In September President Obama signed the Small Business Jobs act into law. The legislation was designed to provide tax cuts to small businesses and increase access to small business capital with a $30 billion fund for local community banks. Just one week after being signed into law the Small Business Administration was able to approve nearly 2,000 loans for nearly $970 million. There were 8 main tax implications of the new legislation, and I have put together the following list of how these changes will affect small business owners.
1. Capital Gains from Business Investments
The first tax cut included in the legislation is a 75% exclusion from capital gains taxes for key small business investments. The act also puts another provision into tax law that will eliminate all capital gains taxes on these investments if they are held for five years. It even eliminates the alternative minimum tax on these sales. The White House estimates that this change will affect over one million small business owners.
2. Expense Investment Limits
The bill raises the amount of investments that businesses can write off for 2010 and 2011. The limit was raised from $250,000 to $500,000. It also expands Section 179 to include improvements to rental property. However, these provisions will expire at the end of 2011.
3. Bonus Depreciation
The act also restores the 50% first-year depreciation for qualifying property through the end of 2010. The President claims that it will allow 2 million businesses to make new investments to stimulate the economy.
4. Self-Employment Deduction
In addition to deducting health insurance expenses for themselves, small business owners and self-employed taxpayers can deduct the cost of their family’s health insurance premiums from their taxable income.
5. Cell Phone Expenses
The legislation also makes it easier for a business to deduct or depreciate cell phones. Before, cell phones were included in the listed property category, meaning that if they were not used mostly for a business purpose then the deduction would be subject to strict limits. However, now the IRS has removed this documentation requirement so that virtually every business owner can qualify for the deduction.
6. Start-Up Expenses
To encourage taxpayers to open new businesses, the bill has increased the amount of start-up expenses that can be deducted. The limit was temporarily raised from $5,000 to $10,000 and the cap on expenditures that triggers a phase-out was increased from $50,000 to $60,000.
7. Five-Year Carry Back
The Small Business Jobs Act also allows qualifying business owners to “carry back” their credits to offset five years of taxes, while also allowing the credits to offset the Alternative Minimum Tax. To ensure that this law only affects small business owners, qualifying businesses must have less than $50 million in annual gross receipts.
8. Limitations on Penalties for Errors
The final tax change in the legislation limits the penalty for failing to report certain tax transactions to a percentage of the tax benefits from the transaction. The penalty had been criticized for imposing a large burden on small businesses.