worker's wages during the 52-consecutive-week period exceed $16,129.03. However, the credit is not available for pay not treated as wages under the Code (e.g., remuneration paid to domestic workers).

Direct payment option for certain tax credit bonds. State and local governments have the ability to issue special purpose tax credit bonds for school construction, energy conservation and renewable energy. The federal government subsidizes these tax credit bonds by providing investors in these bonds with a federal tax credit in place of interest that would otherwise be payable on the bond. In lieu of providing investors with federal tax credits, the new law allows issuers of qualified school construction bonds, qualified zone academy bonds, clean renewable energy bonds, and qualified energy conservation bonds to elect to receive a direct payment from the federal government equal to the amount of the federal tax credit that would otherwise be provided for these bonds.

Revenue offsets. To pay for the tax incentives, the Act includes revenue offsets consisting of: (1) a comprehensive set of measures to reduce offshore noncompliance by giving IRS new administrative tools to detect, deter and discourage offshore tax abuses; and (2) a three-year delay (through 2020) of implementation of worldwide allocation of interest—a liberalized rule for allocating interest expense between U.S. sources and foreign sources for purposes of determining a taxpayer's foreign tax credit limitation..

Small employer health insurance credit for taxable employers

The tax credit available for certain small employers providing health insurance coverage for their employees. The credit is specifically targeted to help certain small businesses that primarily employ moderate-income workers and lower-income workers. The credit can offset a taxable employer's regular tax liability or its alternative minimum tax (AMT) liability.

During the first phase of the credit (i.e., tax years beginning in 2010, 2011, 2012, or 2013), the amount of the credit is generally 35% of the employer's nonelective contributions toward the employees' health insurance premiums. In the second phase of the credit (i.e., tax years beginning after 2013), the amount of the credit is generally 50% of the employer's nonelective contributions. The amount of the credit is subject to a phaseout (described below).

An employer qualifying for the credit (i.e., an eligible small employer or ESE) has to meet all of the following requirements:

(1) The employer can't have more than 25 full-time equivalent (FTE) employees for the tax year. An employer's FTE employees are determined by dividing the total hours worked by all employees during the year by 2,080 (rounded down to the nearest whole number).

(2) The average annual wages of the employees can't exceed $50,000 (for tax years beginning after 2013, the dollar amount is indexed for inflation) for the tax year. The average annual wages are determined by dividing the total wages the employer pays by the number of its FTE employees and then rounding that number down to the nearest $1,000.

(3) The employer has to contribute at least 50% of the premiums for the employees' health insurance coverage on a uniform basis. However, for tax years beginning in 2010 only, an employer can meet this requirement even if it pays differing percentages of different employees' premiums as long as all employer payments are at least 50% of each employee's premium based on single (employee only) coverage.

The amount of the credit gradually phases out if the number of an ESE's FTE employees exceeds ten or if the average annual wages of the employees exceed $25,000. Under the phaseout, the full amount of the credit is available only to an employer with ten or fewer FTE employees and whose employees have average annual wages of less than $25,000. However, an employer with exactly 25 FTE employees or average annual wages exactly equal to $50,000 is not in fact eligible for the credit. Since the eligibility rules are based in part on the number of FTE employees, not the number of employees, in certain circumstances, a business that uses part-time help can qualify for the credit even if it employs more than 25 individuals.

For purposes of determining whether an employer is an ESE and determining the amount of the credit, self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer and certain relatives of these individuals are not treated as employees for purposes of the small employer health insurance credit. There are also special rules that apply to seasonal workers, leased employees, and employees who have more than 2,080 hours of service during a tax year.

For the first phase of the credit, an ESE can claim the credit on qualifying health insurance purchased from an insurance company licensed under state law. If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement (with employees paying the rest), only the portion paid by the employer is taken into account. For example, if an employer pays 80% of the premiums for employees' coverage (with employees paying the other 20%), the 80% premium amount paid by the employer counts in calculating the amount of the credit.

For the second phase of the credit, the credit is only available if the ESE purchases health insurance coverage for its employees through a state exchange. Also, during the second phase, the credit is only available for a maximum coverage period of two consecutive tax years beginning with the first year in which the employer or any predecessor first offers one or more qualified plans to its employees through an exchange. The maximum two-year coverage period does not take into account any tax years beginning before 2014. Thus, an ESE can potentially qualify for the credit for six tax years, four years under the first phase and two years under the second phase.

An employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an ESE pays 100% of the cost of its employees' health insurance coverage and the amount of the tax credit is 50% of that cost (i.e., in tax years beginning after 2013), the employer can claim a deduction for the remaining 50% of the premium cost. Any unused credit can be carried back for one year (but not before 2010) and forward for 20 years to offset future taxes.

How the Temporary Extension Act of 2010 affects the COBRA premium subsidy rules

On Mar. 2, the President signed into law the "Temporary Extension Act of 2010" (the Act), which, among other provisions extends the COBRA continuation premium subsidy for one month and makes a number of other clarifying and substantive changes to it. Here's an overview of the major changes to the COBRA premium subsidy rules:

Extension of COBRA 65% subsidy. In 2009, Congress created a temporary 65% COBRA premium subsidy in response to a major recession that added millions to the unemployment rolls and would have left many without health insurance coverage because they couldn't afford to pay COBRA premiums on their own. The way the subsidy works is that, if a company has a group health plan that is subject to the Federal COBRA continuation coverage requirements or to similar requirements under State law, and the company receives a 35% payment from someone eligible for the subsidy, it must make the remaining 65% premium payment. The company is then "paid back," either by offsetting its payroll tax deposits or claiming the subsidy as an overpayment at the end of the payroll quarter. Eligible individuals can receive this subsidy for up to 15 months. However, under pre-Act law, to qualify for premium assistance, a worker had to be involuntarily terminated between Sept. 1, 2008 and Feb. 28, 2010. That meant that if there had not been an extension, workers involuntarily terminated after Feb. 28 wouldn't have been eligible for the COBRA subsidy. The new law extends the deadline for one month, so that workers who are involuntarily terminated between Sept. 1, 2008 and Mar. 31, 2010 are eligible for up to 15 months of COBRA subsidies. (I should also note that another bill currently being considered by the Senate would extend the 65% COBRA premium subsidy to apply for involuntary terminations through the end of 2010.)

New election for those terminated after a reduction in hours. The new law clarifies the treatment of COBRA continuation that results from reductions in hours followed by termination of employment. Evidently, there was some concern under pre-Act law regarding COBRA continuation coverage for workers who (1) were hit by a reduction in hours, (2) did not make a timely COBRA continuation election or made the election and later dropped COBRA continuation coverage (e.g., because it was too expensive), and (3) are ultimately involuntarily terminated. Under the new law, if an individual did not make a COBRA continuation coverage election when his or her hours were reduced (or made an election but then discontinued COBRA coverage), if the individual is then involuntarily terminated from employment, that will be treated as a qualifying event for COBRA continuation coverage purposes. The period of the individual's COBRA continuation coverage is determined as though the qualifying event were the reduction in hours of employment. However, affected individuals will not be required to make a payment for COBRA continuation coverage for the period between their reduction in hours of employment and their involuntary termination.