The lending fund is only a temporary fix, but it can offer some useful options.
By Mark E. Battersby
Congress has passed, and the President has signed into law, the “Small Business Jobs and Credit Act of 2010.” In addition to creating a unique new $30 billion lending program, the tax provisions offer $12 billion in tax breaks. Both parts of the bill include measures that could have some specialty fabric professionals worried.
The lending provisions in the new bill are designed to help small business owners who have seen the value of real estate and other types of collateral sapped by the recession. Among the bill’s many provisions are:
> Small Business Administration (SBA) lending programs. Those seeking SBA loans stand to benefit from the extension of provisions that amped up the SBA’s lending guarantee programs and recently expired fee reductions. The bill also increases the maximum loan size for the SBA’s 7(a), 504, and microloan programs.
The far-reaching changes to the SBA’s guaranteed loan programs—the new bill allows banks to make much larger loans and permits bigger businesses to take advantage of them—could potentially alter the essential character of the SBA borrowers. In essence, it could make them … not very small.
The 7(a) and 504 loan program maximums would jump from $2 million to $5 million, and the microloans would increase from $35,000 to $50,000. Loans made under the SBA Express program would temporarily increase from $300,000 to $1 million. Also included is a temporary allowance for small business owners allowing them to use a 504 loan to finance certain mortgages to avoid foreclosure.
> State Small Business Credit Initiative. This provision would help businesses in states that have successful small-business lending programs and can explain how a loan could help create jobs. States that have these programs and are facing cutbacks due to tight state budgets may be eligible for funding to continue them. The grant pool would total $2 billion, but states would need to show that there has been at least $10 in new lending for every $1 in federal grant money they receive.
> A Small Business Lending Fund. The fund will provide up to $30 billion in capital to financially sound small banks with less than $10 billion in assets to encourage them to lend money to small businesses. As an incentive to lend, banks that increase lending to small business by 10 percent over the previous year will pay as little as 1 percent on the capital they acquire from the fund.
As with most of today’s legislation, however, the lending fund is only a temporary fix. It will make investments in banks for just one year. The tax breaks in the bill, on the other hand, are worth about $12 billion, and are mostly good for a year or two. Here’s a look at what the bill might mean for your business, including the potential potholes you could be facing down the road.
Taxes, more or less
Among the tax provisions, business owners and managers will find the bill extends the 50 percent “bonus” first-year depreciation write-off. Generally, bonus depreciation is available for new property which is depreciable with a recovery period of 20 years or less. Off-the-shelf computer software depreciable over three years and qualified improvements to leased property also qualify for bonus depreciation. In addition to extending the bonus depreciation write-off, other tax provisions include:
- Section 179 expensing, the first-year write-off for newly acquired equipment and business property, is raised to $500,000 with an investment ceiling up to $2,000,000—at least for 2010 and 2011. Improvements made to leased business property, as well as restaurant property and retail property, are eligible for a $250,000 Section 179 write-off.
- When it comes to cars, light trucks and vans used by a business—or provided to owners or managers—Section 280F of the tax law limits depreciation deductions (including Section 179 expensing) that can be claimed. The limit on the amount of depreciation deductions allowed for certain passenger automobiles has been increased in the first year by $8,000 for automobiles that qualify and are not subject to bonus depreciation. For 2010, the maximum first-year depreciation allowed for passenger automobiles is $11,060.
- The bill continues to treat computer software as qualified Section 179 property subject to the full write-off normally available only for so-called “tangible personal” property.
- The bill also removes cell phones and other personal communication devices from the onerous record keeping, substantiation requirements and limited deductions for so-called “listed” property. The provision also enables the fair market value of personal use of a cell phone or other similar device provided to an employee predominantly for business purposes to be excluded from gross income.
- When a corporation formed as a regular or “C” corporation elects to become an S corporation, the S corporation is taxed at 35 percent on all gains that were built in at the time of the election, if the gains are recognized during the recognition period. (The recognition period is usually the first ten S corporation years.) For tax years beginning in 2009 and 2010, no tax is imposed on the net unrecognized built-in gain of an S corporation if the seventh tax year in the recognition period preceded the 2009 and 2010 tax years. For 2011, the new rules would shorten the holding period of assets subject to the built-in gains tax to five years if the fifth tax year in the recognition period precedes the tax year beginning in 2011.
- The 2009 Recovery Act temporarily increased the percentage exclusion for qualified small business stock sold by an individual from 50 percent to 75 percent for stock acquired when originally issued and held for more than five years. Now, the act includes a 100 percent exclusion of gain resulting from the sale of that unique Section 1244 stock that many business owners employed to attract investors.
- Beginning in 2010, a corporation whose stock is not publicly traded, partnerships and sole proprietors can carry back unused, small business tax credits for five years, resulting in refunds of taxes previously paid. Eligible small businesses would also be able to use all types of general business tax credits to offset their alternative minimum tax (AMT).
- Manufacturers, at least those with revenues under $50 million, should pay close attention to one feature of the new Act—the elimination of the AMT (Alternative Minimum Tax) barrier when it comes to business tax credits. This rights a long-standing wrong in the tax code that has prevented well-deserving small businesses from realizing the value of federal tax incentives, most notably the research and development tax credit.
- A self-employed professional or business owner may take a deduction for health insurance costs paid for himself or herself and immediate family. When determining self-employment taxes however, the self employed cannot deduct any health insurance costs. Today, under the bill, the deduction for income tax purposes for the cost of health insurance is allowed in calculating net earnings from self-employment for self-employment tax purposes, but only for tax years beginning after December 31, 2009.
The new law isn’t all roses, however. Among the provisions designed to help compensate the government for the additional funding and tax savings created by this bill, higher penalties could end up stinging small business owners who, as a group, are sometimes known to run afoul of our confusing and complex federal tax rules.
Penalties for failure to file information returns to payees, such as 1099 and W2 forms, will increase, as will penalties for failure to file timely information with the IRS. Those new 1099 reporting requirements passed earlier this year as part of the Patient Protection and Affordable Care Act may dramatically increase the number of 1099s businesses need to process beginning in 2013. The controversial provision in last spring’s reform legislation included a major change in how businesses report spending, and will soon require every business that spends in excess of $600 with a merchant, vendor, contractor or supplier to issue a Form 1099.
While the $30 billion allocated for SBA loans is a laudable goal, experts predict that the loans will be doled out carefully in order to comply with requirements that a lot of small businesses won’t come close to meeting. On the tax front, although short-lived, the package of enhanced small business tax incentives will benefit many manufacturing operations and businesses.
An extended life for bonus depreciation, extending and doubling the Section 179 first-year write-offs for newly acquired business property—the 100 percent exclusion of gains realized on small business stock, the relaxed S corporation built-in gain conversion rules, and extended carryback period for eligible small business tax credits to five years—are a welcome boon in today’s economy.
To benefit, however, you’ll need to do your homework, and you’ll need to act promptly.