Congress has passed, and the President has signed into law the “Small Business Jobs & 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 includes measures that could have some rural builders 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. Here’s a look at what the bill will mean for many businesses, including the potential potholes that every builder and contractor could be facing down the road.
LOAN FUNDS AND MORE CAPITAL
Among the bill’s many provisions are new funding programs such as:
– A Small Business Lending Fund that 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 to small business, banks increasing lending to small business 10 percent over the previous year will pay as little as one percent on the capital they acquire from the fund.
– The State Small Business Credit Initiative will help businesses in states with successful small-business lending programs, and that can show how a loan could help create jobs. States with such programs and 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.
– Many builders will benefit from new and extended Small Business Administration Lending Programs. For example, those seeking SBA loans stand to benefit from the extension of provisions that amped up SBA lending guarantee programs and fee reductions that recently expired. In addition, the bill increases the maximum loan size for the SBA’s 7(a), 504, and micro-loan programs. The 7(a) and 504 loan program maximums would bump from $2 million to $5 million and the micro-loans 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 to use 504 loans to finance certain mortgages to avoid foreclosure.
MORE OR LESS TAXES
Among the tax provisions, building business owners and managers will find the bill extends the 50-percent ‘bonus’ first-year depreciation which had expired at the end of 2009. Retroactive to January 1, 2010, bonus depreciation is not limited by the size of the business but does have a very short window of opportunity – qualified equipment must be purchased and placed into service before December 31, 2010.
The bill also decouples bonus depreciation from allocation of contract costs under the percentage of completion accounting method rules for assets with a depreciable life of seven years or less. This simple change permits contractors to benefit from bonus depreciation even if they do not complete their contracts within the same year.
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. A building business can write off the whole cost of acquiring property immediately instead of over time.
– The new rules continue to treat computer software as qualified Section 179 property that is subject to the full write-off normally available only for tangible personal property.
– Section 280F of the tax law limits depreciation deductions (including Section 179 expensing) that can be claimed for cars and trucks each year. For passenger automobiles placed in service in 2010, the adjusted first-year write-off was limited to $3,160. For light trucks or vans, the adjusted first year limit was $3,160. But no longer.
The unique limit on the amount of depreciation deductions allowed for certain passenger automobiles is increased in the first year by $8,000 for automobiles that qualify and that are not subject to bonus depreciation. Therefore, for 2010, the maximum first-year depreciation for passenger automobiles is $11,060.
– A self-employed builder or contractor can currently take a deduction for health insurance costs paid for him- or herself and their immediate family. When determining self-employment taxes however, the self-employed builder or contractor cannot deduct any health insurance costs. Today, thanks to the new bill, a tax deduction 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 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. In addition, the provision 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.
– The new law extends the carryback period for eligible small business tax credits to five years. This means that an incorporated building business whose stock is not publicly-traded, a partnership or a sole proprietor whose gross receipts have not exceeded $50 million for the prior three years can reap the refunds from taxes paid in earlier more profitable years using small business tax credits they were unable to currently claim.
Plus, under the bill, an eligible small business credit may be used to offset both regular and alternative minimum tax (AMT) liability.
THE DOWNSIDE OF THE UPSIDE
Naturally, the bill isn’t all roses for builders, contractors or building businesses. Among the provisions designed to help compensate the government for the funding and tax savings created by this bill, higher penalties could end up stinging many small-business owners.
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. And keep in mind that new 1099 reporting requirements passed earlier this year as part of the Patient Protection and Affordable Care Act will soon require every business which spends in excess of $600 with a merchant, vendor, contractor or supplier to issue a Form 1099.
THE ICEBERG’S TIP
Like most of the legislation passed in recent years, the lending fund created as part of the Small Business Jobs Act is only a temporary fix. It will make investments in banks for just one year. The tax breaks in the bill, worth about $12 billion, are mostly good for a year or two.
An extended life for bonus depreciation; extending and doubling the Section 179; first year write-offs for newly acquired business property; the 100% 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.
Will your building operation be fast enough to benefit from these temporary financing options and tax breaks? RB
Mark Battersby, a regular Rural Builder columnist, has more than 30 years experience in small business issues, tax and financial matters. He writes extensively on business topics. Contact him at 610-789-2480 or MCBatt12@Earthlink.net
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