by Richard Schneider
Emeritus Professor of Accounting
Well the logjam loosened up a little, with the passage and signing into law of the Small Business Jobs Act of 2010. President Obama signed the bill September 27th, 2010. The bill defines small businesses generally as those with $50 million or less of assets. One of the biggest items is allowing companies to accelerate the deduction of equipment purchases. There is also a break for investors in small business stock, owners subject to self employment tax who pay health insurance premiums, and employees who can convert regular retirement accounts to ROTH IRAs. For the cost of equipment, the bill increases the expensing provisions of code section 179 for small businesses, from $250,000 to $500,000. The bonus depreciation has been extended. It should be noted that this gives companies the option to deduct these costs sooner rather than later, but not increase the total amount of the deduction, just the timing.
Investors in small business stock can exclude 100% of any gain on sale from taxable income, if the stock is purchased after the date of the bill’s enactment and held for five years. Most of these companies will be privately held, and the stock not available to the general public. Five years is an extended period of investment and not for the average investor.
For business owners who are subject to self employment tax and pay their own health insurance, the premiums, including family coverage, are deductible in calculating the amount of Self Employment tax. This could be a savings of approximately $2,000 for the average owner with a family.
Under this bill, employees are given the opportunity to directly roll a regular retirement account into a ROTH IRA. The regular retirement accounts include 401(k)s, 403(b)s, and 457(b)s. The amount converted is taxable, but the bill allows the employee to spread the taxable amount over the next two years. For example if an employee does a direct roll over in 2010, it is ½ taxable in 2011 and ½ taxable in 2012. The advantage of a ROTH IRA, is that it grows tax-free, and distributions are tax free, whereas the others grow tax free and normally are fully taxable upon distribution. If your 401(k) or 403(b), happens to be depressed in value because of the economy, and you expect the value to rebound in the next ten to twenty years, this may be a good opportunity to avoid tax on this increase.
As always each taxpayer’s situation is unique, and you should consult your tax professional to determine what the affect is on you. Congress still has a lot of work left regarding taxation and the hope is it will be done shortly after the elections.