Business Incentives

The FY 2011 budget appropriates more than $100 billion to fund job creation, including a new jobs tax credit, enhanced expensing, 50-percent bonus depreciation, and a permanent research tax credit. The proposals would also extend certain business extender provisions and would increase the tax break on qualified small business stock to 100 percent.

COMMENT: Unlike the FY 2010 budget, the new budget does not propose an extended net operating loss (NOL) carryback for small businesses since a modified NOL carryback for 2009 has already been enacted under the Worker, Homeownership and Business Assistance Act (2009 Worker Act).

Hiring Tax Credit

The budget proposes $33 billion in small business jobs and wages tax credits. The tax credit would provide a $5,000 tax credit for every net new employee hired by a qualified small business in 2010. The total credit will be capped at $500,000 for any one firm. The proposal would also reimburse small businesses that increase wages or hours for existing employees for the Social Security payroll taxes they pay on real increases in their payrolls, up to the current Social Security maximum wage base of $106,800.

IMPACT: President Obama predicted that the proposed credit comes at the “perfect time…because the economy is growing, but businesses are still hesitant to start hiring again.” The president added that “employers would actually be able to claim the credit every quarter, as opposed to waiting a whole year.”

COMMENT: Several different versions of a job creation tax credit are being discussed in the Senate. One proposal would provide a tax credit of 20 percent for small employers (those with fewer than 100 employees) and a tax credit of 15 percent for large employers (those with more than 100 full-time employees).

Code Sec. 179 Expensing

Congress has regularly enhanced Code Sec. 179 expensing in recent years by increasing the maximum deduction amount and the phase-out limit. For 2009, the maximum Code Sec. 179 deduction was $250,000 and the phase-out limit for qualifying property purchased during the year began at $800,000. The president proposes extending enhanced Code Sec. 179 expensing at 2009 levels through December 31, 2010. The proposal would extend to qualified property placed in service in a tax year beginning in 2010, the rules under Code Sec. 179 that are in effect for tax years beginning in 2009.

COMMENT: Under the president’s proposal, off-the-shelf computer software will continue to be considered Code Sec. 179 property for tax years beginning in 2010. Senate Finance  Committee ranking member Charles Grassley, R-Iowa, has proposed in his Small Business Tax Relief Act of 2009 an even more aggressive plan to jumpstart equipment purchases by businesses: a $500,000 limit on the deduction, with a phase-out starting at $2 million.

Bonus Depreciation

In tandem with enhanced Code Sec. 179 expensing, Congress has regularly provided for bonus depreciation. An additional first-year depreciation deduction was allowed for qualified property placed in service in 2009. The deduction, which was allowed for regular and AMT purposes, equaled 50 percent of the cost of qualified property placed in service in 2009 (through 2010 for certain longer lived (10-year) and transportation property). The president proposes extending the additional first-year bonus.

IMPACT: Extending bonus depreciation into 2010 is one of the most expensive provisions proposed by the president, projected to immediately cost over $37 billion in 2010-2011, with only a portion of that cost made up before 2020.

COMMENT: The president also proposes extending for one year the now-expired election to claim additional research or minimum tax credits in lieu of the additional depreciation deduction.

Qualified Small Business Stock

The president’s FY 2011 budget proposes to raise, from 75 percent to 100 percent, the exclusion currently available on gain realized on qualified small business stock. The exclusion is intended to help small businesses raise capital. Additionally, the administration would eliminate as an AMT preference item the taxable portion of the gain.

Under the 2009 Recovery Act, individuals and certain non-corporate taxpayers may exclude from taxable income 75 percent of their gains from the sale of certain small business stock acquired after February 17, 2009 and before January 1, 2011. The 75 percent exclusion – which would be retroactively raised to 100 percent – would be available for qualifying small business stock acquired after February 17, 2009. To be excludable, the stock must be held for five years. To qualify as a small business, the corporation, when the stock is issued, may not have gross assets exceeding $50 million and may not be an S corporation.

IMPACT: The 100 percent exclusion would result in an effective tax rate of zero percent. This tax break is especially valuable to higher-income taxpayers who can expect, under proposals by the Obama administration, the capital gains tax rate to revert to 20 percent after 2010 (the pre-2003 tax cut rate).

Research Tax Credit

The research and experimentation credit, which provides a temporary tax credit of 20 percent of qualified research expenses above a certain base amount (and all eligible payments to energy research consortiums for energy research) expired on December 31, 2009. The administration views the research credit as important to encouraging technological developments important to economic growth. The president proposes to make the research credit permanent.

IMPACT: Making the research credit permanent has been proposed numerous times over the course of the last several years, including by the Bush administration. However, making the research credit permanent is estimated to cost $82.6 billion over ten years. The “sticker shock” of this tax break, especially in light of the economic recession, is likely to compel Congress to continue keeping it temporary.

Cell Phones

The administration proposes to remove cell phones from their current classification as listed property, thereby lifting the strict substantiation requirements of use and the additional limits placed on depreciation deductions. In addition, the fair market value of personal use of a cell phone (or other similar device) provided to an employee predominantly for business purposes would be excluded from gross income.

IMPACT: This “listed property” designation was imposed on cell phones when they were novel, expensive, and not many individuals owned one. Today, not only are cell phones widely available and used, but necessary for doing business. The IRS Commissioner announced in early January that the IRS would call a temporary halt to enforcing strict substantiation on cell phone use until Congress makes good on its leadership’s promise to pass remedial legislation.

Business Extenders

The president’s FY 2011 budget specifically identifies some business tax breaks for extension through December 31, 2011. They are:

• Subpart F active financing (income derived from the active conduct of banking, finance, insurance, or similar business is temporarily excluded from subpart F income);
• Tax treatment of certain payments to controlling exempt organizations (excludes these payments from unrelated business income);
• New Markets Tax Credit (allows a credit for making qualified equity investments in designated Community Development Entities);
• Qualified leasehold improvements (improvements eligible for a 15-year Modified Accelerated Cost Recovery System (MACRS) recovery period);
• Qualified restaurant improvements (eligible for a 15-year MACRS recovery period); and
• Empowerment and community renewal zones (eligible for special tax incentives, such as tax-exempt financing initiatives).

COMMENT: Other business extenders, such as brownfields remediation, the Indian employment credit, and more, are also likely be extended by Congress sometime in 2010 and made retroactive to January 1, 2010. For more details about the business extenders, see the CCH Tax Briefing: Tax Extenders on CCH Intelliconnect and the CCH Tax Research Network.

COMMENT: The president proposes to permit the New Markets Tax Credit to offset AMT liability and allocate $5 billion for each of 2010 and 2011.

Cash Assistance to States in Lieu of Low Income Housing Tax Credits

Under the 2009 Recovery Act, a state may elect to receive a cash amount in lieu of a portion of the state’s 2009 low income housing tax credit (LIHTC) credit ceiling. The president proposes to allow states to elect cash assistance in lieu of LIHTCs for 2010.

Advanced Energy Manufacturing Projects

Taxpayers investing in eligible property used in a qualifying advanced energy project may qualify for a tax credit. The president proposes providing an additional $5 billion of tax credits for investment in qualified property used in a qualifying advanced energy manufacturing project. The change would be effective on the date of enactment.

Source: CCH, a Wolters Kluwer business