Legal Alerts

Incentives for Acquiring and Investing in Small Businesses

President Obama recently signed the Small Business Jobs Act of 2010 into law. In addition to providing small businesses with access to much needed credit, the Act contains numerous tax incentives for acquiring and investing in small businesses.

Increased Loan Amounts

The Act dramatically increases the maximum amounts available for the U.S. Small Business Administration’s two chief guaranteed loan programs. The 7(a) loan program is commonly used to help existing small businesses and start-ups acquire financing. The maximum amount for the 7(a) loan program is now $5 million rather than $2 million. The 504 loan program is used to assist in the acquisition of fixed assets, like real estate or equipment. This program’s maximum has also been increased from $2 million to $5 million, or $5.5 million for certain manufacturing related loans.

Increased Exclusion for Certain “Qualified Small Business Stock” Gains

The Act contains eight new tax cuts, but one of the most important is the amendment of Internal Revenue Code Section 1202. The Act added language which allows non-corporate taxpayers to exclude 100% of the gain, subject to limitation, from the sale of “qualified small business stock” acquired after September 27, 2010 and before January 1, 2011 if it is held for more than five years. It further provides that the gains exclusion shall not be considered a tax preference item for the purposes of calculating the alternative minimum tax. Effectively, this also excludes such gains from the alternative minimum tax.

“Qualified small business stock” is generally stock in a domestic C corporation that is a “qualified small business” on the date that the stock was originally issued, and is acquired by the taxpayer at its original issue. In order to be considered “qualified small business stock,” the corporation must meet Section 1202’s “active business” requirements for the time during which the taxpayer has held the stock.

Increased Deduction for Start-up Expenditures

The Act also increases the amount of start-up expenditures taxpayers can elect to deduct under Internal Revenue Code Section 195 from $5,000 to $10,000 for tax years beginning in 2010. The phase out threshold was also increased from $50,000 to $60,000. Thus, the $10,000 deduction is reduced, but not below zero, by the amount which the start up expenditures exceed $60,000.  The deduction must be taken in the year an active trade or business starts. The deduction must be taken in the year an active trade or business starts.

Expansion of Expensing and Depreciation

In addition to the above changes, the Act increases the amount taxpayers may elect to immediately expense for certain depreciable property placed in service during 2010 and 2011 under Internal Revenue Code Section 179. The Act also extends the availability of Internal Revenue Code Section 168(k)’s bonus depreciation deduction. It allows a deduction of 50% of the cost of “qualified property” that is acquired and placed in service during 2010, or in some cases 2011.  

For more information on these and other provisions in the Small Business Jobs Act of 2010, and how they can be used to your company’s benefit, please contact your BB&K attorney or Business Transactions attorney George Reyes.

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