Small Business Lending Funding Act

May 19, 2013 - 6 minutes read

On September 27, President Obama signed into law H.R. 5297, the Small
Business Lending Funding Act
. The tax title of this bill, the “Small
Business Jobs Act of 2010″ (the Act), includes a number of important tax
provisions for businesses large and small, and changes for individuals
as well.

Significant changes allow for faster cost recovery of business property.

Enhanced small business expensing (Section 179 expensing). In order to
help small businesses quickly recover the cost of certain capital
expenses, small business taxpayers can elect to write off the cost of
these expenses in the year of acquisition in lieu of recovering these
costs over time through depreciation. Under pre-2010 Small Business Act
law, taxpayers could expense up to $250,000 for qualifying
property-generally, machinery, equipment and certain software-placed in
service in tax years beginning in 2010. This annual expensing limit was
reduced (but not below zero) by the amount by which the cost of
qualifying property placed in service in tax years beginning in 2010
exceeded $800,000 (the investment ceiling). Under the new law, for tax
years beginning in 2010 and 2011, the $250,000 limit is increased to
$500,000 and the investment ceiling to $2,000,000.

The new law also makes certain real property eligible for expensing. For
property placed in service in any tax year beginning in 2010 or 2011,
the up-to-$500,000 of property that can be expensed can include up to
$250,000 of qualified real property (qualified leasehold improvement
property, qualified restaurant property, and qualified retail
improvement property).

Extension of 50% bonus first-year depreciation. Businesses are allowed
to deduct the cost of capital expenditures over time according to
depreciation schedules. In previous legislation, Congress allowed
businesses to more rapidly deduct capital expenditures of most new
tangible personal property, and certain other new property, placed in
service in 2008 or 2009 (2010 for certain property), by permitting the
first-year write-off of 50% of the cost. The new law extends the
first-year 50% write-off to apply to qualifying property placed in
service in 2010 (2011 for certain property).

100% exclusion of gain from the sale of small business stock (with
certain limitations)

Before the 2009 Recovery Act, individuals could exclude 50% of their
gain on the sale of qualified small business stock (QSBS) held for at
least five years (60% for certain empowerment zone businesses). To
qualify, QSBS must meet a number of conditions (e.g., it must be stock
of a corporation that has gross assets that don’t exceed $50 million and
that meets active business requirements). Under the 2009 Recovery Act,
the percentage exclusion for gain on QSBS sold by an individual was
increased to 75% for stock acquired after Feb. 17, 2009 and before Jan.
1, 2011.

Under the new law, the amount of the exclusion is temporarily increased
yet again, to 100% of the gain from the sale of qualifying small
business stock that is acquired in 2010 after date of enactment and held
for more than five years. In addition, the new law eliminates the AMT
preference item attributable for that sale.

It should be noted that while the new provision for QSBS is ostensibly
intended to encourage investment in small businesses, it may be less
effective in that regard than desired, due to the restrictions on
obtaining the total exclusion, specifically: (1) the narrow window
within which the small business stock must be purchased (i.e., between
date of enactment and the end of 2010); (2) the long holding period
requirement for QSBS (the stock must he held for at least five years);
and, most importantly, (3) the fact that the tax break only applies to
investments in C corporations, a form of business organization that is
not often used by small businesses, which, for tax purposes, are
typically operated as S corporations, partnerships, limited liability
companies or sole proprietorships.

Revenue Raisers

To offset a portion of the cost of the various tax breaks and incentives
in the Act, Congress beefed up certain reporting requirements and
penalties, in the hope that the added requirements will generate revenue
and lead to more effective tax collection.

Information reporting required for rental property expense payments. For
payments made after Dec. 31, 2010, the new law requires persons
receiving rental income from real property to file information returns
with IRS and service providers reporting payments of $600 or more during
the year for rental property expenses. Exceptions are provided for
individuals renting their principal residences (including active members
of the military), taxpayers whose rental income doesn’t exceed an
IRS-determined minimal amount, and those for whom the reporting
requirement would create a hardship (under IRS regs).

Increased information return penalties. For information returns required
to be filed after December 31, 2010, the penalties in the tax code for
failure to timely file information returns to IRS will be increased. For
example, the first-tier penalty will be increased from $15 to $30, and
the calendar year maximum will be increased from $75,000 to $250,000.
For small filers, the calendar year maximum will be increased from
$25,000 to $75,000 for the first-tier penalty. The minimum penalty for
each failure due to intentional disregard will be increased from $100 to
$250. The penalties for failure to file information returns to payees
will be similarly increased.

Mark Fly, CPA
Price CPAs, PLLC
3825 Bedford Avenue, Suite 202
Nashville, TN 37215

Phone: 615.577.9686
Fax:     615.463.0586