The Senate by a vote of 61-38 has passed H.R. 5297, the Small Business Lending Funding Act, as amended by the Senate. The tax title of this bill is called the Small Business Jobs Act of 2010. The bill is headed to the House of Representatives, which is expected to pass it without change, thereby clearing the measure for the President‘s signature.

The small business jobs bill includes a number of important tax provisions, including liberalized and expanded expensing for 2010 and 2011, revived bonus depreciation for 2010, five-year carryback of unused general business credits for eligible small businesses, removal of cell phones from the listed property category and liberalized Code Sec. 6707A penalty rules. Specific details are below.

• A 100% exclusion of gain under Code Sec. 1202 from the sale of certain small business stock acquired at original issue and held for more than five years. The change would be effective for stock acquired after the date of enactment and held for more than five years.
• For the first tax year of the taxpayer beginning in 2010, eligible small businesses could carry back unused general business credits for five years. Eligible small businesses would consist of sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.
• For tax years beginning in 2010, eligible small businesses, as defined above, would be able to use all types of general business credits to offset their alternative minimum tax (AMT).
• Where a corporation formed as a C corporation elects to become an S corporation (or where an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), 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 generally is the first ten S corporation years (or the ten-period after the transfer). 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. The substitute amendment would, for any tax year beginning in 2011, shorten the holding period of assets subject to the built-in gains tax to 5 years if the fifth tax year in the recognition period precedes the tax year beginning in 2011.
• Under current law, the Code Sec. 179 expensing limit for tax years beginning in 2010 is $250,000, and the maximum expensing amount is reduced (i.e., phased out, but not below zero) by the amount by which the cost of Code Sec. 179 property placed in service exceeds $800,000 (the investment ceiling). For tax years beginning after 2010, these amounts are to revert to $25,000 and $200,000 respectively. The substitute amendment would for tax years beginning in 2010 and 2011 increase the maximum Code Sec. 179 expensing amount to $500,000 and the investment ceiling to $2,000,000.
• For property placed in service after Dec. 31, 2009, for any tax year beginning in 2010 or 2011, qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) would be eligible for $250,000 of expensing under Code Sec. 179. The dollar cap would apply to the aggregate cost of qualified real property.
• Bonus 50% first year depreciation would be extended to apply to property placed in service in 2010 (in 2011, for certain long production period property).
• Bonus depreciation would be decoupled from allocation of contract costs under the percentage of completion accounting method rules for assets with a depreciable life of seven years or less. According to a summary of the substitute amendment, this change would allow contractors that do not complete contracts within the same year in which they are entered into to benefit from bonus depreciation.
• For a tax year beginning in 2010, the deduction for startup expenses under Code Sec. 195 would be increased from $5,000 to $10,000 and the phaseout threshold would be increased from $50,000 to $60,000.
• For a tax year beginning after Dec. 31, 2009, but before Jan. 1, 2011, when calculating self-employment taxes, the deduction for health insurance costs of a self-employed taxpayer under Code Sec. 162(l) could be taken into account (i.e., could be deducted) in computing net earnings from self-employment.
• Cell phones would be removed from the definition of listed property under Code Sec. 280F, for tax years beginning after Dec. 31, 2009.
• The controversial Code Sec. 6707A penalty would be revised so that the penalty for failure to disclose a reportable transaction to IRS would be commensurate with the tax benefit received from the transaction. Reportable transactions are transactions that IRS has identified as listed tax shelters or that have characteristics of tax shelters, including large losses or confidentiality agreements. The penalty would be 75% of the tax benefit received, with a minimum penalty of $10,000 for corporations and $5,000 for individuals, and for listed transactions a maximum penalty of $200,000 for corporations and $100,000 for individuals (for other reportable transactions, the penalty would be $50,000 for corporations and $10,000 for individuals). These changes would be retroactively effective to penalties assessed after Dec. 31, 2006.

Revenue offsets:

• For payments made after Dec. 31, 2010, persons receiving rental income from real property would have to file information returns to IRS and to service providers reporting payments of $600 or more during the year for rental property expenses. Exceptions would be provided for individuals renting their principal residences (including active members of the military), taxpayers whose rental income doesn’t exceed an IRS-determined minimal amount and those for whom the reporting requirement would create a hardship (under IRS regs).
• For information returns required to be filed after Dec. 31, 2010, the Code Sec. 6721 penalties for failure to timely file information returns to IRS would be increased. For example, the first-tier penalty would be increased from $15 to $30, and the calendar year maximum would be increased from $75,000 to $250,000. For small filers, the calendar year maximum would be increased from $25,000 to $75,000 for the first-tier penalty. The minimum penalty for each failure due to intentional disregard would be increased from $100 to $250. The Code Sec. 6722 penalties for failure to file information returns to payees would be similarly increased.
• For levies issued after the enactment date, the substitute amendment would (1) clarify that Treasury’s continuous levy authority on government payments to federal contractors who owe back taxes to IRS applies to amounts paid for property, as well as to payments for goods and services; and (2) allow IRS to issue levies before a collection due process (CDP) hearing on Federal tax liabilities of Federal contractors (taxpayers would have an opportunity for a CDP hearing within a reasonable time after a levy is issued).
• For tax years beginning after Dec. 31, 2010, retirement savings plans sponsored by state and local governments (i.e., governmental Code Sec. 457(b) plans) would be able to include Roth accounts.
• For distributions after the enactment date, 401(k), 403(b), and governmental 457(b) plans could permit participants to roll their pre-tax account balances into a Roth account. If the rollover is made in 2010, the participant could elect to pay the tax in 2011 and 2012.
• For fuels sold or used after Dec. 31, 2010, eligibility for the Code Sec. 40 tax credit for the production of biofuel from cellulosic feedstocks would be limited to fuels that are not highly corrosive (i.e., fuels that could be used in a car engine or in a home heating application).
• For amounts received in tax years beginning after Dec. 31, 2010, holders of nonqualified annuities (annuity contracts held outside of a qualified retirement plan or IRA) could elect to receive part of the contract in the form of a stream of annuity contracts, leaving the remainder of the contract to accumulate income on a tax-deferred basis.
• Amounts received directly or indirectly for guarantees of indebtedness of the payor issued after the enactment date would be sourced like interest and, as a result, if paid by U.S. taxpayers to foreign persons would generally be subject to withholding tax. The change would prospectively overturn the holding in Container Corporation, Successor to Interest of Container Holdings Corporation, Successor to Interest of Vitro International Corporation, (2010) 134 TC No. 5, that fees paid by a U.S. subsidiary to its foreign parent for guaranteeing the subsidiary’s debt were analogous to payments for a service and therefore were not U.S. source income. No inference would be intended with respect to the treatment of guarantees issued before the enactment date.
• Estimated taxes for large corporations (those with assets of not less than $1 billion) otherwise due for July, August or September of 2015, would be increased by 36%.

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