TaxAlerts Tax Article
October 2010 | Written by: Karen Reed, EA
On September 27th the Small Business Jobs Act of 2010 was signed into law. The bill’s title is somewhat of a misnomer, as the law contains a number of provisions that may affect W–2 wage earners as well as enhancements and extensions of certain tax breaks for all businesses, not just small business owners. In addition, the new law increases failure–to–file penalties on information returns, changes corporate estimated tax payments, adds new requirements for reporting rental expenses, and includes other provisions designed to increase revenue.
Here are just some of the highlights:
Cell Phones: Retroactive to January 1, 2010, cell phones are no longer considered “listed” property. This relieves taxpayers of burdensome requirements to substantiate business use and personal use in order to claim deductions for cell phones purchased for business purposes. In addition, it relieves employees of having to include in their gross income the fair market value of personal use of cell phones provided by their employers.
401(k) Rollovers: Taxpayers who participate in 457(b) government plans, 401(k), and 403(b) retirement plans may, beginning September 27, 2010, rollover qualified distributions, including in–service distributions, to designated Roth accounts within the existing plans. This echoes a provision already in place which allows unlimited rollovers from traditional to Roth IRA accounts beginning in 2010. Similar to the IRA provisions, any rollovers done in 2010 may be taxed ratably in equal amounts in 2011 and 2012 rather than in 2010.
457(b) Plan Deferrals: Beginning in 2011 participants in government (not private non–profit) 457(b) plans may contribute deferred amounts to designated Roth accounts. These Roth accounts will have the same rules as existing Roth accounts.
Annuitization: Owners of nonqualified annuity contracts may split their contracts beginning in 2011, annuitizing a portion of the contract while allowing the remaining balance to continue to grow tax deferred. The period for the annuitization must be ten years or more, or for the lives of one or more persons.
Code Section 6707A Penalty Relief: Many small business owners have in the past been assessed penalties for unwittingly participating in transactions that were considered by the IRS to be tax shelters or improper tax avoidance transactions. A new provision provides permanent relief from certain excessive penalties that many times far exceeded the tax benefits of reportable or listed transactions. The penalties were not eliminated, but much reduced with caps put on the penalties.
Bonus Depreciation: The new law extends through the end of the year the additional first–year 50% bonus depreciation that may be claimed on depreciable property. If the property purchased has a recovery period of 10 years or more, or is tangible property used to transport people or other property, then the first year bonus depreciation extends through the end of 2011.
Section 179 Expense: For 2010 and 2011 the maximum Section 179 deduction was raised to $500,000, and the investment limit to $2 million before the maximum deduction is reduced. Qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property have been included in the definition of qualified Code Section 179 property; however, the $250,000 cap remains in effect for the aggregate cost of these properties. Taxpayers may elect to exclude these properties from the definition of Section 179 property.
Start-Up Expenses: For 2010 only, the first year deduction limit for start–up expenses will be raised to $10,000 versus the current $5,000 limit. In addition, the phase-out threshold has been increased to $60,000.
Self Employed Income: For 2010 only, the net earnings for the purposes of computing self employment taxes will not include any amounts paid for qualified health insurance costs. Generally, qualified health insurance costs include the costs of providing health insurance for the taxpayer, spouse, and dependents.