President Obama signed into law the 2010 Small Business Jobs Act on September 27, 2010, which includes a host of business tax breaks totaling $12 billion in a last-minute effort (before the elections) to create jobs and stimulate the lackluster US economy. The irony of this Jobs Act is that the “tax the rich” Democrats have provided small businesses tremendous tax breaks to invest in new and used equipment. For those businesses who actually need to make capital expenditures in 2010 and more importantly have the money to do so, this law presents a tremendous opportunity to reduce taxable income for 2010 and even potentially utilize some of the additional losses for prior years and receive refund checks from the government.
The tax cuts are straight out of the conservative playbook and it is rather surprising that they have come out of an ideologically monopolistic Congress which has pretty much steamrolled the Democratic agenda for the last two years without much consultation from the Republicans. It is worth noting that the same legislators who support expiration of the Bush tax cuts were signatories to this major tax cut for small businesses. The upcoming elections should serve as a wake up call.
The highlights of the 2010 Jobs Act are as follows:
- Expanded §179 Depreciation—For tax years beginning in 2010 and 2011, the total depreciation allowable under §179 has increased to $500,000 and the asset phase-out threshold has been increased to $2 million. These changes not only help businesses with higher write-offs, but the increased threshold enables more businesses to qualify. Another feature of this expanded write-off is the ability to deduct qualified real estate expenditures up to $250,000. Qualified real estate expenditures include certain leasehold improvements, restaurant building improvements and retail property improvements. Real estate additions have never before qualified under §179 and relevant businesses should look into the applicability of this provision.
- 50% Bonus Deprecation—For qualified new assets purchased and placed into service in 2010, businesses should be able to write off 50% of the cost in 2010. This provision has been part of the law for 2008 and 2009 but has been extended to 2010 under this new law. The definition of qualified property under this section is unchanged from prior year—it must have a recovery period of 20 years or less and the original use must commence with the taxpayer. The biggest benefit of this provision can be derived by businesses who are currently not profitable and are incurring high capital expenditures in the current year. This is because there is no limitation threshold and no taxable income requirement. Bonus deprecation can create significant losses for operating businesses, which can be carried back two years.
- Self Employment tax for Sole Proprietors—The current law allows self-employed individuals who file Schedule C to deduct the cost of their family health insurance to reduce federal taxable income. The new law allows the health insurance as a deduction in computing the self employment income, thus creating a nice tax break on self employment taxes.
- Other Miscellaneous provisions—The Jobs act also creates a whole host of smaller tax breaks including higher start up costs expensing, 100% deduction on Section 1202 stock, reduced period for S Corporation built-in gains tax and carryback of excess small business credits. There are also new provisions that ease cell phone documentation requirements, increase penalties for non-compliance with filing information returns and mandatory 1099 requirements by landlords (starting 2011).
The new legislation certainly won’t create any new jobs before the elections. Economic lessons of the past point to modest benefits of such tax cuts on the overall economy. The biggest hurdle for businesses today is the credit crunch which prevents them from making capital expenditures. Unfortunately, our government has been unsuccessful in making the banks lend or creating an environment conducive to lending. Hopefully, the lack of success should convince the administration to change its ways and further free-market principles.
Whether this new law impacts the general economy or not, businesses that qualify for the deductions and have the means to accomplish the expenditures, should certainly expedite investments and take advantage of the law before the year end.