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No Small Job

What the newly passed Jobs Act means for small aggregates producers.

By Mark E. Battersby

Congress has passed and the president has signed into law a bill creating setting aside billions of dollars in lending and tax breaks for small business owners. The Small Business Jobs & Credit Act of 2010 sets up a $30 billion lending program. The accompanying tax segment, The Small Business Jobs Act of 2010, offers aggregates producers $12 billion in tax breaks, but includes measures that could have some worried.

Needed or not, the lending provisions in the new bill are designed to help small business owners who have seen the value of real estate and other types of collateral sapped by the recession. The Small Business Administration Lending Programs are one of the bill’s provisions. Those seeking SBA loans stand to benefit from the extension of provisions that amped up the SBA’s lending guarantee programs and fee reductions that recently expired. In addition, the bill increases the maximum loan size for the SBA’s 7(a), 504, and microloan programs.

One of the bill’s far-reaching changes could alter the essential character of SBA borrowers. SBA’s guaranteed loan programs now allow banks to make much larger loans and lend that money to bigger businesses.

The 7(a) and 504 loan program maximums will jump from $2 million to $5 million, and the microloans will increase from $35,000 to $50,000. Loans made under the SBA Express program will temporarily increase from $300,000 to $1 million. Also included is a temporary allowance for small-business owners that will allow them to use a 504 loan to finance certain mortgages to avoid foreclosure.

Another provision is the State Small Business Credit Initiative. This provision will help businesses in states that have successful small-business lending programs, and can show how a loan could help create jobs. States with such programs and facing cutbacks due to tight state budgets may be eligible for continued funding. The grant pool will total $2 billion, but states must show that there has been at least $10 in new lending for every $1 in federal grant money they receive.

Lending a hand
The Small Business Lending Fund is a provision that will provide as much as $30 billion in capital to financially sound small banks with less than $10 billion in assets to encourage them to lend money to small businesses. As an incentive to lend, banks that increase lending to small business by 10 percent over the previous year will pay as little as 1 percent on the capital they acquire from the fund.

Like most of today’s legislation, however, the lending fund is only a temporary fix. It will make investments in banks for just one year. The tax breaks in the bill, on the other hand, are worth about $12 billion, and are mostly good for a year or two.

Among the tax provisions, executives will find the bill extends the 50 percent bonus first-year depreciation that had expired at the end of 2009. Retroactive to Jan. 1, bonus depreciation is not limited by the size of the business, but there is a very short window of opportunity; qualified equipment must be purchased and placed into service before Dec. 31.

Another tax provision is Section 179 expensing, the first-year write-off for newly acquired equipment and business property. This has been raised to $500,000 with an investment ceiling up to $2 million, at least for 2010 and 2011. Improvements made to leased business property are eligible for a $250,000, Section 179 write-off.

Depreciation deductions
Section 280F of the tax law limits depreciation deductions (including Section 179 expensing) that can be claimed for cars, light trucks, vans and sport utility vehicles each year. For new vehicles bought and placed in service in 2010, and that qualify for bonus first-year depreciation, the first-year dollar limit is increased by $8,000. Thus, the first-year dollar limit is $11,160 for light trucks and vans.

The bill continues to treat computer software as qualified Section 179 property subject to the full write-off normally available only for tangible personal property.
The bill also removes cell phones and other personal communication devices from the onerous record-keeping, substantiation requirements and limited deductions for so-called listed property. In addition, the provision enables the fair-market value of personal use of a cell phone or similar device provided to employees predominantly for business purposes to be excluded from gross income.

When a corporation formed as a regular or C corporation elects to become an S corporation, the S corporation is taxed at 35% on all gains that were built-in at the time of the election if the gains are recognized during the recognition period. The recognition period is usually the S corporation’s first 10 years. For tax years beginning in 2009 and 2010, no tax is imposed on the net unrecognized built-in gain of an S corporation if the seventh tax year in the recognition period preceded the 2009 and 2010 tax years. For 2011, the new rules shorten the holding period of assets subject to the built-in gains tax to five years if the fifth tax year in the recognition period precedes the tax year beginning in 2011.

The 2009 Recovery Act temporarily increased the percentage exclusion for qualified small business stock sold by an individual from 50 percent to 75 percent for stock acquired when originally issued and held for more than 5 years. Now, the act includes a full, 100 percent exclusion of gain resulting from the sale of that unique, Section 1244 stock many aggregates producers employ to attract investors.

Carry me back
Beginning in 2010, a corporation whose stock is not publicly traded, partnerships and sole proprietors can carry back unused, small business tax credits for five years, resulting in refunds of taxes previously paid. Eligible small businesses also will be able to use all types of general business tax credits to offset their alternative minimum tax.

Manufacturers with revenue under $50 million should pay close attention to one feature of the act, the elimination of the AMT barrier when it comes to business-tax credits. This rights a long-standing wrong in the tax code that has prevented well-deserving small businesses from realizing the value of federal tax incentives, most notably, the research and development tax credit.

A self-employed aggregate operator can take a deduction for health insurance costs paid for himself or herself and immediate family. When determining self-employment taxes however, the self-employed cannot deduct any health insurance costs. Today, under the bill, the deduction for income tax purposes for the cost of health insurance is allowed in calculating net earnings from self-employment for self-employment tax purposes, but only for tax years beginning after Dec. 31, 2009.

Not all roses
The new law isn’t all roses, however. Among the provisions designed to help compensate the government for the additional funding and tax savings created by this bill, higher penalties could end up stinging small-business owners who, as a group, are known for tending to run afoul of our confusing and complex federal tax rules.

Penalties for failure to file information returns to payees, such as 1099 and W2 forms, will increase as will penalties for failure to file timely information with the Internal Revenue Service. Those new 1099 reporting requirements passed earlier this year as part of the Patient Protection and Affordable Care Act may dramatically increase the number of 1099s businesses need to process beginning in 2013. This key sticking point is tied to health care reform, which included a major change in how businesses report spending. It requires every business which spends in excess of $600 with a merchant, vendor, contractor, or supplier to issue a 1099.

While the $30 billion allocated for Small Business Administration loans is laudable, experts predict the loans will be doled out carefully in order to comply with requirements that a lot of small businesses won’t come close to meeting. On the tax front, the package of enhanced small business tax incentives will benefit many aggregates businesses.

The extended life for bonus depreciation—extending and doubling the Section 179, first-year write-offs for newly acquired business property—the 100 percent exclusion of gains realized on small business stock, the relaxed S corporation built-in gain conversion rules, and the extended carryback period for eligible small business tax credits to five years are a welcome boon in today’s economy.

Mark E. Battersby is a freelance writer with more than 25 years specializing in tax and finance. He is the author of four books and a frequent contributor to Rock Products.