The Small Business Jobs Act of 2010
By Mark E. Battersby, a freelance writer and consultant on tax and financial issues based in Ardmore, Pa. He can be reached at 610-789-2480 or by e-mail at MEBatt12@Earthlink.net.
Congress has passed, and the president has signed into law, a bill creating a $30 billion lending program, the “Small Business Jobs & Credit Act of 2010.” The accompanying tax segment, “The Small Business Jobs Act of 2010,” offers business owners $12 billion in tax breaks, but includes measures that could have some service center owners worried.
Needed or not, the lending provisions in the new bill are designed to help small business owners who have seen the value of real estate and other types of collateral sapped by the recession. Among the bill’s many provisions are new lending programs such as:
n A Small Business Lending Fund: A Small Business Lending Fund will provide up to $30 billion in capital to financially sound small banks with less than $10 billion in assets to encourage them to lend money to small businesses. As an incentive to lend, banks that increase lending to small businesses by 10 percent over the previous year will pay as little as 1 percent on the capital they acquire from the fund.
n State Small Business Credit Initiative: This provision would help businesses in states that have successful small-business lending programs, and shows how a loan program can help create jobs. States with such programs and facing cutbacks due to tight state budgets may be eligible for funding to continue them. The grant pool would total $2 billion, but states would need to show that there has been at least $10 in new lending for every $1 in federal grant money they receive.
n Small Business Administration Lending Programs: Those seeking SBA loans stand to benefit from the extension of provisions that amped up the SBA’s lending guarantee programs and fee reductions that recently expired. In addition, the bill increases the maximum loan size for the SBA’s 7(a), 504, and microloan programs.
The bill’s far-reaching changes to the SBA’s guaranteed loan programs—it allows banks to make much larger loans and permits bigger businesses to take advantage of them—could potentially alter the essential character of Small Business Administration borrowers. It could make them less small.
The 7(a) and 504 loan program maximums would jump from $2 million to $5 million, and the microloans would increase from $35,000 to $50,000 in size. Loans made under the SBA Express program would temporarily increase from $300,000 to $1 million. Also included is a temporary allowance for small business owners, such as metals service centers, allowing them to use a 504 loan to finance certain mortgages in order to avoid foreclosure.
Another, less-discussed section of the bill directs the SBA to implement immediately a temporary rule that loosens the eligibility requirements for government-backed loans. Under the current rules, approximately 5.4 million businesses are eligible for SBA loans. This means most metals distributors with fewer than 100 employees are presently eligible for an SBA-backed loan. Under the newly increased limits, any business with a tangible net worth under $15 million and average net income for the last two years that doesn’t exceed $5 million will be eligible for an SBA-backed loan.
As with most of today’s legislation, however, the lending fund is only a temporary fix. It will make investments in banks for just one year. The tax breaks in the bill, on the other hand, are worth about $12 billion, and are mostly good for a year or two. Here’s a look at what the bill will mean for your business, including the potential potholes that every metal center or business owner could be facing down the road.
More or less taxes
Among the tax provisions, metals distributors will find the bill extends the 50 percent “bonus” first-year depreciation write-off, which had expired at the end of 2009. Bonus depreciation is not limited by the size of the business, but there is a very short window of opportunity—qualified equipment must be purchased and placed into service before Dec. 31, 2010.
In addition to extending the “bonus” depreciation write-off retroactive to Jan. 1, 2010, other tax provisions include:
n Section 179 expensing, the first-year write-off for newly acquired equipment and business property, is raised to $500,000 with an investment ceiling up to $2 million, at least for 2010 and 2011. Improvements made to leased business property, restaurant property and retail improvement property are eligible for a smaller, $250,000, Section 179 write-off.
n The limits on the amount of depreciation that may be claimed in the first year for certain passenger automobiles has increased by $8,000 for automobiles for which the business does not elect out of the additional first-year deduction. Therefore for 2010, the maximum first-year depreciation for passenger automobiles is $11,060.
n The bill continues to treat computer software as qualified Section 179 property subject to the full write-off normally available only for so-called “tangible personal” property.
n The bill also removes cell phones and other personal communication devices from the onerous record-keeping, substantiation requirements and limited deductions for so-called “listed” property. In addition, the provision enables the fair market value of personal use of a cell phone or other similar device provided to an employee predominantly for business purposes to be excluded from gross income.
n When a corporation formed as a regular or C corporation elects to become an S corporation, the S corporation is taxed at 35 percent on all gains that were built-in at the time of the election, if the gains are recognized during the recognition period. The recognition period is usually the first 10 S corporation years. For tax years beginning in 2009 and 2010, no tax is imposed on the net unrecognized built-in gain of an S corporation if the seventh tax year in the recognition period preceded the 2009 and 2010 tax years. For 2011, the new rules would shorten the holding period of assets subject to the built-in gains tax to five years if the fifth tax year in the recognition period precedes the tax year beginning in 2011.
n The 2009 Recovery Act temporarily increased the percentage exclusion for qualified small business stock sold by an individual from 50 percent to 75 percent for stock acquired when originally issued and held for more than five years. Now, the act includes a 100 percent exclusion of gain resulting from the sale of that unique, Section 1244 stock many small business owners employed to attract investors.
n Beginning in 2010, a corporation whose stock is not publicly traded, partnerships and sole proprietors can carry back unused, small business tax credits for five years, resulting in refunds of taxes previously paid. Eligible small businesses would also be able to use all types of general business tax credits to offset their alternative minimum tax.
n A self-employed metals distributor or business owner can take a deduction for health insurance costs paid for him or herself and immediate family. When determining self-employment taxes, however, the self-employed cannot deduct any health insurance costs. Today, under the bill, the deduction for income tax purposes for the cost of health insurance is allowed in calculating net earnings from self-employment for self-employment tax purposes, but only for tax years beginning after Dec. 31, 2009.
The new law isn’t all roses, however. Among the provisions designed to help compensate the government for the additional funding and tax savings created by this bill, higher penalties could end up stinging small-business owners who, as a group, are known for tending to run afoul of confusing and complex federal tax rules.
Penalties for failure to file information returns to payees, such as 1099 and W2 forms, will increase as will penalties for failure to file timely information with the IRS. Those new 1099 reporting requirements passed earlier this year as part of the Patient Protection and Affordable Care Act may dramatically increase the number of 1099s a metals business needs to process. This key and controversial new requirement is tied to health care reform, which included a major change in how businesses report spending, requiring every business that spends in excess of $600 with a merchant, vendor, contractor or supplier to issue a 1099.
The iceberg’s tip
While the $30 billion allocated for SBA loans is laudable, many experts are already predicting the loans will be doled out carefully in order to comply with requirements that many small businesses won’t come close to meeting. On the tax front, the package of enhanced small business tax incentives will benefit many metals distributors and other small businesses.
An extended life for bonus depreciation, extending and doubling the Section 179 first-year write-offs for newly acquired business property, the 100 percent exclusion of gains realized on small business stock, the relaxed S corporation built-in gain conversion rules, and extended carryback period for eligible small business tax credits to five years are a welcome boon in today’s economy.
Will your metals operation be fast enough to benefit from these temporary financing options and tax breaks?