A Modicum of Tax Relief for Small Businesses

On September 27, 2010, the President signed the Small Business Jobs Tax Act of 2010 into law. Although the title references small businesses, there are many provisions that also impact large businesses and individuals.

Some of the more important changes brought about by the Act are:

• An increase in the amount of fixed assets that can be expensed, to $500,000 for the 2010 and 2011 tax years. A business will be able to purchase up to $2 million of assets annually without reducing the amount that can be expensed.  For the first time, certain leasehold improvements will be eligible to be expensed, and computer software is now qualified property that can be expensed for all tax years from 2002 through 2011.
• Bonus first-year depreciation (50 percent) has been extended through the 2010 tax year.  The first-year depreciation on autos has also increased from $3,060 to $11,060. 
• The sale of qualified small business stock would not be taxed if it was acquired after the date of the enactment and held for at least 5 years.
• An eligible small business (privately held, with average annual gross receipts of no more that $50 million) can carry back any general business credits 5 years.  For the first time, beginning after 2009, these credits will be available to offset the alternative minimum tax.
• The period for which an S corporation with built-in gains would be subject to a corporate income tax has been reduced to 5 years if the S election was made by the 2006 tax year.
• After 2010, rental activities would be considered a trade or business for purposes of requiring 1099 reporting for payments in excess of $600 to service providers.  Exceptions are available to those who temporarily rent their principal residence, if the income is less than an IRS determined minimal amount, and for those who would experience a hardship in reporting.

There are also provisions in the Act with regard individual retirement arrangements, sourcing of income earned by foreign persons and other less global issues.

If you have any questions, please contact me at bbdcpa.com.

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Welcome to My Blog

Anyone who has dealt with the IRS, the Internal Revenue Code and Regulations, and the plethora of judicial findings, understands that a tax practice is extremely dynamic. The law as well as its interpretations are constantly changing. What had been acceptable one day may now be taboo; what we thought couldn't possibly be a proper tax return position springs from the Courts.

Those who know me understand that I am very reasonable and I normally accept these changes without question or comment (hardly). Over the life of this blog, you will find comments with regard to changes in the law, the findings of the Courts, and IRS documents that either positively or negatively impact what we do as tax professionals. You might also find items that are simply "of interest" to me, that may be same for you.

Occasionally, I will have "guest bloggers" comment on areas in which they have infinitely more experience than I with regard to a particular topic.  Bear in mind that when that happens, the commentary posted will be their opinion, and not mine. Regardless of whether the comments are mine or of others, you will find something "interesting" posted at least weekly. I invite you to appropriately comment on anything that is posted in this site.

I am looking forward to having you bookmark my blog and joining me.

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Taking Advantage of the Preferential Tax Rate on Dividends

Unless action is taken to extend them, the Bush tax cuts will expire at the end of 2010. One of the more beneficial provisions that will expire relates to the taxing of qualified dividends at a 15 percent rate. Obviously, if you are holding 100 shares of stock in a public company, there is no possibility that your voice will be heard by them when it comes to paying a [larger] dividend before the end of this year. This is not the case, however, if you are a substantial or majority shareholder of a closely held corporation.

A dividend is a distribution of previously taxed profits that accumulate during the life of a "regular" [C] corporation. Although there are other issues that could arise if a company does not distribute its accumulated earnings, the one addressed in this blog addresses what people generically refer to as the double tax on corporate earnings. A C corporation pays a tax on its earnings each year; an additional tax is due when those earnings are distributed to the shareholders.

Prior to the Bush tax cuts, dividend payments had always been taxed as ordinary income; after 2010, that rate could again be almost 40 percent, before considering state taxes. If the payment of these earnings by a qualified corporation (read "domestic") is made prior to the end of this year, they will be taxed at a maximum federal rate of 15 percent.

Although this provision generally applies to C corporations, it can also benefit the shreholders of an "S" corporation that had been a regular corporation at some point.  Earnings of an S corporation are taxed at ordinary rates as the income passes through to the shareholders annually. This pass through income is taxed regardless of whether any actual cash distribution is made to the shareholders. A distribution of the earnings realized during the entity's S period will generally not be subject to a second level of tax. If the entity had previously been a regular corporation prior to the S election, however, it could have C corporation earnings that are "trapped" in the entity.

So where is the tax saving opportunity here? If they desire, the shareholders of the S corporation can elect to be taxed on any distribution made in 2010 at the 15 percent rate.  Although this would result in a current tax payment, this distribution would cause a reduction or elimination of the C corporation accumulated earnings, it would have no impact on the shareholder's basis in the entity, they could distribute the accumulated S corporation earnings tax-free in 2011, and they would eliminate a number of other adverse outcomes that could arise if the entity maintained a C corporation accumulated earnings balance.

This provision has been in place for a number of years. Only now when the window is closing on this opportunity, however, are taxpayers seriously entertaining this tack. The only way to determine whether this is the right thing to do is to prepare projections of the cost of making such a distribution.

If you need more information on this, please contact a member of the Commercial Enterprise team at BBD.

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1099 Reporting Remains in a State of Flux

When the Healthcare Act was signed into law earlier this year, the focus of everyone (and rightly so) was on how the Act was going to impact their choices for providing or receiving healthcare coverage in the future.  One item included in this Act that flew under the radar for many small business owners was the onerous and extremely unpopular provision to require 1099 reporting for virtually all payments of $600 or more, made to vendors for any reason.

The $600 threshold amount has been in the law for many years, but it only applied to payments made to non-corporate providers, primarily for services.  Fo example, if a business had paid $600 or more within a year to Joe's Cleaning Service, in most cases, it would have been required to issue a 1099 to Joe reporting that payment.  This would be true for any service provided by Joe unless Joe was incorporated.

The new law provides that any payments of $600 or more made by a business after December 31, 2011 for any reason - services, supplies and even inventory - would require 1099 reporting.  The entity form of the payee will also be irrelevant as of that date.  Thus, if you were to purchase $800 of business lunches from the corner deli within a year, you'd need to issue a 1099 to the deli.  If you did the same from McDonald's corporation, you'd now have the same reporting requirement.  Furthermore, if McDonald's sold you widgets (instead of food) that would be incorporated into a product you either produce or sell, a 1099 would need to be issued to it (a corporation) for the product purchased (inventory).

I bring this issue to bear at this time because the Senate has been discussing a small business tax act that they could vote on as early as this week.  This act contains numerous tax provisions to benefit smaller businesses, and had at one time, included a provision to scale back or eliminate this expanded 1099 reporting requirement.  Sadly, this did not survive that Senate vote; while it is not dead, it is nowhere near repeal at this time. 

Why was this provision included in the Healthcare Act and its repeal now excluded from this more recent proposal?  That's easy - MONEY.  A related provision was included in the Healthcare Act that drastically increased the single occurrance and total penalty ceilings for non-issuance of proper 1099s.  That provision continues to survive, and in fact, was publicly noted by Treasury as a revenue raiser when it was written into law.  Somebody has to pay at least part of our multi-trillion dollar deficit.  It might as well be the scofflaws and n'er-do-wells that will most likely unknowingly ignore the law.

Contact me at BBD if you wish to learn more about this provision.

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