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by HowardSoft®

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Fall 2010


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Special Report

Small Business Jobs Act of 2010

Signed into law on September 27, 2010, the Small Business Jobs Act of 2010 had a long partisan battle before its eventual narrow passage by both houses. In spite of the lack of support from pro-business Republicans and the implications of the bill's title, 80% of the cost of the bill stems from provisions that apply to all businesses, large and small. And there are even benefits for individuals with no business at all!

Paid Preparer's Corner

Registration reminder

The IRS wants you!

Thanks to the IRS's new tighter controls on preparers, all paid pre-parers must register with the IRS and get (or renew) a Preparer Tax ID Number (PTIN) for use on returns they prepare during 2011. This requirement applies to CPAs, attorneys, and enrolled agents ... not just unenrolled preparers, and there is a $64.25 registration fee per year. Even preparers in your office who do not sign a return but "prepare substantially all the return" will have to register and get their own PTINs! Since late September, all PTIN applications automatically satisfy the mandatory registration process. PTINs issued before September, 2010 do not qualify; you must apply for a PTIN anew.

Now's the time to...

If you're a paid preparer, now's the time to set up your practice for e-file. It's required for the next tax season if you file 100 or more returns, and will be required the following tax season if you prepare 10 or more. And even if you aren't yet required to e-file, there are plenty of reasons to jump in now:

  • Error checking by the IRS before acceptance
  • Less printing and less paper
  • Proof of IRS acceptance within 48 hours
  • Refunds in less than half the time

And e-filing is as easy as printing with Tax Preparer. However, you must prepare now. You will be able to e-file in 2011 only if you have the following three items:

  • e-file transmission software in addition to Tax Preparer software. Prices start at $45, but you can upgrade to a higher-priced package to lower or eliminate the $5.95 charge per return. Be sure to order now so you're ready before the tax season starts.
  • EFIN (e-file identification number) to identify you as an IRS-approved e-file provider. However, if you e-filed last tax season, you can use the same EFIN.
  • PTIN (preparer tax identification number) to identify you as an IRS-registered preparer. Even if you used a PTIN last tax season, you must apply for a new one after September 15, 2010 in order to satisfy the new registration requirement.

IMPORTANT: Apply for your EFIN and PTIN as soon as possible because the IRS approval processes can be slow. Feel free to call for help with your application.

YEAR-END TIP: Action now could pay tax dividends later. Many provisions of this bill apply to tax year 2010, and some even expire at the end of 2010! You should therefore be aware of the provisions we review here so that you and your clients can take action before the end of the year.

The following table highlights the major provisions that affect Form 1040 returns for tax year 2010. However, many other provisions exist in the bill, but they are not highlighted here because they either do not apply directly to Form 1040 returns or affect very few taxpayers. Most of them relate to loans, exports, penalties, and administration, including

  • a loosening of restrictions on small business loans,
  • expansion of credit availability for small businesses (including low-interest refinancing),
  • help with small business exports (including grants to states for trade and export programs),
  • revenue provisions (including higher enforcement penalties and tightening of certain loopholes) to prevent the bill from increasing the national deficit in the long run,
  • administrative directives (for small business lending, management assistance, regulatory relief, etc.).

If you want a look at the details of the bill, you can download the complete Legislative Text (352 KB) of the entire Small Business Jobs Act of 2010 or the more helpful Joint Committee Explanation (255 KB) of the tax provisions of the bill, which explains the prior law and the specific changes to it.


Prior law

New law

Maximum Sec. 179 deduction raised and extended
For tax years 2008, 2009, and 2010, the section 179 expensing limit is $250,000, subject to reduction by total costs in excess of $800,000, thanks to the stimulus bills of recent years. After 2010, the limit is slated to fall back to prior law: $25,000, subject to phaseout starting at $200,000. The property's basis for depreciation is reduced by any section 179 deduction claimed. (The phaseout makes no deduction available if capital expenditures for the year exceed $1,050,000, thus effectively ruling out large businesses.)
For tax years 2010 and 2011, the new law doubles the maximum to $500,000 and increases the start of the phaseout to $2 million. A special provision for 2010 alone applies to certain real property, which would not normally qualify as section 179 property. Specifically, a maximum expensing of $250,000 is allowed for 2010 for qualified leasehold improvement, restaurant, and retail improvement property.
Impact on tax forms for 2010: The law makes obsolete the IRS's current draft of Form 4562. The final form for tax year 2010 will show $500,000 and $2,000,000 at lines 1 and 3 instead of the current $250,000 and $800,000. UPDATE: Contrary to our prediction in this issue of HowardNews, the IRS's 10/29/2010 draft of Form 4562 shows that the IRS has decided to leave lines 1 and 3 blank, leaving it up to the preparer to enter the proper amounts (since a lower limit applies for certain real property in 2010).
50% bonus depreciation extended
A first-year depreciation deduction in the amount of 50% of the adjusted basis is allowed for qualified property placed in service in 2008 or 2009 (or 2010 for certain transportation property and certain property with a recovery period of 10 or more years). Like section 179 expensing, the property's basis for depreciation is reduced by any bonus depreciation claimed. Unlike section 179 expensing, there is no phaseout, so this benefit applies equally to small and large businesses.
The new law extends the 50% bonus depreciation for one more year. It therefore now applies to 2010 for most types of property qualified in 2009 (and to 2011 for types of property previously qualified in 2010). If you use the bonus depreciation on an automobile, the first-year limit on depreciation is raised by $8,000 (to $11,060 for passenger automobiles and $11,160 for light trucks). This benefit is the most costly benefit in the bill, losing the government more than $40 billion of revenue in 2011. However, the benefit is offset by savings in all subsequent years (since bonus depreciation reduces the basis for computing depreciation in future years), reducing the net loss to about $5.5 billion by the end of 2020.
Impact on tax forms for 2010: The IRS's current draft of Form 4562 need not change because the wording on the form is generic at lines 14 and 25 (since certain property was qualified for 2010 under the prior law). However, the instructions for Form 4562 will change appreciably.
Cell phones removed from listed property class
Cell phones and similar communication devices are treated as listed property. As a result, if the cell phone is used 50% or less for business, section 179 expensing and accelerated depreciation methods are not allowed. Furthermore, strict substantiation requirements apply to prove the business use claimed.
Cell phones and similar communication devices are not treated as listed property if placed in service in tax year 2010 or later. The business portion of the use is therefore eligible for both section 179 expensing and accelerated depreciation, and strict substantiation does not apply. Furthermore, a cell phone provided by an employer mainly for business use is not taxable as income (even the personal use part).
Impact on tax forms for 2010: The law makes obsolete the IRS's current draft of Form 4562. Reference to cellular telephones will be removed from the title for Part V (Listed Property). UPDATE: The IRS's 10/29/2010 draft of Form 4562 confirms our prediction.
Start-up expensing liberalized
A taxpayer can deduct up to $5,000 of start-up expenditures for a new business started in the tax year, subject to a phaseout by the amount by which the total expenditures exceed $50,000. The remainder is eligible for amortization over a 15-year period. (The phaseout makes the deduction unavailable if start-up costs exceed $55,000, effectively ruling out the start-up of medium and large businesses.)
For tax year 2010 alone, the limit on start-up expensing is doubled to $10,000 and the start of the phaseout is increased to $60,000. Initial cash flow is thereby improved for small start-ups. (As a result of the phaseout, no deduction is available when start-up costs exceed $70,000.)
Impact on tax forms for 2010: The forms themselves will not change, but the instructions for Schedule C, Form 4562, and Pub. 535 will change as a result of the new law for 2010. The prior law will return in 2011.
Health insurance allowed as deduction for self-employment tax
For self-employed individuals not eligible for coverage by an employer, health insurance expenses for that individual (and spouse, dependents, and children under age 27) are deductible as an adjustment to income in computing adjusted gross income (AGI). However, health insurance expenses are not allowed as a deduction when computing income subject to self-employment tax (popularly identified as social security and Medicare taxes). This fact is implemented on the IRS forms by disallowing the deduction on Schedules C and F, and placing it in the adjustments section of Form 1040 instead. Self-employment income computed for Schedule SE then uses the net income on Schedule C and F and ignores the deduction on Form 1040.
For tax year 2010 alone, the self-employment health insurance expense deduction is allowed in computing self-employment income for the purposes of computing the self-employment tax, just like it is in computing AGI on Form 1040. The result will be a reduction in self-employment tax of 14.13% (92.35% of 15.3%) of the health insurance deduction for most taxpayers.
Impact on tax forms for 2010: There are two different approaches the IRS could take to reflect the new law in their forms. (1) The IRS could allow the health insurance deduction on Schedules C and F and remove it as an adjustment to AGI on Form 1040, line 29. (2) The IRS could revise Sections A and B of Schedule SE so that the amount on line 3 of each section is reduced by the amount of self-employed health insurance claimed on Form 1040, line 29. We expect the IRS to take the second approach so that only Schedule SE is changed, since the provision applies only to tax year 2010. UPDATE: The IRS's 10/29/2010 draft of Form 4562 confirms our prediction. The label for line 3 of Schedule SE (in both Section A and Section B) has been revised with the addition of the instruction: "Subtract from that total the amount on Form 1040, line 29, or Form 1040NR, line 29, and enter the result."
Carryback of unused business credits extended
General business credits are limited each year to an amount depending on net income tax and tentative minimum tax. However, unused credit can be carried back one year then carried forward 20 years.
For credits initiated for tax year 2010 alone, the carryback provision is increased from one year to five years.
Impact on tax forms for 2010: Although the forms will not change, the instructions for Form 3800 will change to reflect the new law. The carryback is claimed by filing an amended return (Form 1040X) for each prior year for which unused credit is claimed.
Exclusion of gain increased for qualified small business stock
Qualified small business stock acquired at original issue and held at least five years before disposition is generally eligible for a partial exclusion of the gain. The partial exclusion is generally 50% of the gain, but can be 60% for certain empowerment zone businesses and 75% for stock acquired after February 17, 2009 and before January 1, 2011. The resulting taxable gain after allowed exclusion is taxed at 28% maximum. A percentage of the excluded gain (currently 7%) is a tax preference item for the alternative minimum tax, also taxed at no more than 28%.
The new law increases the 75% exclusion to 100%, but only for qualified stock acquired after the date the bill became law (September 27, 2010) and before 2011. In addition, NONE of the excluded gain is a tax preference item for the alternative minimum tax.
Impact on tax forms for 2010: Because the new provision applies only to stocks acquired after September 27, 2010 and before January 1, 2011 that have been held 5 years or more, the earliest possible date of sale that qualifies for the 100% exclusion is September 28, 2014 Consequently, the new law results in a change in instructions for Schedule D and Form 6251 for 2014 and later, but has no impact on forms for 2010.
Rollovers of 401(k), 403(b), and 457(b) plans into Roth accounts in the plans allowed
Profit-sharing plans that allow an employee to elect whether to receive cash wages or designate contributions to the plan are popularly called elective deferral plans, including section 401(k), 403(b), and government 457(b) plans. Such plans can include designated Roth accounts in addition to the regular account. Although the two types of accounts have many of the same charateristics as Roth IRAs and traditional IRAs, the rules for distributions and rollovers from these accounts are generally much stricter than those for IRAs. For example, whereas rollovers from traditional IRAs to Roth IRAs is allowed (albeit subject to taxation), rollovers from regular accounts in elective deferral plans to designated Roth accounts in the same plans are not allowed. (For rollovers from traditional IRAs to Roth IRAs in 2010, there is a special rule that allows you to defer the tax on the conversion to returns for tax years 2011 and 2012, paying half the tax due each year.)
The new law brings the rollover rules for elective deferral plans into compliance with those for traditional IRAs with regard to conversion to Roth IRAs. In particular, starting September 28, 2010 (the day after enactment of the bill), you are allowed to rollover amounts in a regular account to a designated Roth account in the same plan. Furthermore, the special rule for 2010 for traditional IRAs applies; that is, you can defer the tax on the rollover (conversion) to returns for 2011 and 2012 in equal amounts. However, the rollover is only allowed if the plan already has a designated Roth account as a part of the plan. (Unlike other provisions reviewed here, this provision of the tax bill is a major near-term source of revenue for the government because of tax owed on the rollover. Otherwise, the government would not normally see any taxes until the taxpayer receives distributions from the plan in retirement. The rollover can make sense for the taxpayer if the value of funds in the plan are depressed or the taxpayer believes that tax rates in his or her retirement years will be much higher than they are now.)
Impact on tax forms for 2010: The instructions for Form 5329 (for penalties on early withdrawals) and IRS publications relating to qualified plans will change, However, we do not expect any IRS forms for Form 1040 returns to change because there are no IRS forms analogous to Form 8606 (which is used to compute the taxable part of IRA distributions, conversions, and rollovers) designed for elective deferral plans. Instead, the taxable part of distributions (including rollovers) from elective deferral plans is determined by following the instructions in relevant IRS publications and reporting the taxable amount on line 16b of Form 1040.