On September 27, 2010, President Obama signed into law the Small Business Jobs and Credit Act of 2010 (Act). The Act was designed to provide immediate relief and is expected to provide critical resources to help small businesses continue to drive economic recovery and create jobs. Significantly, the Act authorizes the creation of a $30 billion fund to encourage lending by community banks to small businesses. The Act also contains a series of tax incentives and revenue changes to the Internal Revenue Code.
$30 Billion Small Business Lending Fund
The Act establishes a new $30 billion Small Business Lending Fund which will be administered by the Treasury. The Fund will be available to community banks, which could use the money to leverage billions more in loans. The Act will provide smaller community banks with low cost capital – as low as 1% – if they go above and beyond 2009 small business lending levels.
Impact on SBA Programs
The Act increases the maximum loan size for U.S. Small Business Administration (SBA) Loan Programs. Among other provisions, the Act permanently raises the maximum size for SBA’s two largest loan programs, increasing the maximum 7(a) and 504 loans from $2 million to $5 million, and the maximum 504 manufacturing-related loan from $4 million to $5.5 million. In addition, the Act increases the maximum loan size for SBA Express Loans from $350,000 to $1 million. The desired effect is to provide greater access for small businesses to working capital that, in turn, could be used to purchase new inventory and to obtain new orders with the ultimate goal of creating new jobs.
In addition to the lending expansion, an incentive is being offered to strengthen innovative state small business programs, supplying at least $1.5 billion in small business lending through a new State Small Business Credit Initiative. This initiative is designed to encourage private-sector lenders to extend additional credit.
Significant Tax Provisions
The following tax cuts go into effect immediately:
• Extension and expansion of small businesses’ ability to immediately expense capital investments: The previous expensing limitation of $250,000 was increased to $500,000 and expanded to include certain qualified real property. This benefit is available to property placed in service after January 1, 2010, and tax years beginning on or after January 1, 2010. This provision applies only in 2010 and 2011 tax years.
• Extension of bonus depreciation: This tax cut benefits businesses acquiring property that meets the requirements of Internal Revenue Code Section 168(k) for property purchased and placed in service in 2010. This is a temporary one year extension of bonus depreciation and generally applies only to property placed in service in 2010.
• A new deduction of health insurance costs for the self-employed: This benefit applies to self-employed individuals for the 2010 tax year only.
• Tax relief and simplification for cell phone deductions: Businesses that provide employees with cell phones or other communication devices can permanently deduct expenses associated therewith for tax years beginning after December 31, 2009.
• An increase in the deduction for entrepreneurs’ start-up expenses: The Act temporarily increases the amount of start-up expenditures that entrepreneurs can deduct from their taxes for the 2010 tax year from $5,000 to $10,000.
• Five-year carryback of general business credits: The Act will allow certain small business to “carry back” their general business credits to offset five years of taxes. This benefit applies only in the 2010 tax year.
• Limitations on penalties for errors in tax reporting: Beginning this year, the penalty for failing to report certain tax transactions changes from a fixed dollar amount to a percentage of the tax benefits from the misreported transaction.
• Elimination of 100% of gain on sale of certain small business stock: There is a limitation of one-year on stock acquired after the date of enactment and before January 1, 2011, but the 100% exclusion for sale of stock is permanent if the stock meets requirements for qualified small business stock.
• Reporting of rental property: Beginning in 2011, taxpayers who receive rental income from leasing real property will be required to file information returns (generally, Form 1099) with the IRS and with service providers (e.g., plumbers, painters, accountants) to report payments of $600 or more to that service provider in any tax year. There will be exemptions from these requirements, but those are to be determined under forthcoming IRS regulations.
Federal Contracting Implications
The desired effect of the Act is to create more opportunities for small businesses. The Act provides grants to enable small businesses to team up with each other to compete for larger and more complex federal government contracts. In order to create a more level playing field for small businesses, greater accountability will be required from large business prime contractors to promptly pay small business subcontractors. Moreover, levy rules for federal contractors with federal tax liabilities have been permanently changed by the Act. Additionally, the Act makes it harder for agencies to “bundle” contracts, a practice that commonly eliminates opportunities for small businesses. The Act adds teeth to the current regulations, making agencies more accountable for reaching small business goals.
Small business owners are encouraged to explore which provisions of the Act may apply to their business, when those provisions begin to apply and how long the relevant provisions will apply.
For further information about the impact of the Act on your business, please contact Marian A. Kornilowicz, Chair of the Business Transactions Group at Cohen Seglias.