CONGRESS ACTED SWIFTLY IN SEPTEMBER 2010 to pass what is known as the Small Business fobs Act of 2010 (hereafter called the Act). Signed by President Obama on Sept. 27, 2010, the Act means more business tax relief for small businesses and emphasizes the need to provide additional support in the process of economic recovery.
Summarized below are some key changes made by the Act that are important for small businesses and real estate owners. Much of the material for this article was drawn from and supported by comments made from the Joint Committee on Taxation, Technical Explanation (Sept. 16, 2010). The new tax rules apply beginning in 2010. Therefore, taxpayers may find they have additional deductions for 2010 and 2011 than anticipated.
SUMMARY OF CHANGES MADE BY THE ACT
Some of the Act's changes are especially relevant to real estate practitioners, be they investors or representatives for clients. The changes provide for small business relief in various areas. For example, the Act allows for more capital, since less is paid in taxes. The theory is that tax relief from gains on small business stock will encourage investing more capital in small businesses.
Another change that can aid the real estate investor relates to a shorter time frame to obtain the benefits of business credits. There is now a 5-year carryback of general business credits. For example, a business that paid taxes last year but has tax credits in the current year can file, currently, for a refund of taxes by applying the current year's credits to the prior year's gain. As an example, if Business X has a credit of $100,000 for the year, an amended return for a prior year can be made resulting in using the $100,000 credit to reduce the taxes for a prior year. This would result in an immediate refund to Business X.
The Act allows business credits for eligible businesses without requiring payment of the Alternative Minimum Tax (AMT). The AMT subjects taxpayers to not only the regular tax calculation, but also to a potentially higher tax result by applying the AMT rules. In essence, these rules require a calculation of the current tax under what are the "normal rules" and a calculation under an alternative system. The AMT approach denies some deductions that are allowed for the normal tax rules. The taxpayer pays the greater of the two calculations. As an example of AMT, if the normal tax calculated was $200,000 due, but the AMT calculation denied certain deductions and resulted in tax calculated of $220.000, the taxpayer would have to pay the additional $20,000.
To encourage more access to capital, the Act provides for avoiding a secondary or additional tax on S Corporations, which are entities that have the traditional corporate protection for shareholders, but normally are not taxed at the corporate level; thus it avoids the "double tax." That is, with an S Corporation, there is normally only a tax at the individual shareholder level. Congress created S Corporations to allow for an entity with corporate protection and with no corporate lax. However, in some instances, there could be a tax at the corporate level if the corporation sells property. To avoid this corporate tax, the Act allows for corporations that were C Corporations (regular corporations that pay corporate taxes), to elect to become S Corporations (corporate level and individual level) if the S Corporation can show it held the property being sold for at least five years. (Since a C Corporation pays corporate tax and an S Corporation normally pays no corporate tax, some C Corporations attempted to switch their status to S Corporations right before they sold property. To prevent such action, Congress provided that S Corporations would be taxed on the gain from the sale of such property, unless they showed a longer holding period, such as the five years noted.)
To encourage more investments in small businesses, the Act allows a more accelerated write-off of tangible personal property used in the trade or business. …