Overview of the Small Business Jobs Act of 2010

The Small Business Jobs Act of 2010 (the "Act") was signed by Pres. Obama on September 27, 2010.  The name of the Act is somewhat of a misnomer in that there are tax provisions that apply to large companies and also tax provisions that apply to individuals.  The Act provides $12 billion of tax incentives that are paid with $12 billion of accelerated tax collections and penalty increases.  Some of the important tax provisions are generally described below.  As always, the devil is in the details.

1. The 50% bonus depreciation for the purchase of new business equipment that expired at the end of 2009 is retroactively extended until the end of 2010
2. The Section 179 expensing election for the purchase of new or used business equipment is modified for tax years beginning in 2010 and 2011:
   >  The maximum deduction is increased from $250,000 in 2010 and from $25,000 in 2011 to $500,000
   >  The beginning of the phase-out of the deduction is increased from $800,000 in 2010 and from $200,000 in 2011 to $2,000,000
   >  Computer software remains eligible for Section 179 expensing through 2011
   >  New for the first time, eligible Section 179 property will now include up to $250,000 of certain qualifying real estate improvements made during 2010 and 2011
   >  After 2011 the Section 179 limits will drop down to $25,000 and $200,000
3. The tax on so-called "built-in gains" of S corporations that were formerly C corporations does not apply to gains recognized in 2011 if the fifth year since the S election ends before 2011
4. Eligible small businesses can carry back unused tax credits generated in tax years beginning in 2010 five taxable years instead of the usual one year
5. Up to 100% of the gain on the sale of certain small business stock acquired after September 27, 2010 and before 2011 may be excluded if the stock was held for at least five years
6. The business start-up expense deduction limits have been modified for one year, for tax years beginning in 2010, as follows:
   >  The maximum immediate deduction is increased from $5,000 to $10,000
   >  The beginning of the phase-out of the deduction is increased from $50,000 to $60,000
7. The computation of net earnings subject to the self-employment tax can now include a deduction for health insurance costs, but only for the tax year beginning in 2010
8. Companies that maintain a Roth 401(k) account may now amend their plans to permit participants to rollover all or a portion of their pre-tax 401(k) account balances to the Roth 401(k) account.  This is similar in concept to the conversion of a traditional IRA to a Roth IRA.  The rollover is taxable, but rollovers accomplished in 2010 are taxable one-half each in 2011 and 2012, unless an election is made to include the rollover income in the 2010 tax return.  After 2010 rollovers are fully taxable in the year of rollover.  The rollover isn't subject to the 10% pre-age 59 1/2 penalty.
9. Owners of rental real estate must begin issuing Forms 1099 for rental expenses of $600 or more paid to service providers (e.g. a plumber or painter, etc.) after 2010.
10. Penalties for the non-filing or late-filing of Form 1099 information tax returns are dramatically increased for returns due after 2010.  Taxpayers having average gross receipts of no more than $5 million would suffer a smaller annual maximum penalty as disclosed in [brackets].
    >  Not more than 30-days late, increased from $15 to $30 per day for each form, the annual penalty limit increasing from $75,000 to $250,000 [from $25,000 to $75,000]
    >  More than 30-days late but filed on or before August 1st, increased from $30 to $60 per day for each form, the annual penalty limit increasing from $150,000 to $500,000 [from $50,000 to $200,000]
    >  Filed after August 1st, increased from $50 to $100 per day for each form, the annual penalty limit increasing from $250,000 to $1,500,000 [from $100,000 to $500,000]
    >  Intentionally failing to file information tax returns will increase from $100 to $250 per day
    >  The penalty amounts will be indexed for inflation after 2012
11. The above penalty is for not filing information returns with the IRS.  A DUPLICATE PENALTY applies if the information return wasn't also provided to the companies to which payments were made.  So, in most situations, if an information return is missed, two penalties apply and the amounts shown above are effectively doubled!  The government's practice of enacting new burdensome tax requirements and then imposing draconian financial penalties in order to "pay" for certain tax breaks is very concerning because it can financially destroy businesses and families who inadvertently fail to comply with constantly changing and increasing tax filing requirements.

Small Tax Exempt Charities at Risk of Losing Tax Exempt Status

Small charities must file annual information tax returns.  For charities with annual gross receipts of $25,000 or less (increasing to $50,000 in 2010), only a so-called electronic postcard, Form 990-N is required.  For charities with annual gross receipts of more than $25,000 but less than $500,000 and whose total assets are less than $1,250,000 (dropping to $200,000 of gross receipts and $500,000 of total assets in 2010); the short-form 990-EZ is required.  The tax returns are due on the 15th day of the fifth month following the charity's year end.  Small charities that haven't filed tax returns for 2007, 2008, and 2009 will lose their tax exemption on October 15, 2010 unless they file the past three years under the IRS special one-time relief program.  The IRS estimates some 300,000 charities could be affected.  The IRS has published a list by state of the charities that will lose their exemption at: http://www.irs.gov/charities/article/0,,id=225889,00.html  Check the list for your charity!

For those charities eligible to use Form 990-N, an automatic extension is granted until October 15, 2010 to file the past-due tax returns.  For those charities eligible to file From 990-EZ, their past-due returns must also be filed by October 15, 2010 but they must also pay a small compliance fee of from $100 to $500, depending on the amount of their gross receipts. See http://www.irs.gov/charities/article/0,,id=225705,00.html for more information.  

The IRS filing relief program does not apply to larger charities that must file the full form 990, nor does it apply to private foundations.  Private foundations must file the full form 990-PF.  Private foundations cannot file an e-postcard, and there isn't a short form.  Surprisingly, unfunded private foundations, those with no prior contributions or assets still must file Form 990-PF to avoid losing their exemption.  This could be a sleeper issue for some individuals who may have already formed a private foundation in connection with their estate planning documents but haven't funded it yet.  There is no exemption from filing Form 990-PF based upon the size or the funding of the foundation.