Tax Breaks and Incentives for Small Business in 2010 and 2011

In order to help small businesses quickly recover the cost of certain capital expenditures, qualified small business taxpayers can elect to write off the cost of these expenditures in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Jobs Act law, taxpayers could expense up to $250,000 of qualifying property - generally, machinery, equipment and certain software - placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 expensing limit is increased to $500,000 and the investment ceiling in increased to $2,000,000.

The new law also makes certain real property eligible for expensing. For property placed in service in tax years beginning 2010 or 2011, the $500,000 of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).

Extension of 50% bonus first-year depreciation: Businesses are allowed to deduct the cost of capital expenditures over time based on IRS depreciation schedules. Under the extension of this previously allowed benefit, businesses are permitted a first-year write-off of 50% of the cost of qualifying expenditures for property first placed in service in 2010 (2011 for certain property).

Special rule for long-term contract accounting: The new law provides that in determining the percentage of completion, under the percentage of completion method of accounting, bonus depreciation is not taken into account as a cost. This prevents the bonus depreciation deduction from accelerating income recognition.

Boosted deduction for start-up expenditures: The new law 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 on start-up deductions was capped at $5,000, subject to a $50,000 phase-out threshold.

General business credits of eligible small businesses for 2010 allowed to be carried back five years: 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 the new law, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years. Eligible small businesses consist of 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 in 2010 are not subject to AMT: 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 new law allows eligible small businesses, as defined above, to use all types of general business credits to offset their AMT in tax years beginning in 2010.

S corporation holding period: Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years following its conversion or face a business-level tax imposed on the built-in gain at the highest corporate rate of 35%. The 10 year holding period was reduced where the 7th tax year in the holding period preceded the tax year beginning in 2009 or 2010. 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.

Deductibility of health insurance for the purpose of calculating self-employment tax: The new law 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 removed from listed property category: This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.

Please keep in mind that we have described only the highlights of some of the changes in the new law.

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