Provisions of the Small Business Jobs and Credit Act of 2010

President Obama signed into law the Small Business Jobs and Credit Act (SBJC) of 2010 on Sept. 27. More than $12 billion in tax incentives and relief provisions that are contained in the Act will directly or indirectly affect law firms, partners, their staffs and their clients. The Act provides tax relief such as favorable expensing provision for assets acquisition; liberalizes business credit carrybacks; encourages investments in start-ups; and promotes retirement savings. The following are highlights of provisions that directly or indirectly affect law firms.

Increased Section 179 Expense Deduction

The 2008 Economic Stimulus Act increased the Section 179 expense deduction to $250,000 and the investment amount at which the Section 179 deduction phases out to $800,000. The Hire Act, passed in March, 2010, extended the Section 179 expense deduction limit one more year to Dec. 31, 2010. The SBJC Act provides more relief for law firms and their clients to encourage them to invest in business assets and capital improvement by increasing both the Section 179 expense deduction limit as well as the investment amount at which the Section 179 deduction begins to phase out. The expensing amount increases to $500,000 under the new tax Act for tax years 2010 and 2011.

The maximum annual Section 179 expensing amount generally is reduced dollar-for-dollar by the cost of eligible property placed in service by law firms during the year in excess of a specified investment amount. Prior to the new law, the Section 179 expense deduction starts to phase out for every dollar of property placed in service in excess of $800,000 for year 2010 and reduced to $200,000 for year beginning after 2010. This investment amount increases to $2 million under the new tax Act for tax years 2010 and 2011.

The new tax Act also broadens the qualified property for Section 179 expensing election to include qualified real property. Qualified real property includes: 1) qualified leasehold improvement property; 2) qualified restaurant property; and 3) qualified retail improvement property. Prior to the change in law, the qualified property for Section 179 expensing election was limited to depreciable tangible personal property such as office equipment, and “off-the-shelf” computer software. The new Act allows law firms to elect up to $250,000 of qualified real property for Section 179 expensing deduction. Section 179 is subject to an income limitation; the deduction can only offset business income and cannot reduce net income to below zero. The portion of the Section 179 expenses attributable to the qualified real property that exceeds the income limitation must be used in 2011. To the extent it cannot be used, the unused portion will be treated as assets placed in service and depreciated in the year beginning in 2011.

Section 179 limit increases will generate large deductions in years 2010 and 2011. Law firms and their clients may consider making major assets acquisitions if their business qualifies for this deduction.

Extension of 50% Bonus Depreciation

Bonus depreciation was first introduced and allowed in 2001 as part of the Job Creation and Worker Assistance Act. The bonus depreciation generated from this Act generally expired for property placed in service after 2004 with some transitional exceptions. Fifty percent bonus depreciation was returned in 2008 under the Economic Stimulus Tax Act.

Under prior law, to be eligible to claim the additional 50% bonus depreciation, the law firms and their clients had to meet all of the following requirements:

• The property must be qualified property to which Modified Accelerated Cost Recovery System (MACRS) rules apply with an applicable recovery period of 20 years or less. It generally includes most machinery, equipment or other tangible personal property, computer software, and certain leasehold improvements;
• The original use of the property must begin with the law firm after Dec. 31, 2007 and before Jan. 1, 2010.
• The property must meet a timely acquisition requirement in which the property must be acquired by the law firm after Dec. 31, 2007 and before Jan. 1, 2010, or under a binding written contract entered into after Dec. 31, 2007 and before Jan. 1, 2010.

The property must meet a timely-placed-in-service requirement in which the property must be placed in service after Dec. 31, 2007 and before Jan. 1, 2010.

The new Act extends 50% bonus depreciation for one year to Dec. 31, 2010, which allows law firms and their clients to claim an additional 50% bonus depreciation deduction for qualifying property acquired and placed in service in 2010. It also extends 50% bonus depreciation to 2011 for certain long-production-period property as well. Fifty percent bonus depreciation deduction is allowed for both regular tax and Alternative Minimum Tax purposes. Law firms that do not want to take the additional first year bonus depreciation can elect out by attaching a statement to their return indicating which class of property they elect not to claim bonus depreciation on. This election must be made by the due date (including extensions) for filing the law firm's 2010 federal income tax return.

The allowance of bonus depreciation on qualified leasehold improvements, qualified restaurant property and qualified retail improvement property based on 15-year lives expired in Dec. 31, 2009 notwithstanding the new tax Act. Extension of this provision is pending on the passage of the American Jobs and Closing Tax Loopholes Act (the “tax extenders bill”), which would extend these qualified properties for one year to Dec. 31, 2010. It is likely that the tax extenders bill will be passed, but not until after the election or possibly not until a new congress is seated in 2011.

Extension of First-Year Depreciation Limit for
Passenger Automobiles

Code Section 280F (a) imposes dollar limits on the depreciation deductions that a law firm can claim on “passenger automobiles.” These include any four-wheeled vehicles manufactured primarily for use on public streets, roads, and highways that have an unloaded gross vehicle weight of 6,000 pounds or less. Prior law increased the first-year depreciation limits for these vehicles by $8,000 assuming they were eligible for the 50% bonus depreciation deduction for qualified property placed in service before Jan. 1, 2010. The new Act extends the placed in service deadline Dec. 31, 2010, which allows law firms to claim the $8,000 depreciation deductions for qualified automobile placed in service during 2010.

To be eligible for the additional 50% depreciation deduction, the original use of the automobile must begin with the law firm in 2010; the automobile must be predominantly used (i.e., more than 50%) in the law firm's trade or business; and the automobile must be acquired and placed in service by the law firm in 2010. If all of these requirements are met, the maximum 2010 depreciation deduction for the qualified “passenger automobiles” that are placed in service in 2010 would be $11,060.

Five-Year Carryback of Eligible Small Business (ESB) Credits

Prior to the change in law, a law firm or its clients could carry back unused business credits for one year and carry forward these credits for 20 years. The general business credits include, but are not limited to, the Investment Credit, the Research and Development Tax Credit, the New Markets Tax Credit, the Work Opportunity Credit, the Low Income Housing Credit, the Empowerment Zone Employment Credit and the Employer Social Security Credit. The new Act allows certain eligible small businesses to extend the carryback period to five years for credits generated in tax years beginning after Dec. 31, 2009. It also extends the carry forward period from 20 years to 25 years. Eligible small businesses for this purpose is defined as a non-publicly traded corporation, a partnership or sole proprietorship with average gross receipts for the prior three-year period of $50 million or less.

There was a limitation imposed on the amount of general business credit that was allowable on a law firm partner's tax return. Generally, the general business credit was not allowed if the law firm partner was subject to Alternative Minimum Tax (AMT). For the tax year beginning in 2010, the Act allows ESB credits to offset AMT liability. The Act treats the AMT as zero when applying the ESB credits limitation calculation. Thus, the ESB credit can offset both regular and AMT liability. However, certain credits such as the Research and Development Credit and New Market Tax Credits expired in Dec. 31, 2009. In order to take advantage of this provision regarding expired credits, one must wait for the passage of the tax extenders bill, which would extend those credits for one year through the end of 2010.

100% Gain Exclusion for Qualified Small Business Stock (QSBS) for Both Regular Tax and AMT

Code Section 1202 allows law firm partners to exclude from gross income 50% of the gain on the sale of qualified small business stock (QSBS). To qualify for this treatment, the QSBS must have been acquired at original issue; the gross assets of the corporation must not exceed $50 million; and the holding period for QSBS must be at least five years before sale. The 2009 Recovery Act increased the 50% exclusion to 75% for law firm partners and their clients who acquired the QSBS from Feb. 18 through Dec. 31, 2010. They can only exclude 50% of the gain realized on disposition of QSBS if it was acquired before Feb. 18, 2009 or after Dec. 31, 2010. For AMT purposes, a certain percentage of the QSBS was treated as a tax preference item and therefore included as income in the AMT calculation prior to the change of law.

The new Act provides relief for law firm partners and their clients who acquire QSBS stock from Sept. 28, 2010 through Dec. 31, 2010; a 100% exclusion of gain realized for both regular and AMT purposes. This means that no regular tax or AMT is imposed on the sale of QSBS as long as the law firm partners and their clients acquired the QSBS during that period, and held the QSBS for more than five years before disposition of the stock.

Reduction in S Corporation Built-in Gain Period

Prior to the new Act, law firms and their clients that were a C corporation and converted to an S Corporation generally required holding any appreciated assets for at least 10 years following the conversion. If law firms and their clients disposed of built-in gain assets during the ten years period, the S corporation would pay a tax on the built-in gain at the highest corporate tax rate, which is currently 35%. The American Recovery and Reinvestment Act of 2009 (ARRA) temporarily reduced the period to seven years for dispositions made in 2009 and 2010, provided the seventh tax-year recognition period ended before tax years 2009 and 2010. Generally, this means that only corporations that converted in 2002 or 2003 and disposed of assets in 2009 or 2010 were eligible for the exclusion. The new Act creates a new exclusion for sales that occur in 2011 if the S Corporation converted in 2006. This provides a planning opportunity for law firms and their clients that elected S corporation status in 2006 to consider delaying the sale of the built-in gain assets until year 2011 to avoid built-in gain tax.

Penalty for Failure to Report Shelter Transaction

Law firms or their clients who may have participated in tax shelter transactions such as reportable or listed transactions must disclosure such information on their tax return that is filed with the Internal Revenue Service. Code Section 6707A imposes a penalty for any person who fails to do so. Reportable transactions are those identified by IRS as having a potential for tax avoidance or evasion. Listed transactions are reportable transactions specially identified by IRS as tax avoidance transactions. Prior to the new Act, the penalty for failure to report a reportable transaction was $10,000 for an individual taxpayer and $50,000 for others; $100,000 and $200,000 respectively for listed transactions.

Under the new Act, the penalty imposed for any reportable transaction is 75% of the decrease in tax shown on the tax return as a result of the transaction. The Act also set a minimum and maximum penalty for failure to disclose reportable and listed transactions. The minimum penalty for both reportable and listed transactions would be $5,000 for individual taxpayers and $10,000 for all other taxpayers. The maximum penalty for reportable transactions would be $10,000 for individual taxpayers and $50,000 for other taxpayers; and $100,000 and $200,000 respectively for listed transactions. The change is retroactive to any penalty assessed after Dec. 31, 2006. The retroactive date provides refund opportunities for those who have previously paid the Sec. 6707A penalty at higher amounts.

Deduction of Self-Employed Health Insurance in Computing Tax

Self-employed individuals such as law firm partners are subject to Social Security taxes on their self-employment income from their business. They can deduct as a business expense the amount of health insurance paid for themselves, spouse and child who has not reach the age of 27. The amount of premium is deducted as an adjustment to adjusted gross income on the personal income tax return. However, the health insurance was not a deduction in determining their self-employment income for Social Security tax. The new Act provides one-year relief in 2010 to allow self-employed individuals to deduct their cost of health insurance from their self-employment income.

Cell Phones No Longer Listed Property

Cell phones and other similar telephone communications equipment were listed property under Section 280(F). Law firm partners must meet certain substantiation requirements as to the amount of expenses, the use of the property and the business purpose of the property. The Act removes cell phones and other similar telecommunications equipment from the definitions of “listed property” for tax years beginning after Dec. 31, 2009. The substantiation requirements and special depreciation (such as straight-line depreciation method for less than 50% business use) that applies to listed property are no longer applicable to cell phones.

Increase of Start-up Expenses Deduction

Prior to the law change, law firms could deduct up to $5,000 of start-up expenditure in the year in which the trade or business begins. The $5,000 was reduced when the expenditures exceeded $5,000. The entire amount is phased out when the cumulative expenditure exceeds $50,000. The new Act increases the amount that can be deducted from $5,000 to $10,000, and the phased-out threshold increases from $50,000 to $60,000 for tax year 2010 only.

Promoting Retirement Savings

The new Act liberalizes and provides more options for law firm partners and their staffs for their retirement plan money. The Act authorizes a qualified 401(k) plan, 403(b) annuity plan, or governmental Section 457 plan to maintain a qualified Roth contribution program. An individual can rollover their pre-tax retirement money to the Roth account effective for distributions made after Sept. 27, 2010. The amount of rollover is includible in the taxpayer's income over the two-year period commencing with the first tax year beginning in 2011. The taxpayer can elect not to defer the income over two years by including the taxable portion of the distribution in gross income in 2010.

Rental Income Reporting

Generally, all taxpayers who are in a trade or business and make payments of $600 or more to another person in the course of business are required to report the information to IRS. The prior law did not treat the rental real estate activity as trade or business; thus, was not subject to reporting requirement. The new Act treats real estate rental as trade or business for the information reporting purposes. Any individuals who makes a payment of $600 or more to a service provider is required to provide an information return (i.e., Form 1099-Misc) to the IRS and the service provider. The provision is effective for payments made after Dec. 31, 2010.

Increase of Information Return Penalty

The Act increases the penalties for failure to file a correct information return. The first-tier penalty (not filed within 30 days) increases from $15 to $30, and the calendar-year maximum limit increases from $75,000 to $250,000. The second-tier penalty (not filed by Aug. 1) increases from $30 to $60, and the calendar-year maximum limit increases from $150,000 to $500,000. The third-tier penalty (filed after Aug. 1) increases from $50 to $100, and the calendar-year maximum limit increases from $150,000 to $500,000. The minimum penalty for each failure to file due to intentional disregard increases from $100 to $250.

Richard H. Stieglitz, CPA, a member of this newsletter's Board of Editors, is a Tax Partner and Rita Chu, CPA, is a Senior Tax Manager in the New York accounting firm of Anchin, Block & Anchin LLP, which specializes in providing accounting, tax, and consulting services to law firms. Mr. Stieglitz can be reached at 212-840-3456 or via e-mail at [email protected].

President Obama signed into law the Small Business Jobs and Credit Act (SBJC) of 2010 on Sept. 27. More than $12 billion in tax incentives and relief provisions that are contained in the Act will directly or indirectly affect law firms, partners, their staffs and their clients. The Act provides tax relief such as favorable expensing provision for assets acquisition; liberalizes business credit carrybacks; encourages investments in start-ups; and promotes retirement savings. The following are highlights of provisions that directly or indirectly affect law firms.

Increased Section 179 Expense Deduction

The 2008 Economic Stimulus Act increased the Section 179 expense deduction to $250,000 and the investment amount at which the Section 179 deduction phases out to $800,000. The Hire Act, passed in March, 2010, extended the Section 179 expense deduction limit one more year to Dec. 31, 2010. The SBJC Act provides more relief for law firms and their clients to encourage them to invest in business assets and capital improvement by increasing both the Section 179 expense deduction limit as well as the investment amount at which the Section 179 deduction begins to phase out. The expensing amount increases to $500,000 under the new tax Act for tax years 2010 and 2011.

The maximum annual Section 179 expensing amount generally is reduced dollar-for-dollar by the cost of eligible property placed in service by law firms during the year in excess of a specified investment amount. Prior to the new law, the Section 179 expense deduction starts to phase out for every dollar of property placed in service in excess of $800,000 for year 2010 and reduced to $200,000 for year beginning after 2010. This investment amount increases to $2 million under the new tax Act for tax years 2010 and 2011.

The new tax Act also broadens the qualified property for Section 179 expensing election to include qualified real property. Qualified real property includes: 1) qualified leasehold improvement property; 2) qualified restaurant property; and 3) qualified retail improvement property. Prior to the change in law, the qualified property for Section 179 expensing election was limited to depreciable tangible personal property such as office equipment, and “off-the-shelf” computer software. The new Act allows law firms to elect up to $250,000 of qualified real property for Section 179 expensing deduction. Section 179 is subject to an income limitation; the deduction can only offset business income and cannot reduce net income to below zero. The portion of the Section 179 expenses attributable to the qualified real property that exceeds the income limitation must be used in 2011. To the extent it cannot be used, the unused portion will be treated as assets placed in service and depreciated in the year beginning in 2011.

Section 179 limit increases will generate large deductions in years 2010 and 2011. Law firms and their clients may consider making major assets acquisitions if their business qualifies for this deduction.

Extension of 50% Bonus Depreciation

Bonus depreciation was first introduced and allowed in 2001 as part of the Job Creation and Worker Assistance Act. The bonus depreciation generated from this Act generally expired for property placed in service after 2004 with some transitional exceptions. Fifty percent bonus depreciation was returned in 2008 under the Economic Stimulus Tax Act.

Under prior law, to be eligible to claim the additional 50% bonus depreciation, the law firms and their clients had to meet all of the following requirements:

• The property must be qualified property to which Modified Accelerated Cost Recovery System (MACRS) rules apply with an applicable recovery period of 20 years or less. It generally includes most machinery, equipment or other tangible personal property, computer software, and certain leasehold improvements;
• The original use of the property must begin with the law firm after Dec. 31, 2007 and before Jan. 1, 2010.
• The property must meet a timely acquisition requirement in which the property must be acquired by the law firm after Dec. 31, 2007 and before Jan. 1, 2010, or under a binding written contract entered into after Dec. 31, 2007 and before Jan. 1, 2010.

The property must meet a timely-placed-in-service requirement in which the property must be placed in service after Dec. 31, 2007 and before Jan. 1, 2010.

The new Act extends 50% bonus depreciation for one year to Dec. 31, 2010, which allows law firms and their clients to claim an additional 50% bonus depreciation deduction for qualifying property acquired and placed in service in 2010. It also extends 50% bonus depreciation to 2011 for certain long-production-period property as well. Fifty percent bonus depreciation deduction is allowed for both regular tax and Alternative Minimum Tax purposes. Law firms that do not want to take the additional first year bonus depreciation can elect out by attaching a statement to their return indicating which class of property they elect not to claim bonus depreciation on. This election must be made by the due date (including extensions) for filing the law firm's 2010 federal income tax return.

The allowance of bonus depreciation on qualified leasehold improvements, qualified restaurant property and qualified retail improvement property based on 15-year lives expired in Dec. 31, 2009 notwithstanding the new tax Act. Extension of this provision is pending on the passage of the American Jobs and Closing Tax Loopholes Act (the “tax extenders bill”), which would extend these qualified properties for one year to Dec. 31, 2010. It is likely that the tax extenders bill will be passed, but not until after the election or possibly not until a new congress is seated in 2011.

Extension of First-Year Depreciation Limit for
Passenger Automobiles

Code Section 280F (a) imposes dollar limits on the depreciation deductions that a law firm can claim on “passenger automobiles.” These include any four-wheeled vehicles manufactured primarily for use on public streets, roads, and highways that have an unloaded gross vehicle weight of 6,000 pounds or less. Prior law increased the first-year depreciation limits for these vehicles by $8,000 assuming they were eligible for the 50% bonus depreciation deduction for qualified property placed in service before Jan. 1, 2010. The new Act extends the placed in service deadline Dec. 31, 2010, which allows law firms to claim the $8,000 depreciation deductions for qualified automobile placed in service during 2010.

To be eligible for the additional 50% depreciation deduction, the original use of the automobile must begin with the law firm in 2010; the automobile must be predominantly used (i.e., more than 50%) in the law firm's trade or business; and the automobile must be acquired and placed in service by the law firm in 2010. If all of these requirements are met, the maximum 2010 depreciation deduction for the qualified “passenger automobiles” that are placed in service in 2010 would be $11,060.

Five-Year Carryback of Eligible Small Business (ESB) Credits

Prior to the change in law, a law firm or its clients could carry back unused business credits for one year and carry forward these credits for 20 years. The general business credits include, but are not limited to, the Investment Credit, the Research and Development Tax Credit, the New Markets Tax Credit, the Work Opportunity Credit, the Low Income Housing Credit, the Empowerment Zone Employment Credit and the Employer Social Security Credit. The new Act allows certain eligible small businesses to extend the carryback period to five years for credits generated in tax years beginning after Dec. 31, 2009. It also extends the carry forward period from 20 years to 25 years. Eligible small businesses for this purpose is defined as a non-publicly traded corporation, a partnership or sole proprietorship with average gross receipts for the prior three-year period of $50 million or less.

There was a limitation imposed on the amount of general business credit that was allowable on a law firm partner's tax return. Generally, the general business credit was not allowed if the law firm partner was subject to Alternative Minimum Tax (AMT). For the tax year beginning in 2010, the Act allows ESB credits to offset AMT liability. The Act treats the AMT as zero when applying the ESB credits limitation calculation. Thus, the ESB credit can offset both regular and AMT liability. However, certain credits such as the Research and Development Credit and New Market Tax Credits expired in Dec. 31, 2009. In order to take advantage of this provision regarding expired credits, one must wait for the passage of the tax extenders bill, which would extend those credits for one year through the end of 2010.

100% Gain Exclusion for Qualified Small Business Stock (QSBS) for Both Regular Tax and AMT

Code Section 1202 allows law firm partners to exclude from gross income 50% of the gain on the sale of qualified small business stock (QSBS). To qualify for this treatment, the QSBS must have been acquired at original issue; the gross assets of the corporation must not exceed $50 million; and the holding period for QSBS must be at least five years before sale. The 2009 Recovery Act increased the 50% exclusion to 75% for law firm partners and their clients who acquired the QSBS from Feb. 18 through Dec. 31, 2010. They can only exclude 50% of the gain realized on disposition of QSBS if it was acquired before Feb. 18, 2009 or after Dec. 31, 2010. For AMT purposes, a certain percentage of the QSBS was treated as a tax preference item and therefore included as income in the AMT calculation prior to the change of law.

The new Act provides relief for law firm partners and their clients who acquire QSBS stock from Sept. 28, 2010 through Dec. 31, 2010; a 100% exclusion of gain realized for both regular and AMT purposes. This means that no regular tax or AMT is imposed on the sale of QSBS as long as the law firm partners and their clients acquired the QSBS during that period, and held the QSBS for more than five years before disposition of the stock.

Reduction in S Corporation Built-in Gain Period

Prior to the new Act, law firms and their clients that were a C corporation and converted to an S Corporation generally required holding any appreciated assets for at least 10 years following the conversion. If law firms and their clients disposed of built-in gain assets during the ten years period, the S corporation would pay a tax on the built-in gain at the highest corporate tax rate, which is currently 35%. The American Recovery and Reinvestment Act of 2009 (ARRA) temporarily reduced the period to seven years for dispositions made in 2009 and 2010, provided the seventh tax-year recognition period ended before tax years 2009 and 2010. Generally, this means that only corporations that converted in 2002 or 2003 and disposed of assets in 2009 or 2010 were eligible for the exclusion. The new Act creates a new exclusion for sales that occur in 2011 if the S Corporation converted in 2006. This provides a planning opportunity for law firms and their clients that elected S corporation status in 2006 to consider delaying the sale of the built-in gain assets until year 2011 to avoid built-in gain tax.

Penalty for Failure to Report Shelter Transaction

Law firms or their clients who may have participated in tax shelter transactions such as reportable or listed transactions must disclosure such information on their tax return that is filed with the Internal Revenue Service. Code Section 6707A imposes a penalty for any person who fails to do so. Reportable transactions are those identified by IRS as having a potential for tax avoidance or evasion. Listed transactions are reportable transactions specially identified by IRS as tax avoidance transactions. Prior to the new Act, the penalty for failure to report a reportable transaction was $10,000 for an individual taxpayer and $50,000 for others; $100,000 and $200,000 respectively for listed transactions.

Under the new Act, the penalty imposed for any reportable transaction is 75% of the decrease in tax shown on the tax return as a result of the transaction. The Act also set a minimum and maximum penalty for failure to disclose reportable and listed transactions. The minimum penalty for both reportable and listed transactions would be $5,000 for individual taxpayers and $10,000 for all other taxpayers. The maximum penalty for reportable transactions would be $10,000 for individual taxpayers and $50,000 for other taxpayers; and $100,000 and $200,000 respectively for listed transactions. The change is retroactive to any penalty assessed after Dec. 31, 2006. The retroactive date provides refund opportunities for those who have previously paid the Sec. 6707A penalty at higher amounts.

Deduction of Self-Employed Health Insurance in Computing Tax

Self-employed individuals such as law firm partners are subject to Social Security taxes on their self-employment income from their business. They can deduct as a business expense the amount of health insurance paid for themselves, spouse and child who has not reach the age of 27. The amount of premium is deducted as an adjustment to adjusted gross income on the personal income tax return. However, the health insurance was not a deduction in determining their self-employment income for Social Security tax. The new Act provides one-year relief in 2010 to allow self-employed individuals to deduct their cost of health insurance from their self-employment income.

Cell Phones No Longer Listed Property

Cell phones and other similar telephone communications equipment were listed property under Section 280(F). Law firm partners must meet certain substantiation requirements as to the amount of expenses, the use of the property and the business purpose of the property. The Act removes cell phones and other similar telecommunications equipment from the definitions of “listed property” for tax years beginning after Dec. 31, 2009. The substantiation requirements and special depreciation (such as straight-line depreciation method for less than 50% business use) that applies to listed property are no longer applicable to cell phones.

Increase of Start-up Expenses Deduction

Prior to the law change, law firms could deduct up to $5,000 of start-up expenditure in the year in which the trade or business begins. The $5,000 was reduced when the expenditures exceeded $5,000. The entire amount is phased out when the cumulative expenditure exceeds $50,000. The new Act increases the amount that can be deducted from $5,000 to $10,000, and the phased-out threshold increases from $50,000 to $60,000 for tax year 2010 only.

Promoting Retirement Savings

The new Act liberalizes and provides more options for law firm partners and their staffs for their retirement plan money. The Act authorizes a qualified 401(k) plan, 403(b) annuity plan, or governmental Section 457 plan to maintain a qualified Roth contribution program. An individual can rollover their pre-tax retirement money to the Roth account effective for distributions made after Sept. 27, 2010. The amount of rollover is includible in the taxpayer's income over the two-year period commencing with the first tax year beginning in 2011. The taxpayer can elect not to defer the income over two years by including the taxable portion of the distribution in gross income in 2010.

Rental Income Reporting

Generally, all taxpayers who are in a trade or business and make payments of $600 or more to another person in the course of business are required to report the information to IRS. The prior law did not treat the rental real estate activity as trade or business; thus, was not subject to reporting requirement. The new Act treats real estate rental as trade or business for the information reporting purposes. Any individuals who makes a payment of $600 or more to a service provider is required to provide an information return (i.e., Form 1099-Misc) to the IRS and the service provider. The provision is effective for payments made after Dec. 31, 2010.

Increase of Information Return Penalty

The Act increases the penalties for failure to file a correct information return. The first-tier penalty (not filed within 30 days) increases from $15 to $30, and the calendar-year maximum limit increases from $75,000 to $250,000. The second-tier penalty (not filed by Aug. 1) increases from $30 to $60, and the calendar-year maximum limit increases from $150,000 to $500,000. The third-tier penalty (filed after Aug. 1) increases from $50 to $100, and the calendar-year maximum limit increases from $150,000 to $500,000. The minimum penalty for each failure to file due to intentional disregard increases from $100 to $250.

Richard H. Stieglitz, CPA, a member of this newsletter's Board of Editors, is a Tax Partner and Rita Chu, CPA, is a Senior Tax Manager in the New York accounting firm of Anchin, Block & Anchin LLP, which specializes in providing accounting, tax, and consulting services to law firms. Mr. Stieglitz can be reached at 212-840-3456 or via e-mail at [email protected].