Is the Small Business Jobs Act Good for your Business?

The recently passed Small Business Jobs Act brought a bunch of tax provisions to help the small business owner, or did it? Here is a run down of the main provisions affecting small business owners –

• It extends the 50% “bonus depreciation” allowance, retroactive to January 1, 2010, through the end of the year. It also extends the $8,000 bonus depreciation allowance for new passenger vehicles.
• It hikes the first-year expensing allowance from $250,000 to $500,000 for eligible property placed in service in 2010. The Section 179 phase-out threshold goes from from $800,000 to $2 million for that same period.
• It shortens the recognition period for S-corp built-in gains from seven years to five for most dispositions after 2010.
• It increases the start-up expense deduction from $5,000 to $10,000 (reduced, but not below zero, by the amount of start-up expenses exceeding $60,000).
• It removes cell phones and similar devices from the definition of “listed property.” This means employees no longer have to include the fair market value of personal use in their taxable income and avoids pain-in-the-rear requirements for substantiating business use.
• The law also increases the exclusion for gain on sale of Section 1202 stock to 100% for stock issued after September 27, 2009 and before January 1, 2011. (The exclusion is limited to ten times the taxpayer’s basis or $10 million, whichever is more.)
• The law lets Schedule C filers deduct self-employed health insurance for themselves, their spouses, and their dependents directly on Schedule C — thus letting them avoid self-employment tax on those premiums. The provision is effective for 2010 only.
• Effective immediately, participants in 401(k), 403(b), and 457(b) plans offering designated Roth contributions can roll their pre-tax deferral balances (but not employer contributions) into designated Roth accounts within their plans. These rollovers will be taxable like Roth IRA conversions. Unless participants elect otherwise, amounts rolled over in 2010 will be included in 2011 and 2012 income.

Let’s start with the section 179 bonus depreciation and expensing provision. Is this a good deal for the small business owner or Fool’s Gold? At this point it is hard to tell since we don’t know where tax brackets will be next year. If the Bush tax cuts expire for all income earners as they are set to do it would not make sense to claim bonus depreciation or wholesale expensing when these deductions will be greater next year.

The 100% exclusion from capital gains on section 1202 stock will probably not benefit a whole lot of current business owners. Considering the short period it is available for it is applicable to only a very new ventures.

It is nice to be able to expense more startup expense. It is also nice to not have to keep track of business use percentages of cell phones for addition to personal income.

The expensing of health insurance is a welcome relief for the self employed in 2010 but will probably not last beyond 2010. The National Commission on Fiscal Responsibility and Reform appointed by the Presiednt has deductibility of health insurance in its cross hairs. A pro-active tax plan is definitely required to keep from paying for health care costs on an after tax basis.

The last provision of letting participants in 401(k) plans may apply to small businesses and the self-employed who have established a Roth option inside of their retirement plan. The proper tax plan coul open up the possibility of using the section 179 provision to the business owner’s advantage if considering converting to a Roth. Tax planning consideration must include the complexity of Roth conversion math and the alternative minimum tax.

With pro active tax planning it may be possible the Small Business Jobs Act could bear fruit for the small business owner. If you don’t have a plan to pay less taxes you won’t.

About this Author 

John Beidle is an enrolled agent who specializes in helping entrepreneurs, small business owners and real estate investors pay the least amount of tax as legally possible.

About The Author

John Beidle

John Beidle is an enrolled agent who specializes in helping entrepreneurs, small business owners and real estate investors pay the least amount of tax as legally possible.

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