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Welcome relief: Big tax breaks in new ‘small business’ law

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in Employment Law,Human Resources,Small Business Tax,Small Business Tax Deduction Strategies

The Small Business Jobs Act of 2010, signed by President Obama on Sept. 27, includes a bevy of tax breaks for small business owners. Here are the highlights:

Higher expensing for Section 179

For tax years beginning in 2010 and 2011, your business can immediately write off up to $500,000 of qualifying assets (including purchased software). The new $500,000 maximum allowance doubles the previous $250,000 maximum deduction.

More good news: The threshold for the Section 179 deduction phaseout rule jumps from $800,000 to $2 million, for tax years beginning in 2010 and 2011. Therefore, bigger businesses are now eligible for Section 179 deductions.

In addition, for tax years beginning in 2010 and 2011, up to $250,000 of qualified real property costs (for eligible buildings and improvements) can be deducted under Section 179. Before the new law, real property costs did not qualify for Section 179 deductions.

Bonus depreciation reinstated

The new law retroactively reinstates 50% first-year bonus depreciation for qualifying new (not used) assets placed in service by Dec. 31, 2010. This tax break expired after 2009, but it’s now been resurrected for qualified assets placed in service by year-end.

Qualified small business stock (QSBS) exclusion increases

Previously, you could exclude up to 75% of the gain from QSBS acquired between Feb. 18, 2009, and Dec. 31, 2010, if you held the stock more than five years. The new law increases the potential gain exclusion to 100% for QSBS acquisitions made between Sept. 28, 2010, and Dec. 31, 2010. For such shares, the new law also removes the QSBS gain exclusion from the list of items that count as income for alternative minimum tax (AMT) purposes.

BIG tax whittled down to five years

When a C corporation converts to an S corporation, it may be liable for a “built-in gains” (BIG) tax on gains recognized in its first 10 years of operation.

First, the 10-year recognition period was reduced to seven years for built-in gains recognized in tax years beginning in 2009 and 2010.

Now, the new law cuts the recognition period down to five years for gains recognized in tax years beginning in 2011.

Maximum deduction for start-ups doubles

The new law increases the maximum deduction for qualified start-up expenditures to $10,000 for tax years beginning in 2010 (up from $5,000). The threshold for the start-up deduction phaseout rule increases from $50,000 to $60,000 for tax years beginning in 2010. For tax years beginning in 2011 and beyond, the prior limits are scheduled to return.

Small business AMT offset

Normally, general business credits can’t offset the AMT. But the new law allows eligible small businesses an AMT offset for general business credits arising in tax years beginning in 2010. Also, eligible small businesses can carry back general business credits arising in tax years beginning in 2010 for up to five years.

Special one-year health insurance deduction

For 2010 only, a self-employed individual can reduce his or her self-employment income by deductible health insurance premiums when calculating the self-employment tax.

Cell phone record-keeping relaxed

Cell phones and similar devices used for business will no longer be subject to super-strict record-keeping requirements for business versus personal use. This favorable change is retroactive to tax years beginning after 2009.

Retirement account transfers just got easier

Several provisions help facilitate transfers from 401(k), 403(b) and 457 retirement plans to designated Roth accounts.

Caution: The law also contains a tax bugaboo. Starting in 2011, taxpayers with income from rental real estate will generally have to file Form 1099 information returns with the IRS whenever any service provider is paid $600 or more during the year. Starting in 2012, 1099s will generally have to be filed whenever any party is paid $600 or more during the year. Each payee that receives over $600 must be sent a copy of the Form 1099 sent to the IRS.

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