On September 27 (yesterday) the President signed into law the Small Business Jobs Act of 2010. There is some good news in this latest tax law change. This post will provide a brief overview of the new law, and future blog posts will elaborate on each of the topics in this post.
Section 179 Deduction Increased for 2010 and 2011
The Section 179 deduction is a first-year deduction allowed for purchases of most tangible personal property. The amount of the annual deduction for 2010 and 2011 is increased to $500,000 from $250,000. There is a phaseout based on the amount of property you buy in a year. The Section 179 deduction is phased out by one dollar for each dollar of tangible property purchases over $2 million ($800,000 under prior law).
Up to $250,000 of Qualified Real Property is Eligible for Section 179 in 2010 and 2011
Under prior law, Section 179 was allowed only for tangible personal property. For any tax year beginning in 2010 or 2011, a taxpayer can treat up to $250,000 of qualified real property as Section 179 property.
What is qualified real property? It is:
- qualified leasehold improvement property
- qualified restaurant property
- qualified retail improvement property
Clear? Don’t worry-I’ll have a post on this topic in the very near future.
50% Bonus Depreciation is Back-But Just for 2010
50% bonus depreciation expired in 2009, but has been extended to 2010 under the new law. Under bonus depreciation, you can immediately deduct 50% of the purchase price of qualifying property in the year of purchase. Qualifying property includes most machinery, equipment or other tangible personal property, most computer software, and certain leasehold improvements.
Deduction for Start Up Expenses is Increased to $10,000
When taxpayers incur otherwise deductible expenses (such as payroll for training, advertising, or supplies) before a business opens, such expenses are usually deducted over 15 years. Under prior law, up to $5,000 of such “start up” expenses could be deducted in the first year of business and the remainder deducted over the normal 15 years. Under the new law, up to $10,000 of start up expenses can be deducted in the first year of business, and the remainder is deducted over 15 years.
Health Insurance Costs for Self and Family are Deductible for Self Employment Tax for 2010
A self employed person can deduct the amount paid during the year for health insurance for herself, her spouse, her dependents, and effective March 30, 2010 for any child under age 27 as of the end of the year. Under old law, the health insurance expense was not deductible against self employment income (which is taxed at a 15.3% FICA rate).
For 2010 only, the health insurance expenses are also deductible against self employment income.
Tax Treatment of Cell Phones is Simplified
Under old law, cell phones were considered listed property which required substantial recordkeeping that no one complied with. There were some news stories earlier in the year that reported that the IRS would require 25% of the cost of employer-paid cell phones to be treated as compensation to employees to estimate their personal use of cell phones. This never took effect.
Beginning in 2010, cell phones are no longer considered listed property. To support a deduction for cell phones, the employer need only substantiate their cost, in much the same way as the employer supports the deduction for other types of business equipment.
Retirement Plan Distributions May Be Rolled Over to a Roth 401k
Under old law, rollovers to a designated Roth account (such as a Roth 401k) could only have been made from another designated Roth account. Under new law, a distribution from an applicable retirement plan (401k, 403b, 475) that maintains a qualified Roth contribution program, a distribution from the portion of the plan that is not a designated Roth account may be rolled over to the designated Roth account portion of the plan.
The rollover is not tax free. The taxpayer must pay tax based on the market value of the distributed assets. A 10% penalty will apply if any of the roll over funds are withdrawn within five years of the rollover.
If there is a rollover in 2010, the income can be recognized over 2011 and 2012. However, if there is a distribution of the rollover funds in 2010 or 2011, some of the income deferred to 2011 or 2012 will be recognized earlier.
So, that’s an overview of the brand new tax law. I’ll be posting more often in the next couple weeks to expand on the above topics.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.