As construction company owners shift their thoughts to a new year, it should not be forgotten that the recently enacted Small Business Jobs Act of 2010 (SBJA) may offer impressive cost savings to qualified firms.
Enacted in September, SBJA essentially provides various tax changes – most of them beneficial to company owners – and $30 billion for community banks to lend to small businesses. Because most Texas construction companies qualify as a small business, the law has a lot of appeal. Companies that aren’t certain about their status can go to the Small Business Administration (SBA) website to see if they qualify.
The U.S. Senate says the law intends to make up for the 17.8-% decline in small business lending since 2008. Moreover, SBJA has the potential to create at least 500,000 new jobs, according to Senate officials.
To offset the cost of these tax incentives, the new law establishes several new revenue streams, including higher failure-to-file penalties on information returns, and higher estimated tax penalties for large corporations beginning in 2015.
In terms of the law’s loan program, SBA will provide the governing mechanism. Since its inception SBA has guaranteed small business loans by 75%. That means if a small business owner defaults on a SBA loan, the lending bank loses only a maximum of 25% of the loan amount while SBA pays the remaining 75%. Under the new law, however, SBA will guarantee 90% of a loan. This should further encourage local banks to lend to businesses, even those that may be in distress.
For many contractors, new tax rules enacted by SBJA are as important as the loan guarantees. Some of the changes are retroactive to Jan. 1 of this year, which may require computation of estimated tax payments that will be due for the fourth quarter or the next quarter for fiscal-year taxpayers. It may also require amended returns for taxpayers with fiscal years ending in 2010.
SBJA offers a smorgasbord of depreciation, business and reporting changes that contractors should review with a tax adviser. Here are a few of the leading changes:
Under current law, the Section 179 expensing limit for tax years beginning in 2007 through 2010 is $250,000, and the maximum expensing amount is reduced by the amount by which the cost of Section 179 property placed in service exceeds $800,000. Under the new law, however, those with tax years beginning in 2010 and 2011 will see the maximum Section 179 expensing amount rise to $500,000 and the beginning-of-phase amount move up to $2 million. Section 179 deduction is phased out completely when the expensing-eligible property exceeds $2.5 million.
Bonus First-Year Depreciation Extension:
SBJA extends 50-% bonus first-year depreciation one more year for assets placed in service prior to Dec. 31, 2010. Therefore qualified property placed in service between Jan. 1, 2008 and Dec. 31, 2010, will qualify for bonus depreciation. Certain long-life property and transportation property placed in service in 2011 will qualify if a contract was entered into prior to Dec. 31, 2010.
Percentage of Completion: For purpose of determining percentage of completion, the cost of qualified property does not include 2010 Bonus Depreciation for seven-year assets or less. Depreciation expenses used in computing costs for percentage of completion must be computed without the bonus depreciation allowed for new assets placed in service this year. This will require separate computations of depreciation for each year until the property is fully depreciated.
Rental Income Reporting:
For payments made after Dec. 31, rental income from real property must be filed on returns to the IRS and to service providers reporting payments of $600 or more during the year for rental property expenses.
Higher Deduction for Startup Expenses:
For tax years beginning in 2010, the deduction for startup expenses under Section 195 is increased from $5,000 to $10,000 and the phase-out threshold is increased from $50,000 to $60,000. The excess amount is amortized over 15 years.
Easier S Corporation Rules:
After a C corporation converts to S corporation status, it may be liable for the “built-in gains’’ tax if it sells or otherwise disposes of appreciated property within a specified time period. The normal recognition period of 10 years was shortened to seven years for dispositions in tax years beginning in 2009 and 2010. The new law reduces this period still further to only five years for dispositions in tax years beginning in 2011.
Exclusion of Gain:
Currently, Qualified Small Business Stock (QSBS) acquired before Feb. 17, 2009, and held for five years qualifies for a 50-% exclusion of gain from the sale of the stock. QSBS stock acquired between Feb. 17, 2009, and the date of enactment of SBJA and held for five years qualifies for a 75-% exclusion gain from the sale of the stock. If the election is made to exclude the gain under these provisions, the amount of gain taxable is taxed at 28%. A percentage of the excluded gain is an alternative minimum tax preference; the portion of the gain that can be included in alternative minimum taxable income is taxed at a maximum rate of 28% under the alternative minimum tax.
SBJA provides for a 100-% exclusion of gain from the ssale of QSBS stock: a) acquired after the date of enactment of SBJA and before Jan. 1, 2010, and b) held for at least five years. The 100-% exclusion is for both regular tax and alternative minimum tax.
These are only a few of the key changes created by SBJA. Other changes allow rollover distributions into Roth accounts and the extension of carry-back of small business unused general business credits. Throughout the law are various tax changes that may benefit construction company owners.