Highlights of the Small Business Stimulus Act
The Small Business Jobs Act of 2010 (PL 111-240), which Congress passed and President Barack Obama signed in September, expands loan programs through the U.S. Small Business Administration (SBA), strengthens small business preference programs for federal government projects, provides incentives for exporters, offers a variety of small business tax breaks and includes some revenue raisers.
SMALL BUSINESS LOANS
The act creates a Small Business Lending Fund to address ongoing effects of the financial crisis on small businesses by allowing the Treasury Department to make capital investments in eligible financial institutions to increase credit available for small businesses. Independent community banks may participate in the new $30 billion lending fund on the condition they make loans to small businesses and meet other requirements. Financial institutions (bank and savings and loan holding companies, depository institutions, and community development loan funds) with $10 billion or less in total assets may apply for capital investments of up to 3% of risk-weighted assets.
Other small business lending provisions in the act include:
Online information center. The act directs the SBA to create an online lending platform that lists all lenders that make SBA-guaranteed loans and provides interest rates for each lender.
Nonprofit lenders pilot. The act also creates an intermediary lending pilot program to allow certain private, nonprofit entities that seek or have been awarded SBA loans to make loans to small businesses. The pilot will allow $20 million in loans each year from 2011 to 2013 to not more than 20 eligible entities. Eligible nonprofit organizations may apply for up to $1 million for the purpose of making loans of up to $200,000 to eligible small businesses.
Increased maximums for Microloan Program. The act increases the Microloan Program maximum loan amount to $50,000 from $35,000. The act raises total outstanding loan commitment limits to $4.5 million from $1.5 million and the total gross loan amount to $5 million from $2 million. Increased government guarantees and outstanding loan commitments are effective until Jan. 1, 2011, when the percentage guarantees will revert to the original percentages and the total outstanding loan commitment will be reduced to $3.75 million.
Increased participation limit for Section 7(a) business loans. It also increases the limit on the government’s participation in so-called Section 7(a) small business loans to 90% from 75% or 85% for all Section 7(a) loans regardless of the loan amount.
Raised loan maximums for plant acquisition, construction, conversion and expansion. The new maximums under the SBA’s 504 Program are tiered in relation to the borrower’s plans to use the capital to support federal government priority goals and projects, mostly in the energy and manufacturing sectors. For nonpriority goals and projects, the maximum is increased to $5 million from $1.5 million for each small business concern; to $5 million from $2 million for each small business concern if the loan proceeds will be directed toward certain public policy goals; to $5.5 million from $4 million for each project of a small manufacturer; to $5.5 million from $4 million for each project that reduces the borrower’s energy consumption by at least 10%; and to $5.5 million from $4 million for each project that generates renewable energy or renewable fuels, such as biodiesel or ethanol production.
Reduced fees for American Recovery and Reinvestment Act SBA loan guarantees. The reduced fees for SBA loan guarantees enacted by the American Recovery and Reinvestment Act of 2009 are extended to Dec. 31, 2010 (from Sept. 30).
Low-interest refinancing for Local Development Business Loan Program. Up to $7.5 billion in low-interest refinancing is available under the SBA’s Local Development Business Loan Program. Up to $7.5 billion annually is available for loan refinancing for two years after enactment for qualifying loans. Qualifying conditions include meeting job creation and retention goals and providing collateral valued at least 125% of the amount financed.
Retail floor plan refinancing. The act creates a floor plan refinancing program, under which the SBA can guarantee open-ended extensions of credit to small businesses if the loan is used to purchase certain eligible retail goods for resale.
Express loan enhancement. The maximum amount of express loans under Section 7(a) of the Small Business Act is increased to $1 million from $350,000 for one year from the date of enactment (Sept. 27, 2010).
SMALL BUSINESS FEDERAL CONTRACTING
Federal agencies are called on to solicit bids from small businesses, and federal contracting requirements are amended to encourage small businesses to bid for federal contracts.
The act also establishes a Small Business Teaming Pilot Program, which will promote federal contracting opportunities for joint ventures and small businesses. The program is scheduled to run for five years.
Federal agencies are required to solicit bids from any responsible source, including small business concerns, teams and joint ventures, for multiple award contracts above the substantial bundling threshold of the agency. The act also revises the federal contracting and reporting requirements. Electronic annual certifications of small business size and status are required for ongoing eligibility as a small business contractor. Small business classification criteria must be reviewed by the SBA at least once every five years.
The act requires the comptroller general to study strategic mentoring alliances between large and small businesses as a way of getting small businesses access to federal contracts. The study will examine potential competition between mentor and protégé, systems to assure substantive benefit to the protégé, and agency processes to administer or monitor such programs. The study must be completed within 180 days of the act’s enactment.
SMALL BUSINESS EXPORTS
The act contains measures designed to encourage small businesses to become exporters or to increase their export activities. The SBA will create a pilot three-year trade and export promotion program that will make grants to states to carry out export programs that assist eligible small businesses.
A number of changes are made within the SBA’s Office of International Trade to increase the number of small businesses that export and the volume of small business exports.
OTHER SMALL BUSINESS PROGRAMS
The act creates federal grants for small business development centers to provide technical assistance to small businesses seeking capital and credit and other opportunities. It also mandates regulatory relief for small businesses.
A seven-year small business credit initiative is established to allocate federal funds (up to $1.5 billion) to participating states.
SMALL BUSINESS TAX RELIEF
Many of the act’s provisions provide tax relief for businesses.
Section 179 expensing and bonus depreciation. The act increases the maximum amount a taxpayer may expense under IRC § 179 to $500,000 and increases the phaseout threshold amount to $2 million for tax years beginning in 2010 and 2011. The first-year 50% bonus depreciation available under IRC § 168(k) is extended for one year to apply to property acquired and placed in service in 2010 (or 2011 for certain long-lived and transportation property). The act also allows taxpayers using the percentage-of-completion method to take into account the cost of qualified property as if bonus depreciation had not been enacted.
Qualified small business stock. The act amends IRC § 1202 to increase the exclusion from gross income of gain from the sale or exchange of qualified small business stock from 50% to 100%, and the minimum tax preference does not apply. This provision applies to eligible stock acquired after Sept. 27, 2010, and before Jan. 1, 2011.
Business credits. The carryback period for eligible small business credits under IRC § 38 is extended from one to five years. The act also allows taxpayers to use eligible small business credits to offset both regular and alternative minimum tax liability. Both provisions are effective for credits determined in the taxpayer’s first tax year beginning after 2009.
Built-in gains tax. For tax years beginning in 2011 only, the act provides that for purposes of computing the IRC § 1374 built-in gains tax, the recognition period is reduced to five years from 10 years. The five-year recognition period begins with the first day of the first tax year for which the corporation was an S corporation.
Self-employed individuals’ health insurance. The act allows self-employed individuals who deduct the cost of health insurance for themselves and their spouses, dependents, and children who have not attained age 27 as of the end of the tax year to take the deduction into account in calculating net earnings from self-employment for purposes of SECA taxes. This provision applies to the taxpayer’s first tax year beginning after 2009.
Startup expenses. The act increases the IRC § 195 deduction for trade or business startup expenses from $5,000 to $10,000 for tax years beginning in 2010. The start of the limitation on the deduction is increased from $50,000 to $60,000. So for 2010 the amount of the deduction is the lesser of (1) the amount of the startup expenses or (2) $10,000, reduced (but not below zero) by the amount by which the startup expenditures exceed $60,000.
Reportable and listed transactions. The act limits the IRC § 6707A penalty for failure to disclose a reportable transaction (that is, a transaction determined by the IRS to have a potential for tax avoidance or evasion) to 75% of the decrease in tax resulting from the transaction. The maximum annual penalty allowed will be $10,000 in the case of a natural person and $50,000 for all other persons for failure to disclose a reportable transaction. For listed transactions, the maximum penalty will be $100,000 in the case of a natural person and $200,000 for all other persons. The minimum penalty is $5,000 for natural persons and $10,000 for all other persons.
The act also requires the IRS to report to Congress by Dec. 31, 2010, and then annually, on penalties assessed for certain tax shelters and reportable transactions (under sections 6662A, 6700(a), 6707, 6707A and 6708). The penalty under section 6707A has been criticized because the penalty amounts often exceed the tax benefit of the targeted transactions. The IRS has since July 2009 been working under a self-imposed moratorium on collection enforcement of the section 6707A penalty to give Congress time to amend the penalty amounts. The AICPA has recommended that the IRS be allowed to abate the section 6707A penalty in cases where the taxpayer has acted reasonably and in good faith. The AICPA also believes that judicial review should be allowed in cases where the IRS has assessed a penalty under section 6707A. Congress did not adopt either of these recommendations.
Cell phones. The act removes cell phones from the definition of listed property. Thus, the heightened substantiation requirements and special depreciation rules that apply to listed property under IRC § 280A will no longer apply to cell phones. However, the Joint Committee on Taxation’s Technical Explanation of the act notes that this change “does not affect Treasury’s authority to determine the appropriate characterization of cell phones as a working condition fringe benefit under section 132(d) or that the personal use of such devices that are provided primarily for business purposes may constitute a de minimis fringe benefit, the value of which is so small as to make accounting for it administratively impracticable, under section 132(e).”
The AICPA recommended this statutory change in comments to the IRS.
REVENUE RAISERS
The act also contains several revenue-raising provisions.
Section 457 plan Roth contributions. The act allows participants in government section 457 plans to treat elective deferrals as Roth contributions, effective for tax years beginning after 2010.
Rollovers to Roth accounts. The act also allows rollovers from elective deferral plans to Roth-designated accounts. If a section 401(k) plan, section 403(b) plan or governmental section 457(b) plan has a qualified designated Roth contribution program, a distribution to an employee (or a surviving spouse) from an account under the plan that is not a designated Roth account is permitted to be rolled over into a designated Roth account under the plan for the individual. This provision is effective for distributions made after Sept. 27, 2010.
Annuitization. The act permits a portion of an annuity, endowment or life insurance contract to be annuitized while the balance is not annuitized, provided that the annuitization period is for 10 years or more or is for the lives of one or more individuals. The annuitized portion will be treated as a separate contract for purposes of IRC § 72. This provision is effective for amounts received in tax years beginning after Dec. 31, 2010.
Reporting rental income. The act makes recipients of rental income from real estate generally subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to the IRS and to the service provider. This provision will apply to payments made after Dec. 31, 2010.
Information returns. The act also increases the penalties for failure to file a correct information return. The first-tier penalty increases from $15 to $30, and the calendar-year maximum increases from$75,000 to $250,000. The second-tier penalty increases from $30 to $60, and the calendar-year maximum increases from $150,000 to $500,000. The third-tier penalty increases from $50 to $100, and the calendar-year maximum increases from $250,000 to $1,500,000. For small business filers, the calendar-year maximum increases from $25,000 to $75,000 for the first-tier penalty; from $50,000 to $200,000 for the second-tier penalty; and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard increases from $100 to $250.
Federal contractor levies. The act allows the IRS to issue levies prior to a collections due process hearing with respect to federal tax liabilities of federal contractors identified under the Federal Payment Levy Program, effective for levies issued after Sept. 27, 2010.
Cellulosic biofuels. The act excludes so-called crude tall oil from the definition of cellulosic biofuel for purposes of the IRC § 40 tax credit for alcohol used as fuel. Crude tall oil is a byproduct of the papermaking industry. Earlier this year, the Health Care and Education Reconciliation Act of 2010, PL 111-152, removed another paper byproduct—black liquor—from the definition of cellulosic biofuel.
Income from guarantees. The act overrides the Tax Court’s recent decision in Container Corp. v. Commissioner, 134 TC no. 5 (2010), by amending the IRC §§ 861 and 862 source rules to address income from guarantees issued after Sept. 27, 2010. Under new IRC § 861(a)(9), income from sources within the United States includes amounts received, whether directly or indirectly, from a noncorporate resident or a domestic corporation for the provision of a guarantee of indebtedness of such person. This applies to guarantees issued after Sept. 27, 2010.
Corporate estimated taxes. The act increases the required corporate estimated tax payments factor for corporations with assets of at least $1 billion for payments due in July, August or September 2015.
Matthew G. Lamoreaux (mlamoreaux@aicpa.org) is a JofA senior editor, and Alistair M. Nevius (anevius@aicpa.org) is editor-in-chief of The Tax Adviser and a JofA contributing editor.
To comment on this article or to suggest an idea for another article, contact Matthew G. Lamoreaux, senior editor, at mlamoreaux@aicpa.org or 919-402-4435.
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