Friday, October 15, 2010

Small Things Come in Small Packages – The 2010 Small Business Jobs Act

I didn’t think I would ever say this, but it can be good to be small.  President Obama’s Small Business Jobs Act (H.R. 5297) is intended to benefit both small businesses and small business lenders.  The House passed the 2010 Tax Act last Thursday and the President sign the Act into law yesterday, September 27, 2010.  Of course the two big tax issues remain at large:  the estate tax and the sun-setting Bush Tax Cuts. 

Frankly, the tax benefits under the 2010 Tax Act are not much to brag about from an overall tax perspective.  Among other things, the 2010 Small Business Jobs Act would:

·         Excluded 100 percent of the gains from the sale of qualified small business stock (“QSBS”) for regular tax purposes.  The AMT would still apply.

·         Allow small businesses carry back general business tax credits for up to five years.
 
·         Allow small businesses to apply the general business credits against the AMT.

·         Establish a Small Business Lending Fund of $30 billion providing capital investments to small community banks for small business lending.

·         Establish a state Small Business Credit Initiative to provide $1.5 billion in grants to existing successful state small business programs.

·         Raise the cap on small business loans to increase lending by $5 billion in the first year after enactment.

·         Allow taxpayers to write off more of the cost of purchases for their business, such as equipment and machinery, in the year the purchase is made.

·         Double the amount of start-up expenditures that may be deducted.

·         Target resources to support the Office of the United States Trade Representative’s small business export promotion and trade enforcement activities to help U.S. small business exports grow in foreign markets and ensure small businesses compete on an equitable playing field.

·         Establish the State Export Promotion Grant Program, which would increase the number of small businesses that export goods to other countries.

·         Allow the SBA to waive or reduce the state-matching share of its funding requirement for up to one year to continue providing technical assistance to underserved communities to start and grow small businesses.

·         Revise Section 6707A of the Tax Code to make the penalty for failing to disclose reportable transactions (tax shelters) proportionate to the underlying tax savings (75 percent of the tax credit claimed).

·         Allow self-employed individuals to deduct health insurance costs for purposes of paying the self-employment tax.   This by the way is not very significant.  Taxpayer with income, after subtracting insurance premiums, is $106,800 or less save 15.3 percent of their premium.  However, taxpayer with income over $106,800 saves only 2.9 percent of your premium.

·         Another provision would remove cell phones from listed property so their cost could be deducted or depreciated like other business property, without onerous record-keeping requirements.

·         The legislation closes certain tax loopholes and reduces the tax gap.  The offsets include requiring information reporting for rental property expense payments and substantial increases in the penalties for failure to file information returns.

Please let me know if you have any questions.

There is Never a Good Time to Die

                        A client recently came into my office.  He had heard that because there was no federal estate tax on assets transferred to beneficiaries at death in 2010, now is a really good time to die.  He thought, since the end of the year was coming soon, drastic action was necessary.  I could not disagree with him more.  In fact, moving on to the great beyond maybe a fool’s errand.  I responded to him that clearly there is never a good time to die, and he could quote me on that.

                        2010 Federal Estate Tax Laws Changes.  The client’s basic premise was correct: for 2010, the federal estate tax was repealed.  An estate of a taxpayer who dies in 2010 pays no estate tax to the federal government. The federal estate tax law was modified beginning in 2002.  From 2002 to 2009, the federal “exemption” amount (the amount that a person can transfer free of federal estate tax at death) increased from $1 million beginning in 2002 to $3.5 million in 2009.  Moreover, the federal estate tax rates were reduced over that period.  The law provided for a repeal of the estate tax in 2010.  The purpose of the 2001 law was to reduce the number of estates subject to tax and reduce the estate tax paid by those estates.

                        In 2011, the exemption will once again be $1 million ($2 million for married couples), and an estate tax rate of 55 percent will apply to any amount in excess of that amount. 

                        Future of the Federal Estate Taxes.  The big uncertainty centers on what action Congress may take at the last minute in connection with the federal estate tax.  A number of options exist for Congress, and the actual legislative action may turn on who is in Congress after the November 2010 elections.  Congress could:

                        1.         Do nothing and let the current 2011 change take place ($1 million exemption and 55 percent tax rate),
                        2.         Reinstate the 2009 provisions of the law prospectively, or
                        3.         Reform the entire area of the estate tax law.

Depending on who is making the rules for any new estate tax, it may be a good tax strategy to hang around a while longer just to save taxes.  Pundits have also speculated on a retroactive change to the estate tax law, but that is even more of an excuse to keep on living.

                        State Tax Issues.  A descendant’s individual state of residence may have a separate estate tax which would be in addition to any federal estate tax.  California has no estate tax.  Thus, while California may not be a great place to live from a tax perspective, California is indeed a good place to die.

                        Stepped-Up Basis.  Another significant issue related to the federal estate tax law is the way the tax basis of inherited assets is calculated.  The big deal is what is referred to as a “stepped-up” tax basis.  In 2009, and most tax years before 2009, if a beneficiary inherited assets, such as stock or real estate, the beneficiary’s tax basis in the asset equaled the fair market value of such asset at the decedent’s date of death.  Thus, if the beneficiary later sold the asset, taxable gain would be calculated on the difference between the sales price and the stepped up tax basis.  In 2010, the step up in basis was eliminated, since there was no estate tax.

                        Rather, a beneficiary would receive a carryover basis for tax purposes, meaning the beneficiary would inherit the asset and the decedent’s tax basis with no step-up.  Exceptions exist for certain inherited assets where the basis of the asset may be increased, especially in the case of assets passing to a spouse of the descendant.  Depending on the amount of appreciation built into an asset, the step up could be a substantial amount.  With no step up in 2010, it may not be a good time to die