September 2010

Retroactive Stimulus Bill Sent to President

[ Update: President signs small business bill into law Sept. 27, 2010. ]

The Small Business Jobs Act of 2010 provides an estimated $12 billion in business tax relief. The bill’s name is misleading since many provisions apply to all businesses not just small businesses. Also notable, most of the bill’s business “stimulus” provisions are retroactive to January 1, 2010. Supporters of the bill claim that the bill was not intended to add to the deficit. As revenue raisers, there are some new provisions that may cause extra paper work for many taxpayers and an extension of the ability to rollover retirement funds to a Roth IRA. For a complete discussion of the bill, see the AICPA’s Journal of Accountancy article.

A brief summary of the provisions in the bill that are the most beneficial to our clients is below. Please contact your Blackman Kallick representative for more information:

50% bonus depreciation extended for one year until December 31, 2010. Similar to prior rules regarding bonus depreciation, the property must be new and must have a Modified Accelerated Cost Recovery System life of 20 years or less. Also included is off the shelf software and certain leasehold improvement property. For taxpayers who have already purchased new property in 2010 this represents a retroactive benefit.

For the years 2010 and 2011, Section 179 expensing amount increased to $500,000, $250,000 can be from certain real property purchases. Section 179 allows a taxpayer to expense the cost of new or used personal property purchased during the year. Prior law did NOT allow any real property to be included in the Section 179 election and was limited to a total of $250,000 for 2010 (2011 was scheduled to go down to $25,000).  Real property that qualifies for the Section 179 deduction is qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. Lodging property will NOT qualify. In general, the Section 179 expense is not allowed if the taxpayer is in a loss position which may limit the benefit for many real property owners.

Five year carry back of eligible small business general business credits incurred and unused in 2010. General business credits that are earned and limited in 2010 may be carried back five years. Eligible “small” businesses credits are those credits earned from businesses whose average annual gross receipts for the three years prior to the tax year are less than $50 million. In addition, the tentative minimum tax is treated as being zero for such eligible small business credits. Consequently, such credits are able to offset both regular and alternative minimum taxes.

One year self employment tax break for health insurance. Previously, health insurance costs incurred by a self-employed taxpayer were not a subtraction in calculating total earnings subject to social security and medicare taxes (even though they were generally fully deductible for income tax purposes). For the year of 2010, health insurance costs are a deduction from the total self employed earnings subject to social security and medicare taxes.

Certain S corporation built in gains tax recognition period reduced from ten years to five years. For S corporations, there is a special tax upon certain gains recognized within a ten year period after an S election is made. For those S corporations whose fifth recognition years precedes 2011, the holding period of assets subject to the built in gains tax is shortened to five years. For those select S corporations, this represents up to a 35% tax decrease.

Two of the more notable revenue raisers are:

New requirement for Form 1099 to be filed by most taxpayers that receive rental real estate income exceeding $600. For payments made after December 31, 2010, most taxpayers receiving rental real estate income will be subject to the same information reporting requirement that other businesses are already subject to. 

Most retirement plans will be able to allow current participants the ability to roll over their pretax contributions to a Roth account. The provision will be effective for rollovers that occur after the date of enactment (the bill has passed both the House and Senate, but the enactment date is the date the President signs the bill). Currently, an active participant of a 401(k), 403(b) or 457(b) plan could not rollover prior contributions to a Roth account unless the plan was terminated or the participant terminated service with the employer.

This represents a very brief summary of selected provisions of the bill sent to President Obama. Many of the provisions were much more generous than anticipated from a bill touted to stimulate the economy and provide jobs.

For a more detailed discussion of this bill or any tax matter please contact Michael Calahan at 312.980.2996, Craig Maksymiak at 312.980.2998 or your Blackman Kallick representative.