Recent legislation1 provides a variety of potential tax savings for businesses and individuals. However, in many cases, taxpayers must act within a small window of time to take advantage of the provisions.
100% GAIN EXCLUSION FOR SALE OF SMALL BUSINESS STOCK
Individuals were generally able to exclude 50% of a gain on the sale of stock in certain small businesses, later raised to 75% by the February 2009 Recovery Act. Under the new legislation, the exclusion is increased to 100% for eligible small business stock acquired after September 27, 2010 and before January 1, 2011 and held for at least five years.
BONUS DEPRECIATION DEDUCTIONS2
Businesses were generally able to deduct 50% of the cost of new property purchased and put to use in 2008 or 2009. This so called “bonus depreciation” is now available for certain 2010 assets as well. Remaining depreciation deductions are taken over time in subsequent years.
EXPENSING NEW PROPERTY3
Businesses were generally able to expense up to $250,000 of certain assets purchased and put to use in the current year. Under the new legislation, the limit is increased to $500,000 for 2010 and 2011. In addition, the new legislation allows some expensing of certain real property.
GENERAL BUSINESS CREDITS FIVE-YEAR CARRY-BACK
Businesses were generally able to carry back any unused general business credits one year, often amending the previous year’s tax return to offset that year’s tax liability, resulting in a refund to the taxpayer of taxes paid in that prior year. Under the new legislation, certain small businesses may carry back unused general business credits five years. General business credits include credits such as the work opportunity credit, investment credit, research credit, low-income housing credit, and renewable electricity production credit.
S CORPORATION BUILT-IN GAIN HOLDING PERIOD
C Corporations that converted to an S Corporation (pass-through corporation) were generally required to take note of any assets that had appreciated at the time of the conversion. If such assets were sold by the corporation within ten years of the conversion, the corporation was liable for a 35% tax (the highest corporate rate) on the amount of such appreciation. For the 2009 and 2010 tax years, the ten-year period was shortened to seven years, if the seventh year was reached before the 2009 or 2010 tax year. Under the new legislation, for tax years beginning with 2011, the period is shortened to five years if the fifth year is reached before the 2011 tax year.
ADDITIONAL TAX SAVINGS
Additional tax savings provisions include increased deductions for startup expenses, self employment tax breaks for health insurance costs, and deduction and depreciation options for business cell phones with reduced recordkeeping requirements. Tax savings provisions in the new legislation are subject to certain rules and restrictions, which require careful taxpayer review to ensure eligibility.
The new legislation also includes provisions designed to raise revenue to support the tax reductions.
401(K) ROLLOVERS INTO ROTH ACCOUNTS
Under the new legislation, individuals participating in 401(k) plans (or 403(b) or 457 plans) may generally roll over their accounts into a Roth account. Since Roth account distributions are tax-free, participants may be taxed currently on any amounts rolled over. However, the participant may include the applicable amount in his or her 2011 and 2012 income instead.
INCREASED PENALTY FOR NOT FILING INFORMATION RETURNS
Penalties are generally imposed in varying amounts, depending on whether an information return is filed, whether it is filed correctly, and when it is filed correctly. The new legislation increases the penalties imposed on those who do not file correct informational returns due after December 31, 2010, doubling the applicable per-return penalties and more than tripling the maximum annual per-person penalties. Information returns are returns such as 1099s, W-2s, 1098s, and forms reporting certain currency transactions, payments to foreign persons, or interests in foreign bank accounts.
ADDITIONAL REVENUE RAISERS
Additional revenue-generating provisions include information return requirements for rental property expenses and Roth account options for state and local government retirement savings plans.
[1] 2010 Small Business Jobs Act, signed into law by President Obama on September 27, 2010
[2] For additional information, see “Bonus Depreciation Reintroduced for New Aircraft Purchases,” Edward H. Kammerer, Hinckley, Allen & Snyder LLP, October 2010
[3] For additional information, see “Section 179 Expense Rules Improved as Part of the Small Business Jobs Act of 2010,” Edward H. Kammerer, Hinckley, Allen & Snyder LLP, October 2010