NEW TAX LAW
This September Congress passed and the president signed into law a series of new tax laws implementing changes to tax law effective January 1, 2010. Hard to have serious tax planning if we don't know the law until the year is two-thirds over as is the case for 2010.
There are many summaries cirulating that recap the new tax law - a subject that's dry as toast. I like the summary prepared by and recieved from an Atlanta CPA, Kent Bridges of Bridges & Dunn-Rankin, LP (
www.bridgesdunnrankin.com). Here is what Kent had to say about the tax law changes:
· Bonus first-year depreciation – For most new depreciable assets (other than buildings) placed in service during 2008, The Economic Stimulus Act (which was passed in early 2008) permitted 50% of the cost to be expensed immediately, with the balance recovered under the regular depreciation rules. This special first-year deduction applied both for regular tax and alternative minimum tax. For autos and light trucks, for which first-year depreciation would otherwise have been limited under the so-called “luxury automobile rules”, bonus depreciation of $8,000 could be taken (bringing the total deduction for such to approximately $11,000). These bonus depreciation rules were to have applied only for 2008. However, the rules were subsequently extended through 2009, and this new legislation further extends bonus depreciation through the end of 2010. Also, for purposes of the long-term contract accounting rules, bonus depreciation will be decoupled from allocation of contract costs under the percentage of completion method.
· Increased section 179 expense amount – The amount of furniture and equipment purchases that businesses can elect to immediately expense is increased to $500,000 for purchases made during 2010 and 2011, and the level of purchases at which this benefit begins to be phased out is increased to $2,000,000. This benefit is also now extended to cover the cost of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.
· Increased deduction for start-up expenses – For tax years beginning in 2010, the amount of start-up expenses which can be immediately expensed is increased to $10,000.
· Increase in exclusion for gain on sale of Qualified Small Business Stock – Under current law, non-corporate taxpayers may exclude from taxable income 75% of the gain from the sale of “qualified small business stock” which has been held at least 5 years. The new legislation increases this exclusion to 100% for qualified stock purchased after the date of enactment and before January 1, 2011. Further, while the benefit of the exclusion has in the past been somewhat limited by an alternative minimum tax add-back, the alternative minimum tax adjustment will not apply to qualified stock purchased during this period. Accordingly, gain from the sale of qualified stock could be completely free of Federal tax.
· More favorable treatment of small business tax credits – “Eligible small businesses” (those with average annual revenue of less than $50 million) will be able carry general business credits generated in 2010 back 5 years. Further, such credits will be able to offset both regular tax and alternative minimum tax.
· Shortening of the “built-in gains tax” period for S-corps – C-corporations which make a Subchapter S election and then sell their assets within 10 years of electing S status are subject to a corporate level tax (the “built-in gains tax”) on any unrealized gains that existed at the effective date of the S election. For asset sales which occur during 2009 or 2010, legislation enacted last year shortened this period to 7 years. For asset sales which occur during 2011, the new legislation further shortens the period to 5 years.
· Deduction of health insurance in computing self-employment tax – For 2010, self-employed persons may deduct their health insurance premiums not only in computing income tax, but also for purposes of the self-employment tax.
· Cell phones no longer listed property – For tax years beginning after 2009, cell phones and similar telecommunications equipment will no longer be subject to the strict substantiation-of-use requirements which apply to “listed property”.
· Information reporting by owners of rental property – Under the new legislation, owners of rental real estate will generally be subject to the same information reporting requirements as businesses, which means that they will need to file Form 1099s with respect to payments of $600 or more to service providers.
· Increased penalties for late filing of information returns – Consistent with recent trends, the legislation seeks to offset some of the cost of its favorable tax provisions with increased penalties for late filing of information returns such as 1099s.
· Roth conversions within employer plans - Participants in employer-sponsored retirement plans which include a Roth feature, will be able to convert pre-tax balances to Roth status, provided the funds are otherwise eligible for distribution at the time of conversion. The conversion is a taxable event.
· Sourcing of guarantee fees for foreign corporations – Foreign corporations which receive fees from their U.S. subsidiaries for guaranteeing their debt will be required to treat such fees like interest under the sourcing rules, which will generally mean that such fees are subject to U.S. withholding tax, unless otherwise exempt under an income tax treaty.
