Small Business Jobs Act of 2010

On September 27, 2010 (Monday), President Obama signed an additional economic stimulus bill - the Small Business Jobs Act of 2010 (H.R. 5297).

For details:

• H.R. 5297 text - here.
• White House video and summary of the bill - here.
• Joint Committee on Tax (JCT) technical explanation (JCX-47-10) - here.
• Joint Committee on Tax revenue estimate (JCX-48-10) - here.
• Information from Senator Baucus, Chair of the Senate Finance Committee - here. At the bottom of his press release is a link to helpful documents about this new law.

I have a list of all of the tax provisions at the end of this post.

This legislation includes provisions to improve lending for small businesses as well as several tax changes including a few that affect more than what we might think of as "small" businesses. For example:

1. Extending 50% bonus depreciation (IRC Section 168(k)) through 12/31/10 for all businesses. This is the most costly provision in the bill per JCT estimates, costing the government $5.5 billion over ten years. I think this is puzzling because it is not giving businesses more depreciation deductions than they would have claimed but is instead just allowing them to claim a large portion of depreciation in the first year. Caveats to using this deduction is that the eligible property (generally equipment) must not only be purchased by 12/31/10, but placed in service. Also, to benefit from the deduction, the business needs to have sufficient taxable income in the current year or if an NOL is generated, the ability to carry it back and use it.
2. 100% exclusion on "qualified small business stock" purchased between date of enactment and 12/31/10. QSBS relates to a corporation with assets of $50 million or less (beyond what I think of when I think of "small business"). This could encourage eligible corporations to offer equity investment and eligible shareholders to purchase it before year end. (IRC Section 1202)
3. Expanded asset expensing for 2010 and 2011 under IRC Section 179. Because this higher expensing amount ($500K) would apply to businesses that acquire up to $2 million of eligible assets, I also label this one as beyond the traditional "small business."
4. Remove cell phones from listed property - for all businesses.

Observations

Does the Act meet principles of good tax policy and move the tax law into the 21st century? Well, partially, but it also adds complexity mostly due to multiple complex temporary provisions. At least one - bonus depreciation, is an extension and taxpayers and practitioners have mostly already figured this one out. A few more observations:

While several of the provisions are temporary to encourage small businesses to do things that might stimulate the economy, several are improvements that have long been sought, such as removing cell phone from "listed property" in order to simplify and modernize the tax law (see AICPA comments on this one). In addition, relaxing the onerous IRC Section 6707A penalty for small businesses has been on Congress' list of necessary changes for a while.

An equity measure - allowing self-employed to deduct their health insurance in computing self-employment tax is included - but just for 2010! There is a lot of inequity in the tax treatment of health insurance premiums. Employees with employer-provided health coverage (whether the employer pays the entire premium or part of it) get the best benefit because they don't have to include in their income the benefit they get from having the employer pay their health insurance premiums (so employees get both an income tax and Social Security tax break). This also comes at great cost to the government - meaning that everyone else subsidizes this. If Congress doesn't want to reduce this benefit, they should at least try to equalize it for others, such as by allowing an above the line for people who have to buy their own health care and letting self-employeds get a benefit for both income and self-employment taxes. This is an area that needs further work by Congress to both educate the public on the issue and make the law more equitable. I wrote a short article on this in 2008 - here.

One of the provisions to help offset the "costs" of the bill is to require information reporting on rental real estate. I think this is interesting in light of efforts to repeal the expanded 1099 reporting that was enacted as part of the March 2010 health care legislation and that has been complained about by both practitioners and the National Taxpayer Advocate. For more information see my 2009 article on the GAO findings that warranted 1099s for rental real estate, 6/21/10 post on current 1099 issue, and 2010 mid-year report of the IRS National Taxpayer Advocate).

The Act also increases certain information reporting penalties, such as for failure to issue a 1099 from $50 to $100. This is a good idea. Ideally, the penalties should be automatically adjusted for inflation and rounded to the next highest $10 increment.

List of all of the tax provisions:

TITLE II--TAX PROVISIONS

Subtitle A--Small Business Relief

PART I--Providing Access to Capital

Sec. 2011. Temporary exclusion of 100 percent of gain on certain small business stock.

Sec. 2012. General business credits of eligible small businesses for 2010 carried back 5 years.

Sec. 2013. General business credits of eligible small businesses in 2010 not subject to alternative minimum tax.

Sec. 2014. Temporary reduction in recognition period for built-in gains tax.

PART II--Encouraging Investment

Sec. 2021. Increased expensing limitations for 2010 and 2011; certain real property treated as section 179 property.

Sec. 2022. Additional first-year depreciation for 50 percent of the basis of certain qualified property.

Sec. 2023. Special rule for long-term contract accounting.

PART III--Promoting Entrepreneurship

Sec. 2031. Increase in amount allowed as deduction for start-up expenditures in 2010.

Sec. 2032. Authorization of appropriations for the United States Trade Representative to develop market access opportunities for United States small- and medium-sized businesses and to enforce trade agreements.

PART IV--Promoting Small Business Fairness

Sec. 2041. Limitation on penalty for failure to disclose reportable transactions based on resulting tax benefits.

Sec. 2042. Deduction for health insurance costs in computing self-employment taxes in 2010.

Sec. 2043. Removal of cellular telephones and similar telecommunications equipment from listed property.

Subtitle B--Revenue Provisions

PART I--Reducing the Tax Gap

Sec. 2101. Information reporting for rental property expense payments.

Sec. 2102. Increase in information return penalties.

Sec. 2103. Report on tax shelter penalties and certain other enforcement actions.

Sec. 2104. Application of continuous levy to tax liabilities of certain Federal contractors.

PART II--Promoting Retirement Preparation

Sec. 2111. Participants in government section 457 plans allowed to treat elective deferrals as Roth contributions.

Sec. 2112. Rollovers from elective deferral plans to designated Roth accounts.

Sec. 2113. Special rules for annuities received from only a portion of a contract.

PART III--Closing Unintended Loopholes

Sec. 2121. Crude tall oil ineligible for cellulosic biofuel producer credit.

Sec. 2122. Source rules for income on guarantees.

PART IV--Time for Payment of Corporate Estimated Taxes

Sec. 2131. Time for payment of corporate estimated taxes.

Making Work Pay Credit & Economic Stimulus - Need for Better Discussion

The Wall Street Journal reported yesterday (9/22/10) - "Obama Tax Credit Looks Endangered" by McKinnon. The article refers to the Making Work Pay Credit (MWPC) that was added for 2009 and 2010 by the American Recovery and Reinvestment Act. President Obama would like to extend it through 2011. The estimated cost would be about $60 billion for 2011.

Is this good tax policy? I have a few questions and observations I'd like to see be part of the debate on whether the temporary MWPC and Economic Recovery Payment should be extended.

1 - Effective stimulus? The MWPC was originally enacted for economic stimulus purposes. If we still need economic stimulus perhaps we don't need the MWPC (if it really helped the economy before, why do we still need economic stimulus?) I'm aware that unemployment rates are still high and the economy is weak, I just think the question needs to be answered - was the MWPC the best type of stimulus?

One issue raised about MWPC in its original form was that the credit was doled out via paychecks. A single person eligible for the full $400 credit saw and extra $7.70 in her weekly paycheck. This distribution method was intended to better ensure that those receiving the credit spent it rather than saved it. Let's see Congress and the Administration engage in the discussion - is the MWPC the best type of economic stimulus?

Obama also proposes to extend the Economic Recovery Payment of $250 for those on Social Security for one year. This was a companion to the MWPC and a person could not receive both. Again, there should be a discussion of whether this is the best economic stimulus. If not, something else should be done with the approximately $74 billion the 1-year extension of these provisions would cost. [Joint Committee on Taxation, JCX-7-10R]

2 - How do we pay for one more year of the MPWC and the ERP? What spending will be cut or taxes raised to cover the $74 billion cost of a 1-year extension and how will that change affect the economy?

3 - Are these provisions too generous? The MWPC results in $400 for single taxpayers and $800 for married taxpayers. There is an AGI phase-out, but it is fairly high - $75K for single and $150 for married. I say fairly high because, as reported by the US Census Bureau recently (9/16/10), the "real median household income in the United States in 2009 was $49,777" (9/16/10 press release).

The cost of extension can be reduced by lowering the AGI phase-out levels. But again, see my question 1 above.

4 - What does temporary mean? It is not unusual for Congress and the President (and taxpayers) to really view a "temporary" measure as meaning only that Congress has to revisit regularly to extend. That is not really temporary. It also hurts the budget, creates compliance difficulties and becomes a pointless exercise because there is little discussion or data collection to inform the almost non-existent debate on why temporary measures should be extended.

5 - Are there reasons other than economic stimulus for the MWPC? The Administration's reasons for a 1-year extension of the MWPC are (Greenbook FY2011, page 1):

The MWP credit partially offsets the regressivity of the Social Security payroll tax. It effectively raises the after-tax income of workers eligible for the credit, which makes work more remunerative and so encourages individuals to enter the labor force. Furthermore, the ability of many taxpayers to receive the credit through reduced withholding, rather than after the end of the tax year, increases the incentive effects of the credit. Extending the credit would allow the positive benefits of the credit to continue during the period in which the economy is still recovering from the recession."

If there is truly concern about the need to reduce regressivity of the Social Security tax, the proposal should be for a permanent MWPC. However, I think that reason is a bit misleading in that there is already an Earned Income Tax Credit that provides significant relief from regressivity of the Social Security tax for low-income wage earners.

Hopefully there can be a well-informed discussion in Congress on whether extension of the MWPC and Economic Recovery Payment is the best type of stimulus and considering the points above.

What do you think? What would be the best use of $74 billion to help the economy?

President Obama's New Stimulus Proposals & Tax Policy

Over Labor Day Weekend, President Obama announced new plans to help stimulate the economy (9/8/10 post to White House blog + Wall Street Journal, 9/6/10 "Obama to push tax break"). The plans include:

• Research tax credit - eliminate the 20% regular credit that uses a base period of 1984 - 1988 and just have the simplified credit but increase the credit rate from 14% to 17%; make this credit that has been temporary since 1981 permanent. [White House fact sheet]
• Equipment expensing - allow businesses to fully expense equipment in the year of purchase through 2011 (so rather than extending 50% bonus depreciation, move to 100% expensing). [White House fact sheet]
• Permanently extend tax cuts for middle class individuals. In the press release, President Obama indirectly acknowledges that he means 98% of individuals when he refers to this group of taxpayers (he refers to efforts to hold up his plan by those who want to also extend the cuts for the "wealthiest two percent of Americans").
• Wants Congress to pass the small business jobs bill that includes a broadened exclusion for qualified small business stock (IRC Section 1202).
• Additional support for middle class families including making the American Opportunity Tax Credit permanent.

While President Obama is proposing these measures as economic stimulus, given that a few are permanent, it goes beyond that goal. Would these changes move our tax system into the 21st century and meet principles of good tax policy? Overall, I don't think so.

My observations:

• Research tax credit - I think this is a good move. It simplifies the law by having only one formula for calculating the credit. It brings certainty to this temporary measure that has been extended at least 12 times. It last expired on 12/31/09 so businesses have been waiting over 8 months to know if it will be extended for 2010. While they might believe that it will be given that it has been retroactively extended in the past (other than one year), companies cannot make that assumption on financial statements which causes challenges. Also, when companies are looking at where to locate R&D operations, the US doesn't look too good relative to countries with permanent R&D incentives. Since the credit only applies to R&D labor in the US, a permanent credit sends a strong message that the US does want to have these high-paying jobs here.
• Temporary expensing of assets - this really is a timing adjustment rather than a new tax deduction. Relative to 50% bonus depreciation, full expensing is easier. One thing I wonder is whether such an incentive might cause a significant increase in equipment purchase only to drop off thereafter which would hurt companies that provide the equipment. Expensing might be a starting point to further business tax changes such as changing from an income tax to a consumption tax, such as a business activity tax (BAT). [For more on BAT, see Tax Notes article by Bill Barrett.]
• Permanent tax cuts for 98% of individuals described as the middle class - I think this is too expensive and unrealistic. I really don't believe that a married couple making up to $250K (or unmarried person making up to $200K) is the middle class. Given our large, unending deficits and debt, I don't think it makes sense to extend a temporary tax cut to such a large group of individuals. Also, the dollars not used for such a broad tax cut could be better targeted to provide real economic stimulus on a temporary basis without jeopardizing forever the ability to reduce the deficit and pay down the debt.
• Temporary 100% exclusion (rather than 50%) for qualified individuals who acquire "qualified small business stock" during the stated time period. I think this could be effective stimulus if it encourages people to want to invest in qualified businesses. High income/wealth individuals can best afford to make these investments, but I think this is still better stimulus than an across the board capital gains tax cut (such as the President wants to give to 98% of individuals), because it is targeted to encourage new investment.
• Permanent American Opportunity Tax Credit - I think this is too generous in that it helps a married couple with up to $180,000 of income get cash to pay for a child's college tuition. I think equity could be better served by using the money to help those who can truly not afford to get a Bachelor's, Master's or doctorate to do so rather than giving cash to people who can afford to send their child to college and beyond. Also, this credit is focused on those individuals fortunate enough to complete college in four years. Today, data on graduations is tracked using a 6-year graduation rate, yet this credit only covers the first 4 years of college. I have more on this one in a recent article in the AICPA Tax Insider - here.
• PAYGO - the only tax cut above that doesn't need to be "paid for" is the extension of tax cuts to 98% of individuals. That is the legal reality under the PAYGO rules, although not the budget reality (after all, there is no free lunch!). The other provisions, need revenue offsets (tax increases). So, it is not possible to provide a full analysis of the proposals until the entire tax package is available - we shouldn't forget that! [For more on PAYGO: Congressional Research Service report, PricewaterhouseCoopers article, and White House OMB information.]

What do you think?

More on expiring tax cuts

It looks like interest in extending tax cuts for one more year for everyone is catching on per a USA Today article - "More Democrats lean against tax increases for the rich," 9/2/10. As I've noted before, for both tax policy and better stimulus reasons, I think Congress needs to work harder to target any tax cuts if they want to use this large amount of money to help the economy.

The CBO has a spreadsheet listing provisions that expire at the end of this year (as well as those that expired at the end of 2009 and were not (yet) renewed). I encourage you to take a look. The list is not detailed enough to indicate, for example, the cost of extending the lower capital gains rate to 97% of individuals (those with income under $250K if married or $200K if not married) versus also extending it to the other 3% (the group that has a lot of capital gains!).

I think the CBO list is one of several good tools that indicate that an across the board extension of all tax cuts is not a good idea. Once a temporary measure gets extended once, its likely to become either truly permanent or something that annually gets extended. One example of something that should be allowed to expire is the deduction for real property taxes for those who claim the standard deduction. Adding deductions to the standard deduction violates the purpose of the standard deduction, makes the law more complicated and more unfair (why allow non-itemizers to deduct real property taxes rather than something else)? If Congress believes the standard deduction is not large enough, they should increase it for everyone, not only for those with real property taxes. The CBO cost on this item is $26 billion over ten years.

That is just one example. I encourage you to take a look at the CBO spreadsheet.

If Congress and President Obama do decide to extend the 2001/2003 (and perhaps even some of the 2009 American Recovery & Reinvestment Act tax cuts) for one more year, why not add a requirement that all or some of the taxpayer savings be invested in some manner? For example, if you report capital gains in 2011 of more than $30,000 (or some other figure), you get the lower rate if you show you invested some portion of your proceeds in qualified small business stock or your local school (rather than buying other investments on the stock market). While this does complicate the tax law, this type of change would be for higher income individuals - which should be defined using lower dollar amounts than used by President Obama (I think his thresholds could be cut in half) - thus, the complication would be both temporary and affect less than 40% of individuals.

To continue tax cuts that are poorly targeted will not only increase the debt and deficit, but won't stimulate the economy. On the other hand, if the government collected those tax dollars, they could use them to stimulate the economy (hopefully). Another tax break that ends this year is the American Opportunity Tax Credit. As modified for 2009 and 2010, it provides a tax credit for individuals making up to $180K if married. At that income level, one should not need or receive taxpayer support to help send their children to college (for more on AOTC - here). This credit should not be extended in its current form, but modified to be better targeted to provide relief to those who need it (and when college aid is not given to those who don't need it, there is more available to provide to those who do need it).

What do you think? Should Congress just extend all tax cuts for one more year or only those it can target in such a way to address a true need or to truly help the economy?

More stimulus?

In a speech at the National Press Club yesterday, outgoing Chair of the Council of Economic Advisers, Christine Romer noted the need for more economic stimulus to help the economy. (Reuters, Bohan, "Romer: U.S. must find will for further stimulus")

If the President and Congress follow that advise, does it mean the tax law has to change? Prior economic stimulus measures have included temporary changes to the tax law including bonus depreciation, larger expensing deductions, greater gain exclusion percentages for qualified small business stock, longer NOL carrybacks and even larger credits for higher education expenses. I'm not convinced that it has all helped but has certainly made the tax law more complex. Also, taxpayers seems to want to keep temporary measures around forever which usually leads to continued temporariness due to the challenge of finding tax increases or spending cuts to pay for the tax breaks.

The American Recovery and Reinvestment Act included both tax changes and various spending measures. I'd like to see any additional stimulus be targeted to where it is most likely to do the most good which is probably in employing the unemployed. Paying for that will likely result in permanent tax increases as recently occurred with the Education Jobs and Medicaid Assistance Act (P.L. 111-226; 8/10/10) which included several tax law changes regarding international provisions.

I don't think extending all of the 2001/2003 tax cuts for one more year will help much either and Congress will have to find a way to pay for the cuts for those with income over $250K ($200K if not married). See my 7/31/10 post and 8/20/10 post on these topics on targeting those dollars to where they will best help the economy and even looking at the 2001/2003 tax cuts for those making less than $250K (which is a lot of income - why is President Obama so focused on providing tax cuts to people who don't need them?!)

What do you think - more stimulus? If yes, what and how to pay for it?

More Stimulus - Payroll Tax Exemption

In March, enactment of two health care reform laws overshadowed signing of another economic stimulus bill. On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act (P.L. 111-147). The stimulus highlight is a payroll tax exemption (Social Security only) for employers who hire a new worker this year. This is an interesting policy approach for a few reasons. For example, a payroll tax credit benefits more employers that would an income tax credit. The payroll tax credit will benefit employers with a taxable loss and non-profits.

There is more in this stimulus bill, namely some significant new foreign reporting and withholding rules. So, all in all, more to keep tax advisers well-employed.

I've got a short article in this week's AICPA Tax Insider on the employer benefits in HIRE and some policy considerations of the approach and the Act - here.

Modernizing the Tax Law for Small Businesses

On April 10, 2008, the House Small Business Committee held a hearing - “Modernizing the Tax Code: Updating the Internal Revenue Code to Help Small Businesses Stimulate the Economy."

The Committee also issued its own report - “Seven Ways to Stimulate the Economy by Updating the Internal Revenue Code." In addition to having witness testimony online in written form, the Committee has videos on YouTube about the hearing. This can all be accessed at this summary of the hearing.

I think the ideas presented by witnesses and in the Committee's report fall into two categories:

• Tweaks to the federal tax law to make compliance and doing business easier for small businesses.
• Changes that reflect the fact that most of the federal tax law was written before we entered our global, interconnected, knowledge-based economy and society and thus is in need of modernization.

Examples of Category 1 suggestions:

• Repeal the AMT
• Make the 2001 and 2003 tax cuts permanent
• Allow greater choice of tax year for non-corporate businesses
• Increase meals deduction for small businesses

Examples of Category 2 suggestions:

• Allow non-resident aliens to be shareholders in S corporations
• Stop treating cell phones and PDAs as listed property for depreciation purposes since these are not luxury items, but necessities of operating a business; detailed recordkeeping of use is not productive
• Create a simpler tax systems, even with less incentives, due to the significant compliance costs small businesses face
• Simplify the home office deduction to be a standardized deduction
• Shorten some depreciation lives to be more in line with today's technology

The focus of the hearing was improving tax rules for small business to stimulate the economy, not just to modernize the tax law. However, there were several good ideas that remind us how out-of-date the tax law is (such as treating cell phones as questionable business items and giving personal computers a 5-year depreciation life).

What are your ideas to modernize the tax law to better help small businesses succeed in today's economy?