Six Tax Breaks for Small Business

Plus steps to ease the credit crunch for smalls -- all in a bill moving rapidly through Congress.

High on the agenda as Congress returns to work is a bill designed to give small businesses a big boost, in hopes that will allow them to start adding badly needed jobs. Key hurdles have been cleared for the legislation, which has bipartisan backing and popular support. The measure will create a $30-billion fund so that community banks can lend to small businesses. The fund, to be administered by the Treasury Department, will offer grants to existing state lending programs, encouraging private lenders to loosen up on credit. The bill will also give the Small Business Administration more options and money to match private investment in start-ups.

Smalls are even more excited by several tax breaks:

•Higher limits for expensing assets. Smalls would be allowed to expense up to $500,000 of the cost of assets put in service in 2010 and 2011, up from $250,000 now. The $500,000 write-off wouldn’t begin to phase out until more than $2 million of assets were placed in service. The current phaseout starts at $800,000. Thus, a lot more firms would qualify.

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•Some improvements to real estate could be expensed -- up to $250,000 of the cost of restaurant and retail store renovations and improvements for tenants. This easing would also apply to improvements made anytime in 2010 and 2011.

•And 50% bonus depreciation would be reinstated for 2010. Businesses could deduct half of the cost up front and claim regular depreciation on the balance. This would be available only for new assets with useful lives of 20 years or less. Firms could deduct more start-up costs in 2010 -- $10,000, up from $5,000.

•Owners of companies with $50 million or less in assets would get a break: Tax free profits on future sales of company stock that’s held over five years. A 75% exclusion is in effect now. However, relief would be limited to stock issued after enactment and before Jan. 1, 2011, an extremely brief window of opportunity.

•Plus two breaks for firms that normally gross $50 million or less annually: For 2010, general business credits, such as the jobs credit, could offset the alternative minimum tax. And any excess business credits could be carried back for five years instead of one.

•Self-employeds would also get help, in the form of a long awaited easing. They would be allowed to deduct their medical coverage on Schedule C, lowering their SECA tax. Right now, they can deduct it only against income tax. But this would be a one-year break -- for 2010 only.

Two main revenue raisers would help offset the cost of the legislation. The 1099 filing rules would be applied to landlords. Starting in 2011, they’d have to issue a 1099 if they paid a service provider $600 or more a year. Temporary rentals of primary homes would be exempted. And the IRS would be allowed to issue regulations exempting landlords with rental income below a specified level. Reporting almost certainly would be delayed to allow time to collect tax ID numbers.

And balances in 401(k)s could be rolled directly into the plan’s Roth 401(k). Ditto for 403(b)s and 457 plans. As when an IRA is converted to a Roth, the income from a 2010 conversion could be deferred, with half of it taxed in 2011, the rest in 2012.

Neema P. Roshania
Researcher-Reporter, The Kiplinger Letters