The Creating Small Business Jobs Act of 2010, Pub. L. No. 111-240, 124 Stat. 2504 (Title II, H.R. 5297) became law on September 27, 2010. The Joint Committee on Taxation (Committee) estimates that the tax provisions will provide $56 billion in relief to small businesses in 2011. Congress had taken a revenue-neutral approach to the relief, much of it in the form of accelerating depreciation on recent investments in capital assets. The Committee gives an in-depth technical explanation of the new provisions, some of which include:
One-year extension of bonus depreciation
Prior to the new law, the fifty percent bonus depreciation deduction on the cost of qualified property investments had expired. Congress has extended the allowance to qualified property acquired and put into service in 2010. This deduction is allowed in conjunction with the otherwise applicable depreciation deduction. The Committee projects that the extension will provide $40 billion in tax relief during 2011, making this single provision more than two-thirds of the stimulus.
Increase and expand expensing of certain depreciable business assets
For tax years beginning in 2010 and 2011, a taxpayer may claim a deduction for the full cost of capital investments up to an aggregate amount of $500,000 with a phase-out threshold of $2 million. For example, if a taxpayer’s aggregate cost of qualifying property placed in service during the applicable tax year equals $2,200,000, the taxpayer will be able to “expense” $300,000 for that tax year; while a taxpayer placing property in service with an aggregate amount of $2,400,000 will qualify for a $100,000 deduction. The previous limitation was $250,000 with an $800,000 phase-out. For tax years beginning in 2012, the limitation will revert to the pre-2007 level of $25,000 with a phase-out threshold of $200,000. Additionally, Congress has temporarily expanded the property qualifying as a capital investment to include certain real property, such as qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. A taxpayer may deduct up to $250,000 with respect to qualified real property. The Committee estimates this provision will provide a $9.7 billion stimulus in 2011.
Deduction for health insurance costs in computing self-employment taxes
The new law permits self-employed taxpayers to deduct the cost of health insurance when calculating net income for the purpose of determining tax liability under the Self-Employment Contributions Act (SECA), often referred to as the self-employment tax. Generally, self-employed taxpayers may deduct the cost of health insurance when determining adjusted gross income with respect to income tax liability, but are barred from using the deduction to calculate net income with respect to SECA. This provision is welcome relief to small business owners. However, it only applies for the tax year beginning 2010.
Five-year carryback of general business credit
For the tax year beginning in 2010, an eligible small business may carryback the excess general business credit unused due to statutory limitation up to five years. Additionally, the general business credit limitation will not be subject to the alternative minimum tax. Previously, the excess unused credit could be carried back only one year (or carried forward up to twenty years). Thus, the provision will accelerate the use of the excess credit by providing additional prior years against which an eligible business may immediately offset the credit.
Increase of amount allowed as deduction for start-up expenditures
Congress has increased the allowable deduction for start-up expenses to $10,000 with a phase-out threshold of $60,000 for such expenditures. This provision only applies to the tax year beginning in 2010. Previously, entrepreneurs could deduct start-up expenses up to $5,000 with a phase-out threshold of $50,000.
Temporary exclusion of 100 percent of gain on certain small business stock
The new law temporarily permits exclusion of 100 percent of gain on stock acquired between September 27, 2010 and January 1, 2011, provided that the stock is initial issue and held for five years. To take advantage of the exclusion, the taxpayer must purchase stock from a domestic C corporation with aggregate assets totaling under $50 million both before and immediately after issuance. Additionally, the corporation must meet certain active trade and business requirements. The previous exclusion of the gain of qualified stock was seventy-five percent.
Of course, the unifying theme of these provisions is their temporary nature. Indeed, by not allowing small businesses adequate time to plan their investments to take advantage of the potential tax benefits, many of the provisions seem less for the purpose of encouraging economic growth than for providing campaign-trail talking points as mid-term elections approach.
Particularly striking is the fifty-percent bonus depreciation extension (upon which the majority of the putative stimulus relies), which will only apply to capital expenditures made in 2010. True, the retroactive provision will still reward small businesses who made capital investments in the first three quarters of 2010. However, Congress’ evident reluctance to extend bonus depreciation through 2011, despite the bill’s passage so late in the year, provides taxpayers with a terribly small window for action. Further, the failure to extend bonus depreciation for the following year could have the unintended effect of decreasing capital expenditures in 2011, thereby slowing down what has already been a sluggish recovery. Taxpayers wanting to take advantage of the fifty-percent bonus deduction are forced to act immediately, thereby accelerating capital investments which may have occurred in 2011 to this year. Consequently, while bonus depreciation will likely spur short term investment, the provision’s near sunset could potentially lead to a corresponding decrease in capital expenditure which was destined for 2011.
If Congress were serious about stimulating the capital expenditures of small businesses, it would have provided that the bonus depreciation extension mirror that of the “expense” provision, allowing bonus depreciation for the 2011 tax year. Such an approach would have both comported with the congressional goal of a revenue-neutral stimulus as well as encouraged sustained investment in 2011. Further, such an extension would have substantially increased the stimulus. As noted above, the Committee estimates that the bonus depreciation extension will provide $40 billion in stimulus. Even assuming a fifty percent decrease in the bonus extension’s effectiveness if it were extended through 2011, that would still provide an additional $20 million in revenue-neutral stimulus.
In sum, while these tax breaks will likely help spur capital investment and provide some additional capital to small business, the overall effectiveness of the legislation as a stimulus is, at best, likely mitigated by its passage so late in the year. At worst, Congress’ failure to extend bonus depreciation through 2011 could further stall a lagging recovery. In any event, the tax provisions, though limited in duration, do offer small businesses some attractive tax breaks, so long as they act before the year is out.