Small Business Jobs Act Offers Valuable Tax Incentives


	Jeff Bither

December 2010

Small Business Jobs Act Offers Valuable Tax Incentives

In September 2010, Congress passed the Small Business Jobs and Credit Act. This important legislation provides various tax incentives targeted to small business owners, including the provisions discussed below.

Enhanced Section 179 Depreciation Deductions. Under Section 179 of the Internal Revenue Code, a business can currently deduct the cost of qualified property placed in service during the year, within an annual limit.

The new law increases the maximum deduction to $500,000 for 2010 and 2011 with a phase-out threshold of $2 million. Eligible assets include computers, office equipment and furniture. Certain real estate improvement costs now qualify for Section 179 deductions of up to $250,000.

Easing of S Corporation Disposition Rules. After a C corporation converts to S corporation status, it may be liable for the “built-in gains” (BIG) tax if it sells or otherwise disposes of appreciated property within a specified time period. The normal recognition period of 10 years was shortened to seven years for dispositions in tax years beginning in 2009 and 2010. The new law reduces this period still further to only five years for dispositions in tax years beginning in 2011.

Start-Up Expense Deductions. Prior to the new law, a taxpayer could deduct up to $5,000 of qualified business start-up expenditures for new ventures just getting off the ground. The maximum $5,000 deduction was phased out for expenses over $50,000.

The new law doubles the maximum deduction for 2010 to $10,000 with a $60,000 phase-out threshold. (These figures are scheduled to revert to their prior amounts in 2011.)

Business Credits. With limited exceptions, general business credits cannot be used to offset a taxpayer’s Alternative Minimum Tax (AMT) liability. The new law removes this restriction for “eligible small businesses.”

To qualify, average annual gross receipts of a non-public corporation, partnership or small proprietorship cannot exceed $50 million for the prior three years. In addition, beginning in 2010, an eligible small business may carry back general business credits for five years instead of one year.

Cell Phones. Previously, cell phones were treated as “listed property” for tax purposes, therefore triggering the same strict substantiation rules that apply to business use of vehicles. The new law removes these requirements for cell phones and similar communication devices and treats employer-provided devices as tax-free fringe benefits.

Self-Employed Health Insurance. A self-employed individual must pay self-employment tax comparable to the Social Security tax paid on employee wages. For 2010, eligible self employed people can deduct health insurance premiums from the self-employment income subject to employment tax. This tax break is a limited one-year window of opportunity.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.