Small business changes

guest commentary by David Potts

In an attempt to buy your vote this November, Congress passed the 2010 Small Business Jobs Act which President Obama signed into law Sept. 27. The unintended consequence unforeseen by Congress is that this law might benefit small businesses more than the Congressmen that passed it. But let’s not look at gift horse in the mouth. Instead, let’s take an overview look at some of the tax breaks allowed by this new tax act.

Small businesses that have been in operation more than a few years are familiar with the Section 179 expensing election. Section 179 of the Internal Revenue Code allows a business, subject to certain limitations, to deduct the cost of equipment in the year it is purchased rather than depreciating this equipment and spreading the deduction over several years.

Prior to the Small Business Jobs Act, for 2010, a taxpayer could expense up to $250,000 of machinery and equipment, furniture and fixtures, and certain software placed in service as long as the total investment in these assets was less than $800,000. Then in 2011, the amount of property that could be expensed under Section 179 was to decrease to $25,000 with an investment ceiling of $200,000. With the passage of the Small Business Jobs Act, for years beginning in 2010 and 2011 the limit is increased to $500,000 with an investment ceiling of $2,000,000. In 2012, the Section 179 expensing limit will return to $25,000.

What is new, in addition to the higher expensing limits, is that qualified real property can be expensed in 2010 and 2011. Qualified real property is basically leasehold improvements, qualified restaurant property, and qualified retail improvement property. The limit for expensing qualified real property is $250,000. This $250,000 limit is part of the overall $500,000 section 179 expensing limit. In other words, if you spent $400,000 for qualified real property and $100,000 for machinery and equipment, the allowed section 179 deduction would be $350,000: $250,000 for qualified real property and $100,000 for machinery and equipment. In a second scenario, if you spent $400,000 on qualified real property and $400,000 on machinery and equipment, the total Section 179 deduction would equal $500,000.

The Section 179 deduction is also limited to a taxpayer’s taxable income. The part of the deduction that is not used in the current year can be carried forward and used in future years. This is not true for qualified real property. The part of the section 179 deduction attributed to qualified real property must be deducted in 2010 and 2011.

The Small Business Jobs Act extended the 50% bonus first-year depreciation through 2010. This bonus depreciation had previously expired at the end of 2009. The advantage to 50% bonus depreciation when compared to the section 179 deduction is that the 50% bonus depreciation is not subject to an investment ceiling or taxable income limitation, but it provides for faster write-offs  for business equipment than standard depreciation.

Another provision of the small business jobs act that I expect will benefit a great number of self-employed taxpayers is a new provision that allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their families in calculating their 2010 self-employment tax. Since this provision is limited to premiums paid in 2010, it will reward self-employed taxpayers who already have health insurance, but will do little to motivate those without health insurance to go find health insurance in the next three months.

Of course, with every tax break Congress passes a new revenue raiser. And while the tax breaks Congress allows us always seem to have a short life with a fixed expiration date, revenue raisers are permanent. But then, tax revenues are required for politicians to pay their supporters and to buy votes in future elections.

Beginning with payments made in 2011, taxpayers who own rental property must report payments made to service providers in excess of $600 a year by preparing and filing certain information returns with the IRS. The information returns are primarily forms 1099– MISC Miscellaneous Income which landlords will complete to report to the IRS the payee’s name, address, social security number, and the amount the taxpayer paid for services, due by the end of February following each calendar year. Said more simply, if you are a landlord, you must report to the IRS the amount you paid the plumber or electrician in 2011 (if the amount exceeds $600) by completing and filing form 1099-MISC Miscellaneous Income by February 28, 2012. If this requirement affects you, go to the IRS website and download Form W-9 Request for Taxpayer Identification Number and Certification and keep the form ready and available. Have your service provider (the plumber, the electrician, etc.) complete the W-9 before you pay him. Otherwise you might not be able get this information from them later.

What happens if you fail to file the required informational tax forms, the 1099-MISC? You’re penalized, of course. The Small Business Jobs Act has increased the information return penalties for not filing or filing incomplete returns required to be filed after Dec. 31, 2010.

There are many more provisions of the Small Business Jobs Act not covered in today’s commentary. As I sort through these provisions, I will select the ones that I believe will affect a large number of taxpayers and discuss them in my next commentary. But notice the short lifespan on the majority of these provisions, at least the ones that lower your taxes. If you plan to benefit from this new tax law you will have to move quickly. Its unstated purpose (in my opinion) wasn’t to lower your taxes but to buy your votes. If Congress really wanted to help small business and let them generate jobs, these tax cuts would be permanent.

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

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