The House yesterday passed the version of the “small business” tax and loan package passed last week by the Senate (HR 5297). The president is expected to sign the bill quickly. The key tax provisions:
$500,000 Section 179 depreciation limit. Current law allows taxpayers to expense $250,000 in capital expenses that would otherwise have to be recovered through depreciation deductions. The bill raises the Section 179 limit to $500,000, with the deduction phasing out dollar-for-dollar as capital expenditures exceed $2 million. This applies to taxable years beginning in 2010 and 2011. (Sec. 2021 of the bill)
The bill also extends the Section 179 deduction to three classes of real estate; this is the first time any real estate assets have qualified. It will apply to the two classes of property that had been eligible for 15-year depreciation — “qualified restaurant property” and “qualified leasehold improvements,” and “qualified retail improvement property.”
Extended bonus depreciation. The current provision allowing taxpayers buying new property to deduct half the cost in the first year of service had expired at the end of 2009. The bill extends bonus depreciation through 2010. (Sec. 2022 of the bill)
Exclusion of certain capital gains. Current law gives a 75% exclusion for gains on C corporation stock acquired at original issue between February 17, 2009 and January 1, 2011, if the stock is held for more than five years — though the excluded gain is an AMT preference. The bill removes the AMT preference and increases the exclusion to 100% from the date the bill is signed through the end of 2010. This means taxpayers will have about three months to start a new C corporation in the hopes that it will make money and can be sold tax free in five years. That will make the economy go nuts, no doubt. (Sec. 2011 of the bill).
Five-year built-in gain period for S corporations. If a C corporation converts to S corporation status, it has to pay a corporate level tax on “built-in gains” recognized in the first ten years of its S corporation life. The 10-year built-in gain period was shortened to seven years for gains recognized in 2009 and 2010. The bill shortens the recognition period to five years for gains recognized in taxable years beginning in 2011; the recognition period becomes 10 years again in 2012. (Sec. 2014 of the bill).
Five-year carryback and AMT offset for business credit carryforwards. The bill allows taxpayers who have “general business credits” — for example, research credits and jobs credits — to carry them back five years. More importantly, it will allow taxpayers to offset alternative minimum tax for “eligible small businesses” in 2010. These credits normally are not allowed to offset AMT, so they are useless to many entrepreneurs.
Unfortunately, the AMT waiver only applies to credits generated in 2010. Taxpayers who have credit carryforwards because of prior year AMT won’t get to cash in their carryforward credits.
Eligible small businesses will be non-public corporations, partnerships and individuals with gross receipts under $50 million. For pass-through entities, the $50 million test will be applied at both the entity and individual levels. (Secs. 2012 and 2013 of the bill)
Deduction for health insurance in calculating 2010 SE tax. For 2010 only, taxpayers with self-employment tax will get to reduce their self-employment income by their deductible self-employed health insurance (Sec. 2042 of the bill).
1099 requirement for rental property owners. The bill isn’t just tax breaks. The bill requires rental operators to issue 1099-MISC forms to vendors with over $600 of business starting with 2011 expenditures (Sec. 2101 of the bill).
Start-up expenditures. The bill increases the $5,000 limit for deductible start-up expenditures to $10,000 for 2010 only (Sec. 2031 of the bill).
Meanwhile, the Senate has punted on dealing with its real tax policy agenda — the expiration of the Bush-era tax cuts, the “AMT patch,” and the “expiring provisions” — until after the election, reports the Wall Street Journal. That increases the chances for a tax policy train wreck, with a 39.6% top rate for individuals and a 55% estate tax with a $1 million exemption next year, and AMT for millions of new taxayers this year. Well played.
