Tax Legislation Update

Tax Legislation Update

By David DuWaldt

November 12, 2010

As you may have heard, the Small Business Jobs Act of 2010 (SBJA) was signed into law on September 27, 2010. Included in this recent tax legislation are some provisions that may prove beneficial to certain buyers and sellers of businesses.

The SBJA moved up the gain exclusion from the sale of small business stock to 100%. By comparison, prior to 2009, the exclusion was 50% of the gain. In the early part of 2009, tax legislation was passed which increased the exclusion from gain to 75% for qualifying small business stock acquired during the period from February 17, 2009 to December 31, 2010. Eligibility for the 100% exclusion includes the following requirements:

  1. The stock must be held at least five years
  2. The aggregate gross assets of the issuing corporation must not exceed $50 million
  3. The stock is acquired in an original issuance from the corporation
  4. At least 80% of the value of the assets must be used in a qualifying trade or business
  5. The stock must be acquired by December 31, 2010

With respect to stockholders that are individuals, the exclusion from gain is capped at 10 times the stockholder’s basis in the stock or $10 million, whichever is greater. Under the SBJA, the excluded amount will not be treated as an alternative minimum tax (AMT) preference item.

For S corporations, one of the provisions included under the SBJA is the reduction of the built-in gains period to five years. An S corporation with a built-in gains tax exposure (i.e. was previously a C corporation), which plans on consummating an asset sale transaction, or a stock sale and elect to treat the transaction as an asset sale under IRC Section 338(h)(10), might find an opportunity to avoid the built-in gains tax depending upon when the S election was made. Originally, under the Tax Reform Act of 1986, the built-in gains period was 10 years. More recently, the American Recovery and Reinvestment Act of 2009 temporarily moved the built-in gains period from 10 years down to seven years (for tax years beginning in 2009 and 2010 only). Under the SBJA, the new five-year built-in gains period applies to tax years beginning in 2011.

Under the SBJA, for tax years beginning in 2010 and 2011, the Section 179 expense deduction with respect to qualifying property has been increased to $500 thousand. The qualifying property cap under the new law increased from $800 thousand to $2 million. The new law also expanded the definition of qualified real property (principally leasehold improvements) as being eligible for the Section 179 expense election; however, the expense limit for such property is $250 thousand.

The SBJA extended the 50% bonus depreciation into the 2010 year only. Without the SBJA, the 50% bonus depreciation would have expired at December 31, 2009. Unlike the Section 179 expense deduction, the 50% bonus depreciation does not have a spending cap; however, this tax benefit only applies to new, original use, qualifying property (i.e., does not apply to property acquired in an asset purchase transaction).

Based on the foregoing, you can see that timing is critical for attaining certain tax benefits. If you have not done so already, it is wise to review the possibilities that exist now rather than wait and find out that you missed a window of opportunity.

posted by David DuWaldt