Highlights of the New Small-business Law

The new Small Business Jobs and Credit Act—signed by the president on September 27, 2010—provides several tax breaks designed to stimulate the economy. Here’s a summary of the key provisions in the new law of interest to employers:

*Section 179 deductions: Under Section 179 of the tax code, your business may currently deduct (i.e., “expense”) the cost of qualified assets placed in service during the year. The maximum deduction is phased out for purchases above an annual threshold.

Previously, the maximum deduction for 2010 was $250,000, with an $800,000 phaseout threshold. The new law increases the maximum deduction for 2010 and 2011 to $500,000, with a $2 million phaseout threshold. The new law also allows a maximum Section 179 deduction of $250,000 for qualified real estate for 2010 and 2011.

*Bonus depreciation: The “bonus depreciation” deduction for qualified business assets expired after 2009. The new law retroactively extends the deduction for assets placed in service in 2010 (through 2011 for certain assets). If you qualify, you can deduct an amount equal to 50% of the cost (after any Section 179 deduction).

*Capital gains exclusion: Prior to the new law, you could exclude 75% of the gain from qualified small-business stock (QSBS) acquired between February 17, 2009, and January 1, 2011, for stock held more than five years. The new law increases the exclusion to 100% for acquisitions made from September 28, 2010, through December 31, 2010. It also removes the exclusion for QSBS as a tax preference item for alternative minimum tax (AMT) purposes. It is expected that these provisions will generate a slew of new business ventures by entrepreneurs.

*S corporation BIG tax: If a C corporation converts to S corporation status, it may have to pay the built-in gains (BIG) tax on gains realized in its first ten years of operation. The ten-year period was shortened to seven years for gains realized in 2008 and 2009. Now, the new law reduces the recognition period still further to five years for gains realized in tax years beginning in 2011.

*Business credits: Normally, general business credits—such as the research and Work Opportunity Tax Credit (WOTC)—cannot be used to offset the AMT. Under the new law, a qualified small business is allowed an offset for 2010. The new law also authorizes businesses to carry back these credits for up to five years.

*Health insurance deduction: For 2010 only, the new law permits self-employed individuals to reduce self-employment income by the amount of their deductible self-employed health insurance.

*Start-up expenses: The new law increases the maximum $5,000 deduction for qualified start-up expenditures to $10,000 for 2010 only. It also increases the phaseout threshold from $50,000 to $60,000.

But not all the tax news is favorable. Taxpayers who receive rental income from real estate and incur expenses of $600 or more must now file information returns with the IRS and their vendors.

Finally, the new law creates a special fund of $30 billion to help increase small-business lending by banks. Contact your professional advisers for more details.