More Tax Breaks, Loans for Small Business

The legislation, passed by the Senate and soon to clear the House, will create a $30-billion fund so that community banks can lend to small businesses. The fund, to be administered by the Treasury Department, will provide money to community banks with assets of less than $10 billion. If they make more loans to small businesses, the banks will pay a lower interest rate on the money they borrow from the fund. The bill also will create a $1.5-billion fund to help state and local governments provide small businesses with needed capital.

The bill will also give the Small Business Administration more options and money to match private investment in start-ups. The maximum size of microloans, for example, will grow from $35,000 to $50,000.

Smalls are even more excited by several tax breaks:

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•Higher limits for expensing assets. Smalls will be allowed to expense up to $500,000 of the cost of assets put in service in 2010 and 2011, double the current limit. The $500,000 write-off won’t begin to phase out until more than $2 million of assets are placed in service. Now the phaseout starts at $800,000. Thus, a lot more firms will qualify.

•Some improvements to real estate can be expensed -- up to $250,000 of the cost of restaurant and retail store renovations and improvements for tenants. This easing will also apply to improvements made anytime in 2010 and 2011.

•And 50% bonus depreciation will be reinstated for 2010. Businesses can deduct half of the cost up front and claim regular depreciation on the balance. This will be available only for new assets with useful lives of 20 years or less. Firms can deduct more start-up costs in 2010 -- $10,000, up from $5,000.

•Owners of companies with $50 million or less in assets will get a break: Tax free profits on future sales of company stock that’s held over five years. A 75% exclusion is in effect now. However, relief will be limited to stock issued after enactment and before Jan. 1, 2011, an extremely brief window of opportunity.

•Plus two breaks for firms that normally gross $50 million or less annually: For 2010, general business credits, such as the jobs credit, can offset the alternative minimum tax. And any excess business credits can be carried back for five years instead of one.

•S-Corporations will get relief on the built-in gains tax -- the 35% tax on the gain from sales of assets owned before a corporation became an S-Corp. In 2010, the tax applies to gains on assets sold within seven years of the switch. In 2011, the period is cut to five years.

•Self-employeds will also get help, in the form of a long awaited easing. They will be allowed to deduct their medical coverage on Schedule C, lowering their SECA tax. Right now, they can deduct it only against income tax. But this will be a one-year break -- for 2010 only.

Two main revenue raisers will help offset the cost of the legislation. The 1099 filing rules will be applied to landlords. Starting in 2011, they’ll have to issue a 1099 if they paid a service provider $600 or more a year. Temporary rentals of primary homes will be exempted. And the IRS will be allowed to issue regulations exempting landlords with rental income below a specified level. Reporting almost certainly will be delayed to allow time to collect tax ID numbers. Efforts to ease this requirement failed when the Senate took up the bill, but we still expect relief in this burdensome reporting rule.

Also, balances in 401(k)s can be rolled directly into the plan’s Roth 401(k). Ditto for 403(b)s and 457 plans. As when an IRA is converted to a Roth, the income from a 2010 conversion can be deferred, with half of it taxed in 2011, the rest in 2012.

Peter Blank passed away in November 2017. He had worked on the staff of The Kiplinger Tax Letter since 1981 and had edited the publication since 1999. He earned a BSE in civil engineering from Princeton University, a JD from Widener University School of Law and an LLM in taxation from Georgetown University.