2010 Lane Reports

A Window of Opportunity with the September 2010 "Small Business" Law: Why You Need to Take Action by December 31st

The Lane Report, November 2010
Monday, November 1, 2010 6:00 am
by Jeffrey A. Miller

 Overview:

The Small Business Jobs Act of 2010 (“SBJA”) was signed into law on September 27, 2010.  With the economy still struggling to recover, SBJA was enacted to provide significant tax benefits for a wide variety of tax-favored activities.  This report will highlight some of the key provisions as well as focus on a few significant and intriguing tax opportunities.  However, some of these tax benefits require taking action within the next 60 days, on or before December 31, 2010.  Accordingly, here is what you need to know as you go window shopping for tax benefits this year (and next).

The primary areas we will bring to your attention include: (1) Increased 2010 Business Deductions, and (2) Zero-tax opportunities for investments in certain C corporations.  Those will be described in more detail below.  However, the SBJA made a number of changes that affect common taxpayers as well.  With that in mind, we briefly call several items to your attention so that you may discuss them in more detail with us or your tax advisor if you believe you may qualify.  These brief highlights to new tax law changes in the SBJA are as follows:

  1. Roth conversions for retirement plans.  Effective September 28, 2010, 2011, participants of 401(k), 403(b) and 457(b) retirement plans may be able to convert their account balances to Roth accounts, if their plans have been amended to allow for such conversions.  Conversions made before December 31, 2010 are eligible for electing to pay the tax on the conversion over a 2-year period in 2011 and 2012.
  2. Roth accounts for state and local government retirement plans.  Effective for 2011, Section 457(b) retirement plans may offer Roth accounts.

  3. Self-employment taxes break for 2010.  For this year only (2010), Congress has allowed health insurance premiums to be deducted for self-employment tax purposes.  (Note the distinction between self-employment tax and income tax.  Health insurance premiums continue to be deductible for income tax purposes for self-employed workers.)

  4. Carryback of unused general business credits.  Starting in 2010, the SBJA increases the carryback period from 1 year to 5 years for eligible small business credits.

  5. Cell Phones are no longer “listed” property.  Effective for 2010, Congress has finally eliminated the special accounting treatment that was previously required for personal and business use of cell phones.

 

Increased 2010 Business Deductions and Depreciation

Increased business deductions under the SBJA primarily fall into 5 different categories:

  1. Direct expensing under Section 179
  2. Bonus Depreciation 
  3. Auto Depreciation 
  4. Start up Expenses 
  5. Real Estate Expenses

 Direct expensing under Section 179 allows certain business expenses to be written off in the same year they are incurred even though those expenses would normally have to be depreciated over several years on your tax returns.  Effective for 2010, Congress has increased the Section 179 limit to $500,000 of eligible business expenses (from $250,000).  This tax benefit is reduced or phased out for larger businesses that have more than $2,000,000 of eligible Section 179 business expenses (increased from $800,000).

Bonus depreciation has existed for several years but under previous law had expired after 2009.  Under the SBJA bonus depreciation is extended for one additional year, through 2010.  Therefore, qualifying property purchased and placed into use in 2010 can be depreciated by an extra 50%. 

Auto depreciation, similarly, had existed in prior years but had previously expired.  Under the SBJA, business owners can write off up to an additional $8,000 for new automobiles purchased and placed into use in 2010. Since the normal automobile depreciation deduction limit is $3,060, business owners can write off up to a total of $11,060 of the cost of a qualifying new automobile in 2010.

Traditionally certain business startup expenses had to be spread out and deducted over 5 years.  Under SBJA, the law now allows up to $10,000 of startup expenses to be immediately deducted in the first year they are incurred (subject to phase out if more than $60,000 of startup expenses are incurred).

Finally, for the first time, the SBJA has created a new first-year deduction for certain qualified real-estate-related property.  The rules regarding this new deduction are fairly complex, so be sure to work with your tax advisor to help ensure that you qualify for the deduction.  This deduction does not apply to the land or real estate itself, rather, just certain depreciable property on the real estate.

Generally speaking, the qualified real-estate-related property eligible for a first-year / same-year deduction includes: (1) certain leasehold improvements, (2) certain restaurant property, and (3) certain retail improvement property.  Leasehold improvements must be placed in service at least 3 years after the building was placed in service, must benefit a tenant's specific space (rather than a common area), and generally must meet several other detailed requirements.  Restaurant property is generally eligible if more than 50% of the building's square footage is devoted to the preparation of or the consumption of meals.  Retail improvement property is generally eligible if the improvement is to an interior portion of a nonresidential building used for selling tangible personal property to the general public and is an improvement made to the property more than 3 years after the building was first placed in service.  Please call us for more details regarding any of the above new real-estate-related deductions for 2010 since our general descriptions have been greatly simplified and your specific situation should be reviewed to ensure that you qualify with this very detailed new law.

 

Zero Tax on Certain Investments in C Corporations before December 31, 2010

An additional significant tax opportunity exists for certain taxpayers that make qualified investments in certain C corporations before December 31, 2010.  If the investment qualifies, the tax benefits are incredibly as follows: (1) there is no tax due on gains from a subsequent sale of the investment, and (2) the gains are also not subject to Alternative Minimum Tax (which increasingly has been an issue for higher-income taxpayers).

Briefly, the highlights of this zero-tax investment opportunity are as follows:

 

  1. The investment must be made on or between September 28, 2010 and December 31, 2010 
  2. The investment must be held more than 5 years 
  3. The investment must be made in a C corporation that does not have more than $50 million in gross assets 
  4. The C corporation must be engaged in a qualifying type of business activity (generally most businesses except farms, financial institutions, professional service firms, restaurants and hotels)  
  5. The investment must be an “original issuance” by the corporation (not a repurchased investment) 
  6. The investment must be made by a non-corporate investor (e.g. by an individual,  partnership or LLC) 
  7. The gains eligible for zero tax are limited to $10 million or ten times the adjusted basis of the stock

If this tax planning and investment opportunity sounds intriguing to you, please give us a call.  Some additional rules and restrictions may apply and any individual investment opportunity should be considered in the context of your other investments that you have made.

  

Conclusion

While Congress may have given us a short “window of opportunity” to make certain strategic tax decisions, the potential tax benefits arising from the new SBJA law enacted about a month ago are significant.  If any 2010 tax benefit mentioned in our monthly report caught your attention, the time to act is now.  Please call Marc Lane at (312) 372-1040 or (800) 372-1040, or e-mail him at [email protected]ne.com to explore all the possibilities.


Jeffrey A. Miller is Of Counsel with the Law Offices of Marc J. Lane, A Professional Corporation. Mr. Miller received his undergraduate degree from the University of Illinois. Mr. Miller received his law degree and his masters of laws (LLM) in taxation, with honors, from IIT Chicago-Kent College of Law.  Mr. Miller is also a Certified Financial Planner.



Marc J. Lane
The Law Offices of Marc J. Lane, A Professional Corporation
180 North La Salle Street
Chicago, Illinois 60601-2701
(312) 372-1040
Nationwide: (800) 372-1040
Facsimile (312) 346-1040
Email:

[email protected]
Websites: www.MarcJLane.com


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