A package of small business tax incentives, as part of the larger Small Business Jobs Act of 2010 (H.R. 5297) has been slowly making its way through Congress over the past several months. However, on July 29 members of the Senate effectively blocked a final vote on the H.R. 5297, pushing the prospects for passage of bill by both chambers of Congress into September (when Congress returns from its August recess).

Officially known as the Senate Substitute Amendment to H.R. 5297, the Senate’s Small Business Tax bill makes significant additions to the tax title that the House passed on June 15, 2010. Most of these tax incentives are retroactive to January 1, 2010, but are only temporary; once they pass, most businesses need to act quickly to maximize their benefits.

Here’s what’s in store for businesses if the Senate bill is approved:
Bonus depreciation. Extends, through December 31, 2010, 50-percent first-year bonus depreciation that had expired at the end of 2009.

Code Sec. 179 expensing. Increases the maximum Code Sec.179 expensing deduction from $250,000 to $500,000 and the investment limit from $800,000 to $2 million for tax years beginning in 2010 and 2011.

S corp built-in gain. Shortens the holding period for appreciated C corp assets after an S corp conversion to five years, if the fifth tax year in the holding period precedes the S corp’s tax year beginning in 2011.

Cell phones. Removes cell phones and similar communication devices from their current classification as listed property, thereby lifting strict substantiation requirements, depreciation limitations, and imputed income for employee use.

General business credit. Extends the carryback period for general business credits from one to five years for eligible small businesses, applied to tax years beginning after December 31, 2009; similarly extends the carryforward period.

AMT offset. Removes the limitations on which general business credits may offset AMT liability for eligible small businesses.

SECA deduction for health insurance. Allows the deduction for health insurance to be taken into account in determining earnings for self-employment tax purposes.

Qualified small business stock. Raises the exclusion for qualifying gain from 75 percent to 100 percent on Code Sec. 1202 stock acquired anytime from the date of enactment through the end of 2010.

Code Sec. 6707A penalty relief. Moderates the penalties that the IRS must apply to taxpayers failing to disclose participation in certain tax shelters. For listed transactions, a $5,000 minimum penalty would apply to individuals, $10,000 to corporations.

Start-up expense deduction. Raises the deduction limit on start-up expenses from $5,000 to $10,000, and increase the threshold to $60,000 for one year, 2010.

Roth retirement options. Authorize 401(k), 403(b) and 457 retirement plans to allow participants to roll over pre-tax account balances into a Roth account.

Revenue offsets. Many of the tax incentives in the bill must be “paid for” under Congressional budget rules with reciprocal offsets. In addition to counting on revenues from voluntary Roth conversions, the Senate bill would raise more than $4 billion through broadened information reporting rules and higher penalties for ignoring those rules.

Congress is set to return from its month-long August recess on September 14th. In addition to considering further tax breaks to jump-start business growth when it returns, Congress will be focused on whether to raise individual tax rates, revise capital gains and dividends treatment, preserve the estate tax, and shorten the growing reach of the alternative minimum tax (AMT).

We will continue to closely monitor these developments and recommend appropriate tax strategies as they evolve. If you have any questions about these changes, please contact us today.