Cell Phone Relief and Other Provisions in Small Business Jobs Act

In a continuing attempt to stimulate the economy, Congress recently passed the Small Business Jobs Act of 2010 which provides potentially significant benefits to businesses. As the title suggests, the Act is focused on tax benefits for small businesses and their investors. However, all businesses will benefit from the relaxing of the documentation requirements for cell phones. Other benefits include exclusion of gain on small business stock, extending bonus depreciation benefits and the deduction of medical insurance costs in calculating the self-employment tax.

Temporary Exclusion of 100 Percent of Gain on Certain Small Business Stock

Generally, individuals may exclude 50 percent of the gain from the sale of certain small business stock in a regular (not S) corporation acquired at original issue and held for at least five years. The recently enacted legislation, however, increases the exclusion to 100 percent for qualified small business stock acquired after Sept. 27, 2010, and before Jan. 1, 2011. The amount of gain eligible for the exclusion by an individual with respect to any corporation is the greater of 10 times the taxpayer's basis in the stock or $10 million. To qualify as a small business, when the stock is issued, the gross assets of the corporation may not exceed $50 million. Although the period for this increased benefit is rather limited, with appropriate planning, individuals can realize significant tax savings in the future.

Cell Phones Removed From Listed Property

Prior to the passage of the Small Business Jobs Act, cell phones provided by employers to employees were classified as “listed property” and therefore were subject to be extensive record-keeping and substantiation requirements to qualify as a deductible business expense. The new law removes cell phones from listed property thus allowing employer-provided cell phones to be deducted or depreciated like other business property, without the strict recordkeeping requirements. While the substantiation requirements have been relaxed, we are awaiting guidance from the Internal Revenue Service on whether an employee’s personal use of a business cell phone will be taxable to the employee as income.

Section 179: “Small Business Expensing”

Under Section 179 of the Internal Revenue Code, a business may elect to deduct, rather than capitalize qualified property (namely equipment and machinery) up to specified dollar limits. Prior to the Small Business Jobs Act, the amount that could be deducted was $250,000. The new law increases this deduction to $500,000 for tax years 2010 and 2011. However, the deduction is reduced on a “dollar for dollar” basis when a business purchases over $2 million of qualifying property within the year. Therefore, generally, if a business had purchased $2.2 million of qualifying property in 2010, the business would only be allowed to elect to deduct (rather than capitalize) $300,000 of the property (the $500,000 maximum election was reduced to $300,000, because the business was $200,000 over the permitted ceiling).

Bonus Depreciation Extension

In a previous effort to stimulate the economy, Congress allowed businesses an additional first-year depreciation deduction equal to 50 percent of the purchase price of the qualifying property that was purchased and placed in service in 2008 and 2009. The Small Business Jobs Act extends this benefit through 2010. This benefit is further extended through 2011 for certain transportation property or qualifying property that has a recovery period of 10 years or longer.

Deductibility of Insurance Costs for Self-Employed Individuals

Under the new law, self-employed individuals are able to deduct health insurance costs incurred in 2010 for themselves and their family members when calculating their 2010 self-employment tax.

While the above mentioned provisions received much of the attention upon the passage of the Small Business Jobs Act, the new law included additional changes in the tax law. Some of these provisions included:

· Five year carry-back of general business credit for eligible small businesses;

· Temporary reduction in built-in gain period for S corporations;

· Increased deduction for start-up expenditures;

· 1099 reporting requirements for rental property expense payments;

· Permitting rollovers from elective deferral plans to Roth accounts; and

· Allowing participants in governmental 457 plans to treat elective deferrals as Roth contributions.

For more information on the Small Business Jobs Act, please contact Tom Schnellenberger, Matt Ehinger or another attorney in Ice Miller's Tax Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.