Small Business Expensing (Section 179)
Under Section 179 of the Tax Code, small business taxpayers can elect
to write off an established amount of certain capital expenditures
(mostly machinery, equipment and software) in the year they are made
instead of recognizing the expense through depreciation over several
years. The previous limit of qualifying property eligible for
write-off was $250,000 and the annual limit was reduced by the
amount by which the cost of property placed in service exceeded
$800,000 during the tax year.
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 Act also allows certain real property
expenditures (qualified leasehold improvement property, qualified
restaurant property and qualified retail improvement property) up to
$250,000 to be eligible for inclusion in the overall $500,000 limit.
Bonus First-Year Depreciation
the past two years, businesses have been allowed to more rapidly
deduct capital expenditures of most new tangible personal property
placed in service by writing off 50% of the cost in the year of
acquisition. The Act extends the first-year 50% write-off through 2010
and also extends it through 2011 for certain aircraft and long
production period property.
In order to boost small-business startups, taxpayers will be allowed
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
Gains On Small Business Stock
Individuals can currently exclude 75% of their gain on the sale of
qualified small business stock (QSBS) held for at least five years
(the exclusion is 60% for certain empowerment zone businesses) so long
as the stock was acquired after February 17, 2009 and before January
The amount of the exclusion has now been increased to 100% of the gain
from the sale of qualifying small business stock that is acquired
between September 27, 2010 and December 31, 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
General Business Tax Credits
Prior to 2010, a business's unused general business credits could be
carried back to offset taxes paid in the previous year, and the
remaining amount could be carried forward for 20 years to offset
future tax liabilities. For the first tax year beginning in 2010,
eligible small businesses can now carry back unused general business
credits for five years instead of just one.
Eligible small businesses include sole proprietorships, partnerships
and non-publicly traded corporations with $50 million or less in
average annual gross receipts for the prior three years.
In addition, the general business credits of eligible small businesses
will not be subject to AMT for 2010. Businesses can typically
claim allowable general business credits for AMT purposes only 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, could be used to offset AMT liability but for tax
years beginning in 2010, eligible small businesses will be allowed to
use all types of general business credits to offset their AMT.
C Corporation to S Corporation Conversion
Traditionally, C corporations which convert to an S corporation have
been required to hold onto any appreciated assets for 10 years or be
faced with a built-in gain tax at the highest corporate rate of 35%.
This holding period has been shortened temporarily to 5 years if the
5th tax year in the holding period precedes the tax year beginning in
Accounting For Long Term Contracts
For our construction and manufacturing clients who use the percentage
of completion method of accounting, bonus depreciation in 2010 will
not be taken into account as a cost. This prevents the bonus
depreciation from having the effect of accelerating income.
Business owners will be allowed to deduct the full cost of health
insurance incurred in 2010 for themselves and their family members in
calculating their 2010 self-employment tax.
Cell phones can now be deducted or depreciated like standard business
property and will no longer be considered "listed" property which
requires burdensome recordkeeping rules.