The following are highlights of the tax implication of the newly passed Small Business Jobs Act of 2010.

Items Decreasing Tax

Business Loans — The government will loan money for five years to small banks (those with assets under $10 billion) to loan to small businesses. The banks will have to pay interest. Unlike when the Bush administration sent out money without strings attached, the rules require banks to report to a newly created loaning agency both the amount and the number of small business loans that they have made. Their interest rate will be pegged in inverse ratio to those numbers.

Gain From Sale of Small Business Stock — Applies to investors of “original issue” stock issued during 2010 by corporations with assets less than $50,000,000. If held for 5 or more years, that stock can be sold tax free.

Built-In Gains Tax — Applies to S-corporations which were formerly C corporations that at transfer had assets that not been taxed. Typical examples would be receivables in a cash basis corporation, or assets whose market value exceeded the cost basis (in the old days that was typically real estate or investments such as publically held stocks or gold or silver). An S-corporation could escape the tax by holding the assets — or not showing a taxable profit — for 10 years. The holding period was temporarily lowered to seven years in 2008 (to help the Gallo wine family); for 2011 only, it’s been lowered to five years.

Section 179 Asset Writeoff — The large first-year asset write-offs were about to expire. Congress instead expanded the write-off limits of equipment and furniture for 2010 and 2011. Assets totaling $500,000 can be written off immediately. They added leasehold improvements and retail space improvements for up to $250,000. The deduction is reduced dollar for dollar to the extent that total asset purchases exceed $2,000,000.

First Year Depreciation — The 50% depreciation allowance permitted in 2009 was extended to 2010, but not 2011. This bill retroactively tacked on automobile additional depreciation of $8,000 putting it on parity with 2009.

Start Up Expenditures — For taxable years beginning in 2010 and thereafter, start up expenditures up to $10,000 can be immediately deducted as long as the total does not exceed $60,000; the deduction is reduced dollar for dollar by the excess.

Self Employment Tax — For 2010 only, self-employed people can deduct the cost of the family’s health insurance from self-employment income in computing their self-employ-
ment tax. The deduction will not reduce their income records for social security retirement purposes.

Cell Phones — Finally — Cell phones are removed from “listed property” which required written proof that every call was for business purposes. The IRS had, on occasion, used this as a club to disallow major portions of the telephone deduction for some unfortunate companies under IRS audit.

Items Increasing Tax

Form 1099 Requirements — The battle that was raged over the stupid, onerous law requiring all businesses to file 1099s for every firm or individual to whom it paid more than $600 for any reason after January 1, 2011 — that battle not only was lost, the rule was expanded to cover owners of real estate. Covered under this provision and specifically mentioned in the preamble to the law are plumbers, painters and accountants. The law allows some exception to filing for “minimal rentals” — the amount to be decided by Secretary of the Treasury.

Penalties — It’s easy to raise penalties. Congress doubled the penalty for failure to file 1099s. Considering the new rules may require thousands if not tens of thousands of 1099s by a company, it should be easy pickings for the IRS to find filing errors and omissions. Other penalties were also increased.

A final note on the 1099 situation: There is almost unanimous consent that the law should be repealed. Lots of smoke, no action. If this law is not repealed, everyone owning or operating a business must plan on issuing 1099s as indicated above in January 2012. You can’t wait until late in 2011 to think about a system to accumulate that information. You have to obtain the employer identification number of every supplier of every transaction. The $600 is cumulative for the calendar year, so even if the supplier’s bill is $55 per month for office coffee, you will need to produce a 1099. At the end of the year you will want to be able to push a button and get a list of all suppliers and the total paid to them.

IMPORTANT: Payments to credit card companies are excepted. Start thinking about it now.