The Small Business Jobs Act of 2010

The recently enacted Small Business Jobs Act of 2010 includes a wide-ranging assortment of tax changes generally affecting business. Two of the most significant changes allow for faster cost recovery of business property. Here are the details.
Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Act law, taxpayers could expense up to $250,000 for qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.
The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property that can be expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).

The recently enacted Small Business Jobs Act of 2010 includes a wide-ranging assortment of tax changes generally affecting business. Two of the most significant changes allow for faster cost recovery of business property. Here are the details.
Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Act law, taxpayers could expense up to $250,000 for qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.
The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property that can be expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).
If you've recently started a business, or if you're in the process of starting one now, you should be aware of a recent tax law change that could make a big difference in your tax bill. The recently enacted 2010 Small Business Jobs Act doubles the amount of start-up expenses that someone starting a business in 2010 can write off this year. Here are the details.
Generally, expenses incurred before a business begins don't generate any deductions or other current tax benefits. However, under pre-2010 Small Business Jobs Act law, taxpayers, whether they were individuals, corporations or partnerships, were permitted to elect to write off up to $5,000 of “start-up expenses” in the year business began, and the rest could be deducted over a period of 180 months. The $5,000 figure was reduced by the excess of total start-up costs over $50,000. You were deemed to have made this election unless you opted out.
The new law doubles the amount that can be written off for 2010 to $10,000 and increases the phaseout threshold from $50,000 to $60,000. It is important to note that this increased deduction is temporary, and only applies to tax years beginning in 2010.
Start-up expenses include, with a few exceptions, all expenses incurred to investigate the creation or acquisition of a business, to actually create the business, or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense also must be one that would be deductible if it were incurred after the business actually began. An example of a startup expense is the cost of analyzing the potential market for a new product.
As you can see, it's important to keep a record of these start-up expenses, and to make the appropriate decision regarding the write-off election. As mentioned above, if you opt out of the election, there is no current tax benefit derived for the eligible expenses covered by the election. Also, you should be aware that an election either to deduct or to amortize start-up expenditures, once made, is irrevocable.
Analysis of the Tax and Pension Provisions of the Small Business Jobs Act of 2010 (i.e., Title II of HR 5297, generally referred to in the Analysis as the “2010 Small Business Act”), as signed into law by the President on Sept. 27, 2010 ( PL 111-240, 9/27/2010 ).
The 2010 Small Business Act 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.
RIA observation: “The Small Business Jobs Act of 2010” is a bit of a misnomer because the legislation carries many tax provisions affecting large as well as small businesses, plus changes that affect individuals, such as eased Roth IRA rules.
Here are the highlights of the tax and pension changes in the 2010 Small Business Act.
Dollar amounts for expensing liberalized. For tax years beginning in 2010, the 2010 Small Business Act increases the maximum Code Sec. 179 expensing amount from $250,000 to $500,000 and the beginning-of-phaseout amount from $800,000 to $2,000,000. For tax years beginning in 2011, the same $500,000 maximum expensing amount and $800,000 beginning-of-phaseout amount will apply even though, under pre-2010 Small Business Act law, those amounts had been scheduled to revert to $25,000 and $200,000, respectively.
RIA observation: Virtually all small businesses and many medium sized businesses that don't have heavy machinery and equipment needs would be able to use expensing. For property placed in service in tax years beginning in 2010 or 2011, the Code Sec. 179 deduction won't phase out completely until the cost of expensing-eligible property exceeds $2,500,000 ($2,000,000 beginning-of-phaseout amount) + $500,000 (dollar limitation)).
RIA observation: The 2010 Small Business Act provides a welcome tax-saving windfall to taxpayers that already have placed in service Code Sec. 179 eligible property at a cost that exceeded the pre-2010 Small Business Act dollar amount limits.
Qualified real property expensing. For any tax year beginning in 2010 or 2011, a taxpayer can elect to treat up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) as expensing-eligible property. (Certain types of property, such as that used for lodging, would not be eligible.) (Code Sec. 179(f)(1) ) The dollar cap applies to the aggregate cost of qualified real property. This change applies to property placed in service after Dec. 31, 2009, in tax years beginning after that date.
RIA observation: This is the first time that Code Sec. 179 expensing can be claimed for realty. Under pre-2010 Small Business Act law, the expensing election was limited to depreciable tangible personal property purchased for use in the active conduct of a trade or business, including “off-the-shelf” computer software.
However, no amount attributable to qualified real property can be carried over to a tax year beginning after 2011, but to the extent that any amount cannot be carried over to a tax year beginning after 2011, the Code will be applied as if no Code Sec. 179 expensing election had been made for that amount.
Other expensing changes. The 2010 Small Business Act also provides that a taxpayer's ability to revoke a Code Sec. 179 election without IRS consent applies to any tax year beginning after 2002 and before 2012 (instead of before 2011, as under pre-2010 Small Business Act law). (Code Sec. 179(c)(2) ) Additionally, computer software is qualifying property for purposes of the Code Sec. 179 election if it is placed in service in a tax year beginning after 2002 and before 2012 (instead of before 2011, as under pre-2010 Small Business Act law). (Code Sec. 179(d)(1)(A)(ii) )
Bonus first-year depreciation extended through 2010. The 2010 Small Business Act extends 50% bonus first-year depreciation for one year, i.e., makes it available for qualifying property acquired and placed in service in 2010 (as well as 2011, for certain long-lived property). (Code Sec. 168(k)(2)(A)(iv) and Code Sec. 168(k)(2)(A)(iii) )
RIA observation: Bonus depreciation provides an extra writeoff to all businesses, large or small, and a windfall to taxpayers that already have bought and placed in service bonus-depreciation-eligible property in 2010.
First year dollar cap for autos increased by $8,000. Under Code Sec. 280F , depreciation deductions (including Code Sec. 179 expensing) that can be claimed for passenger autos is subject to dollar limits that are annually adjusted for inflation. The 2010 Small Business Act boosts the first year business-auto write-off by $8,000 (i.e., from $3,060 to $11,060 for autos and from $3,160 to $11,160 for light trucks or vans) for vehicles that are qualified property for bonus depreciation purposes (i.e., are new and acquired and placed in service in 2010). (Code Sec. 168(k)(2)(A)(iv) )
Special long-term contract accounting rule for bonus depreciation. Bonus depreciation will 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. More specifically, for property placed in service after Dec. 31, 2009, solely for purposes of determining the percentage of completion under Code Sec. 460(b)(1)(A) , the cost of qualified property will be taken into account as a cost allocated to the contract as if bonus depreciation had not been enacted. (Code Sec. 460(c)(6) ) Qualified property is property otherwise eligible for bonus depreciation that has a MACRS recovery period of 7 years or less and that is placed in service after Dec. 31, 2009, and before Jan. 1, 2011 (Jan. 1, 2012, in the case of Code Sec. 168(k)(2)(B) property (certain longer-lived property)).
Deduction for startup expenses increased. For tax years beginning in 2010, the deduction for startup expenses under Code Sec. 195 is increased from $5,000 to $10,000 and the phaseout threshold is increased from $50,000 to $60,000. Code Sec. 195(b)(3) )
100% exclusion for gain from qualified small business (QSBS) stock. There is a 100% exclusion of gain from the sale of QSBS stock (a) acquired after Sept. 27, 2010 and before Jan. 1, 2011, and (b) held for at least five years. (Code Sec. 2012 )
Five-year carryback of small business unused general business credits. The general business credit (GBC) generally can't exceed the excess of the taxpayer's net income tax over the greater of the taxpayer's tentative minimum tax or 25% of so much of the taxpayer's net regular tax liability as exceeds $25,000. Credits in excess of this limitation may be carried back one year and forward up to 20 years. The 2010 Small Business Act extends the carryback period from one to five years for eligible small business (ESB) credits determined in tax years beginning in 2010. (Code Sec. 39(a)(4) )
ESB credits, for a tax year beginning in 2010, include all of the component credits of the GBC, but only as determined with respect to eligible small businesses (ESBs). ESBs are businesses that (1) are corporations the stock of which isn't publicly traded, partnerships or sole proprietorships and (2) have average annual gross receipts, for the three-tax-year period preceding the tax year, of no more than $50 million.
ESB credits not subject to AMT. For ESB credits determined in tax years beginning in 2010, ESBs, as defined above for purposes of the longer credit carryback, may use all types of general business credits to offset their alternative minimum tax (AMT). (Code Sec. 38 ) More specifically, the tentative minimum tax will be treated as being zero for ESB credits. Thus, an ESB credit can offset both regular and AMT liability.
Reduced recognition period for S corp built in gains tax. Where 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.
For any tax year beginning in 2011, the 2010 Small Business Act shortens 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. (Code Sec. 1374(d)(7) )
One year self-employment tax break. For tax years 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) can be taken into account (i.e., can be deducted) in computing net earnings from self-employment. (Code Sec. 162(l)(4) )
The Joint Committee on Taxation's Technical Explanation of H.R. 5297 says that it is intended that earned income within the meaning of Code Sec. 401(c)(2) be computed without regard to the deduction for the cost of health insurance.
Cell phones no longer listed property. For tax years beginning after Dec. 31, 2009, cell phones (and similar telecommunications equipment) are removed from the definition of listed property under Code Sec. 280F (Code Sec. 280F(d)(4)(A) )
Relaxed penalty for failure to include reportable transaction information with return. Retroactively effective to penalties assessed after Dec. 31, 2006, the controversial Code Sec. 6707A penalty is revised so that the penalty for failure to disclose a reportable transaction (i.e., a transaction IRS has identified as a listed tax shelter or as having the characteristics of a tax shelter) to IRS is commensurate with the tax benefit received from the transaction. Thus, under the 2010 Small Business Act, the penalty is 75% of the tax benefit received, with a minimum penalty of $10,000 for corporations and $5,000 for individuals. For listed transactions, the maximum penalty is $200,000 for corporations and $100,000 for individuals, while for other reportable transactions, the maximum penalty is $50,000 for corporations and $10,000 for individuals). (Code Sec. 6707A(b) )
The 2010 Small Business Act pays for its tax breaks with the following revenue raisers:
Information reporting for rental income. For payments made after Dec. 31, 2010, persons receiving rental income from real property will 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 are provided for individuals temporarily 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). (Code Sec. 6041(h) )
Increased penalty for failure to timely file information returns. For information returns required to be filed after Dec. 31, 2010, the 2010 Small Business Act increases the Code Sec. 6721 penalties for failure to timely file information returns to IRS. The first-tier penalty increases from $15 to $30, and the calendar year maximum increases from $75,000 to $250,000. The second-tier penalty increases from $30 to $60, and the calendar year maximum increases from $150,000 to $500,000. The third-tier penalty increases from $50 to $100, and the calendar year maximum increases from $250,000 to $1,500,000. For small business filers, the calendar year maximum increases from $25,000 to $75,000 for the first-tier penalty, from $50,000 to $200,000 for the second-tier penalty, and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard increases from $100 to $250.
Increased penalty for failure to furnish a payee statement. The Code Sec. 6722 penalty for failure to furnish a payee statement is revised to provide tiers and caps similar to those applicable to the penalty for failure to file the information return. A first-tier penalty will be $30, subject to a maximum of $250,000; the second-tier penalty will be $60 per statement, up to $500,000, and the third-tier penalty will be $100, up to a maximum of $1,500,000. Limitations will apply on penalties for small businesses and increased penalties for intentional disregard that parallel the penalty for failure to furnish information returns.
Exception to pre-levy CDP hearing rule for Federal contractors. For levies issued after Sept. 27, 2010, IRS may issue levies before a CDP hearing with respect to Federal tax liabilities of Federal contractors identified under the Federal Payment Levy Program. When a levy is issued before a CDP hearing, the taxpayer will have an opportunity for a CDP hearing within a reasonable time after the levy. (Code Sec. 6330(f)(4) )
Code Sec. 457(b) plans could include Roth accounts. 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) will be able to include Roth accounts. (Code Sec. 402A(e)(1) , Code Sec. 402A(e)(2) )
Certain retirement plans can rollover distributions into Roth accounts. For distributions after Sept. 27, 2010, 401(k), 403(b), and governmental 457(b) plans will be able to permit participants to roll their pre-tax account balances into a designated Roth account. If the rollover is made in 2010, the participant may elect to pay the tax in 2011 and 2012. (Code Sec. 402A(c)(4) )
Limit on credit for production of biofuel from cellulosic feedstocks. 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 will 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). (Code Sec. 40(b)(6)(E)(iii) )
Annuitization of nonqualified annuity allowed. For amounts received in tax years beginning after Dec. 31, 2010, the 2010 Small Business Act will permit a portion of an annuity, endowment, or life insurance contract to be annuitized while the balance is not annuitized, if the annuitization period is for 10 years or more, or is for the lives of one or more individuals. (Code Sec. 72(a) )
Sourcing of guarantee income. Amounts received directly or indirectly for guarantees of indebtedness of the payor issued after Sept. 27, 2010 will be sourced like interest and, as a result, if paid by U.S. taxpayers to foreign persons will generally be subject to withholding tax. (Code Sec. 861(a)(9) ) This change prospectively overturns 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.
Accelerated estimated tax payment for large corporations. Estimated taxes for large corporations (those with assets of not less than $1 billion) otherwise due for July, August, or September of 2015, will be increased by 36%.
Cites in the analysis to the appropriate Committee Reports ( JCX-47-10 for the 2010 Small Business Act) are cited as Com Rept.
Click here for the relevant text of JCX-47-10.
The Analysis of the Tax and Pension Provisions of the Small Business Jobs Act of 2010 is reproduced at ¶101 et seq.
The Client Letters and Interoffice Memos begin at ¶901 et seq.
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Tax and Pension Provisions of the Small Business Jobs Act of 2010
RIA's Complete Analysis of the of the Tax and Pension Provisions of the Small Business Jobs Act of 2010 (i.e., Title II of H.R. 5297, generally referred to in the An, signed into law by the President on September 27. The 2010 Small Business Act (P.L. 111-240) 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. The Small Business Jobs Act of 2010 is a bit of a misnomer because the legislation carries many tax provisions affecting large as well as small businesses, plus changes that affect individuals, such as eased Roth IRA rules.
Code Sec. 179 expensing limit increases to $500,000 and phaseout threshold increases to $2,000,000 for tax years beginning in 2010 and 2011
Code Sec. 179(b)(1), as amended by 2010 Small Business Act §2021(a)(1)
Code Sec. 179(b)(2), as amended by 2010 Small Business Act §2021(a)(2)
Generally effective: Property placed in service in tax years beginning after Dec. 31, 2009
Committee Reports, see ¶5605
Generally, taxpayers can elect to treat the cost of any section 179 property (defined below) placed in service during the tax year as an expense which is not chargeable to capital account, and any cost so treated is allowed as a deduction for the tax year in which the section 179 property is placed in service, see FTC 2d/Fin ¶L-9900; et seq. USTR ¶1794; et seq. TaxDesk ¶268,400; et seq.
Under pre-2010 Small Business Act law, the deductible Code Sec. 179 expense could not exceed $250,000 (dollar limitation) in the case of a tax year beginning in 2008 through 2010, and the maximum deductible expense had to be reduced (i.e., phased out, but not below zero) by the amount by which the cost of section 179 property placed in service during a tax year beginning in 2008 through 2010 exceeded $800,000 (beginning-of-phaseout limitation). FTC 2d/Fin ¶L-9900; , FTC 2d/Fin ¶L-9907; USTR ¶1794.01; TaxDesk ¶268,411; The $250,000 and $800,000 amounts were not adjusted for inflation, see FTC 2d/Fin ¶L-9907.1; USTR ¶1794.01; TaxDesk ¶268,411; .
RIA illustration 1: In 2010, T, a calendar-year taxpayer, places into service section 179 property with a cost of $1,000,000. Under pre-2010 Small Business Act law, the maximum amount T could elect to expense was $50,000: $250,000 (maximum expense for 2010) − $200,000 (the amount by which the cost of section 179 property placed in service, $1,000,000, exceeded the beginning-of-phaseout amount for 2010, $800,000).
Under pre-2010 Small Business Act law, for tax years beginning after 2010, the dollar limitation was to be $25,000 and the beginning-of-phaseout amount was to be $200,000. FTC 2d/Fin ¶L-9900; , FTC 2d/Fin ¶L-9907; USTR ¶1794.01; TaxDesk ¶268,411; The $25,000 and $200,000 amounts were not to be adjusted for inflation, see FTC 2d/Fin ¶L-9907.1; USTR ¶1794.01; TaxDesk ¶268,411; .
Under pre-2010 Small Business Act law, qualifying property for purposes of the Code Sec. 179 expensing election (“section 179 property”) was limited to depreciable tangible personal property purchased for use in the active conduct of a trade or business, including “off-the-shelf” computer software placed in service in tax years beginning before 2011. FTC 2d/Fin ¶L-9901; , FTC 2d/Fin ¶L-9922; USTR ¶1794.02; TaxDesk ¶268,424;
The following concepts and computations are affected by the amount of the Code Sec. 179 deduction limit, and the beginning-of-phaseout amount, for a particular tax year:
• 50% bonus depreciation for “qualified disaster assistance property,” see FTC 2d/Fin ¶L-9366; USTR ¶1684.085; TaxDesk ¶267,756; ;
• the expense deduction ceiling amount for partnerships and partners, S corporations and their shareholders. FTC 2d/Fin ¶L-9900; FTC 2d/Fin ¶L-9909; USTR ¶1794.01; TaxDesk ¶268,414; ; and
• the maximum Code Sec. 179 expense deduction and phaseout amount for enterprise zone businesses, see FTC 2d/Fin ¶L-9951; , FTC 2d/Fin ¶L-9952; USTR ¶13,97A4; , USTR ¶1794.01; TaxDesk ¶268,402; , TaxDesk ¶268,413; .
New Law. The 2010 Small Business Act provides that, for tax years beginning in 2010 or 2011:
... the dollar limitation on the Code Sec. 179 expense deduction is $500,000 (Code Sec. 179(b)(1)(B) as amended by 2010 Small Business Act §2021(a)(1)) , and
... the reduction in the dollar limitation starts to take effect when property placed in service in a tax year exceeds $2,000,000 (beginning-of-phaseout amount). (Code Sec. 179(b)(2)(B) as amended by 2010 Small Business Act §2021(a)(2))
Thus, for tax years beginning in 2010 and 2011, the maximum amount a taxpayer can expense is increased to $500,000 and the phase-out threshold amount is increased to $2 million. (Com Rept, see ¶5605)
RIA observation: Thus, the $500,000 amount (discussed above) of qualified property that can be expensed is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during 2010 or 2011 exceeds $2,000,000. Accordingly, for property placed in service in tax years beginning in 2010 or 2011, the Code Sec. 179 deduction phases out completely when the cost of the property exceeds $2,500,000 ($2,000,000 (beginning-of-phaseout amount) + $500,000 (dollar limitation)).
For tax years beginning after 2011, the 2010 Small Business Act provides for a $25,000 dollar limitation on the Code Sec. 179 expense deduction (Code Sec. 179(b)(1)(C) as amended by 2010 Small Business Act §2021(a)(1)) and a $200,000 beginning-of-phaseout amount. (Code Sec. 179(b)(2)(C) as amended by 2010 Small Business Act §2021(a)(2))
RIA observation: Thus, the reversion to the $25,000 dollar limitation and $250,000 beginning-of-phaseout amount will take effect for tax years beginning in 2012 and later, one year later than under pre-2010 Small Business Act law.
RIA observation: The 2010 Small Business Act's increased expensing limits should help stimulate the economy by motivating taxpayers, in the short term, to invest in section 179 property (as defined above) before the lower deduction ($25,000) and phaseout thresholds ($200,000) take effect in 2012 and later tax years. According to a Senate News release dated July 28, 2010, expensing is an important tool for small businesses because it is the most accelerated type of depreciation. A Floor Statement of Senator Max Baucus dated July 28, 2010, provides that the increase in the Code Sec. 179 thresholds in the 2010 Small Business Act will effectively decrease the cost of newly purchased equipment (making it more economical for businesses to invest), increase businesses' cash flow, and encourage them to make further capital investments.
RIA illustration 2: Z, a calendar-year taxpayer, places into service in 2010 section 179 property with a cost of $1,000,000. The maximum amount Z can elect to expense is $500,000: $500,000 (maximum expense for 2010) − $0 (the amount by which the cost of section 179 property placed in service during 2010, $1,000,000, exceeds the beginning-of-phaseout amount for 2010, $2,000,000).
For the eligibility for a Code Sec. 179 deduction of “qualified real property” placed in service in tax years beginning in 2010 or 2011, see ¶102 .
For the one-year extension of the provision permitting revocation of a Code Sec. 179 election without IRS consent to apply to Code Sec. 179 elections made for tax years beginning in 2011, see ¶103 .
For the one-year extension of the eligibility of off-the-shelf computer software for Code Sec. 179 expensing to apply to property placed in service in tax years beginning in 2011, see ¶103 .
Effective: Property placed in service after Dec. 31, 2009, in tax years beginning after Dec. 31, 2009. (2010 Small Business Act §2021(e)(1))

Code Sec. 195 specified deduction limit and phaseout for start-up costs are increased to $10,000 and $60,000, respectively, for 2010
Code Sec. 195(b)(3), as amended by 2010 Small Business Act §2031(a)
Generally effective: Tax years beginning after Dec. 31, 2009 and before Jan. 1, 2011
Committee Reports, see ¶5608
Start-up expenses of a trade or business are not deductible unless the taxpayer elects to deduct them. A taxpayer is deemed to have made this election unless it chooses to forgo the election by clearly electing to capitalize those costs on the return for the tax year in which the trade or business began, see FTC 2d/Fin ¶L-5001; , FTC 2d/Fin ¶L-5001.1; USTR ¶1954; , USTR ¶1954.03; TaxDesk ¶301,001; , TaxDesk ¶301,001.1; .
Under Code Sec. 195(b)(1)(A)(ii) , a taxpayer can elect a current deduction for up to $5,000 of start-up expenditures in the tax year in which the active trade or business begins. However, this $5,000 amount is reduced (but not below zero) by the amount by which the cumulative cost of start-up expenditures exceeds $50,000 (the deduction phaseout threshold). FTC 2d/Fin ¶L-5000; FTC 2d/Fin ¶L-5001; USTR ¶1954; TaxDesk ¶301,001; The remainder of the start-up expenditures can be claimed as a deduction ratably over 180 months starting with the month the active trade or business began, see FTC 2d/Fin ¶L-5001; USTR ¶1954; TaxDesk ¶301,001; .
RIA observation: Thus, in the tax year in which an active trade or business begins, a taxpayer may be able to claim both the up-to-$5,000 deduction and the ratable portion of any excess start-up costs.
RIA observation: These rules primarily benefit smaller businesses. They can elect to deduct currently all or most of their start-up expenditures. Larger start-ups have to deduct their start-up expenditures over 180 months.
All start-up expenditures related to a particular trade or business, whether incurred before or after Oct. 22, 2004 (the date that the $5,000/$50,000 rule discussed above came into effect), are considered in determining whether the cumulative cost of start-up expenditures exceeds the deduction phaseout threshold, see FTC 2d/Fin ¶L-5001; USTR ¶1954; TaxDesk ¶301,001; .
New Law. The 2010 Small Business Act provides that, in the case of a tax year beginning in 2010, Code Sec. 195(b)(1)(A)(ii) (discussed above) is applied— (Code Sec. 195(b)(3) as amended by 2010 Small Business Act §2031(a))
(A) by substituting “$10,000” for “$5,000,” and (Code Sec. 195(b)(3)(A) )
(B) by substituting “$60,000” for “$50,000.”(Code Sec. 195(b)(3)(B) )
Thus, for tax years beginning in 2010, the 2010 Small Business Act increases the amount of start-up expenses a taxpayer can elect to deduct from $5,000 to $10,000. The 2010 Small Business Act also increases the deduction phaseout threshold so that the $10,000 is reduced (but not below zero) by the amount by which the cumulative cost of start-up expenditures exceeds $60,000. (Com Rept, see ¶5608)
RIA observation: If a taxpayer begins an active trade or business in a tax year beginning in 2010 and the taxpayer's business start-up expenses are $10,000 or less, the taxpayer can deduct those expenses in full in 2010.
RIA illustration 1: X Corp., a calendar year taxpayer, incurs $10,000 of start-up expenditures that relate to an active trade or business that begins on July 1, 2010. If X elects to forgo the election to capitalize start-up expenses (as discussed above), X could deduct the entire amount of the start-up expenditures for tax year 2010.
RIA illustration 2: The facts are the same as in Illustration 1, above, except that X incurs start-up expenditures of $56,000. For 2010, X can deduct $10,000 plus $1,533, the portion of the remaining $46,000 ($56,000 − $10,000) that is allocable to July 2010 through Dec. 2010 ($46,000/180 × 6).
RIA illustration 3: Y Corp. is a fiscal year taxpayer with a fiscal year of July 2010 through June 2011, and incurs start-up expenditures of $56,000 for an active trade or business that begins on July 1, 2010. For that fiscal year, Y can deduct $10,000 plus $3,067, the portion of the remaining $46,000 ($56,000 − $10,000) that is allocable to July 2010 through June 2011 ($46,000/180 × 12).
RIA observation: As Illustrations 2 and 3 above show, for total expenditures up to and including $60,000 for a trade or business that begins in 2010, a taxpayer can deduct, in the year the trade or business began, $10,000 of the start-up costs, plus the ratable portion of start-up costs over $10,000 incurred in the tax year in which the active trade or business began.
RIA illustration 4: The facts are the same as in Illustration 1, above, except that X incurs start-up expenditures of $69,500. For 2010, X can deduct $500 ($10,000 − ($69,500 − $60,000)) plus $2,300, the portion of the remaining $69,000 ($69,500 − $500) allocable to July 2010 through Dec. 2010 ($69,000/180 × 6).
RIA illustration 5: The facts are the same as in Illustration 1, above, except that X incurs start-up expenditures of $210,000. For 2010, X can deduct $7,000 ($210,000/180 × 6), the amount allocable to July 2010 through Dec. 2010.
RIA observation: Since the $10,000 and $60,000 amounts discussed above only apply for tax years beginning in 2010, presumably, for tax years beginning in 2011 and beyond, the $5,000 and $50,000 amounts will again apply, in the absence of additional legislation.
Effective: Tax years beginning after Dec. 31, 2009 (2010 Small Business Act §2031(b)) and before Jan. 1, 2011 (Code Sec. 195(b)(3) )

Gain exclusion for qualified small business stock (QSBS) is temporarily increased to 100% for both regular tax and AMT purposes
Code Sec. 1202(a)(3), as amended by 2010 Small Business Act §2011(b)(2)
Code Sec. 1202(a)(4), as amended by 2010 Small Business Act §2011(a)
Generally effective: Stock acquired after Sept. 27, 2010 and before Jan. 1, 2011
Committee Reports, see ¶5601
Noncorporate taxpayers can, within limits (see below), exclude a percentage of the gain realized on the sale or exchange of “qualified small business stock” (QSBS) held for more than five years. Under pre-2010 Small Business Act law, the excluded percentage was 50% (60% for certain gain attributable to QSBS in a qualified business entity, see below), but was 75% for any QSBS acquired after Feb. 17, 2009 and before Jan. 1, 2011. FTC 2d/Fin ¶I-9100; et seq.USTR ¶12,024; TaxDesk ¶246,600; et seq.
For regular income tax purposes, the portion of the gain that is includible in taxable income is taxed at a maximum rate of 28% (Com Rept, see ¶5601) . FTC 2d/Fin ¶I-5100; FTC 2d/Fin ¶I-5110.13; USTR ¶14.08; TaxDesk ¶223,323; . Thus, for regular tax purposes, the gain from QSBS that is subject to the 50% exclusion is taxed at a maximum effective rate of 14%, and the gain from QSBS that is subject to the 75% exclusion is taxed at a maximum effective rate of 7%, see FTC 2d/Fin ¶I-9100.1; et seq. USTR ¶12,024; TaxDesk ¶246,600.1; et seq.
For alternative minimum tax (AMT) purposes, under pre-2010 Small Business Act law, a percentage of the excluded gain was a preference item, and, thus, included in income, regardless of when the stock was acquired. For dispositions made in tax years beginning before Jan. 1, 2011, the percentage of the otherwise-excluded gain that was a preference item (the preference percentage) was in all cases 7% (7% preference stock). For dispositions in tax years beginning after Dec. 31, 2010 of stock whose holding period began after Dec. 31, 2000 (except for stock acquired under an option, or other right or obligation, acquired before Jan. 1, 2001), the tax preference percentage was to be in all cases 28% (28% preference stock). For dispositions in tax years beginning after Dec. 31, 2010 of stock whose holding period began before Jan. 1, 2001 (and for stock acquired under an option, or other right or obligation, acquired before Jan. 1, 2001), the tax preference percentage was to be in all cases 42% (42% preference stock). FTC 2d/Fin ¶A-8300; FTC 2d/Fin ¶A-8304; FTC 2d/Fin ¶A-8304.1; USTR ¶574; TaxDesk ¶697,004; TaxDesk ¶697,004.1;
For AMT purposes, the portion of the total gain that is includible in taxable income is taxed at a maximum rate of 28%. Thus, for AMT purposes: (1) gain from 7% preference stock subject to the 50% exclusion is taxed at a maximum effective rate of 14.98%; (2) gain from 28% preference stock subject to the 50% exclusion is taxed at a maximum effective rate of 17.92%; (3) gain from 42% preference stock subject to the 50% exclusion is taxed at a maximum effective rate of 19.88%, and (4) gain from 28% preference stock subject to the 75% exclusion is taxed at a maximum effective rate of 12.88% (see the observation below), see FTC 2d/Fin ¶A-8304; , FTC 2d/Fin ¶A-8304.1; TaxDesk ¶697,004; , TaxDesk ¶697,004.1; .
RIA observation: The 75% exclusion is treated, immediately above, as applying only to 28% preference stock (and not to 7% or 42% preference stock) for the following reasons: (1) stock is 7% preference stock only if disposed of in a tax year beginning before Jan. 1, 2011 (above), but, because, the 75% exclusion apples only to stock acquired after Feb. 17, 2009 (see above), stock eligible for the 75% exclusion cannot both meet the 5-year holding period requirement for QSBS and be disposed of in a tax year beginning before Jan. 1, 2011, and (2) stock acquired after Feb. 17, 2009 can be 42% preference stock only in the unlikely event that it was acquired under an option, or other right or obligation, acquired before Jan. 1, 2001 (above).
Generally, for gain to be excludible, the taxpayer must acquire the stock at original issue, and after Aug. 10, '93, see FTC 2d/Fin ¶I-9102; USTR ¶12,024; TaxDesk ¶246,636; . The gain excludible by a taxpayer for the QSBS of any one corporation is the greater of: (1) ten times the taxpayer's basis (excluding post-issuance basis increases) in that corporation's QSBS disposed of by the taxpayer in the tax year, or (2) $10 million ($5 million if married filing separately), and the $10 million (or $5 million) amount is reduced by the total amount of eligible gain taken into account by the taxpayer on dispositions of that corporation's QSBS in earlier tax years (referred to below as the basis-or-dollar-amount limit rule), see FTC 2d/Fin ¶I-9112; USTR ¶12,024.01; TaxDesk ¶246,603; . QSBS must be issued by a corporation that meets a gross assets limit and certain other requirements, see FTC 2d/Fin ¶I-9103; et seq. USTR ¶12,024.02; TaxDesk ¶246,641; et seq.
Under pre-2010 Small Business Act law, for QSBS in a corporation that also qualified as a “qualified business entity” (QBE), the exclusion rate was 60% (but 75% if the 75% rate discussed above would otherwise apply). No gain attributable to periods after Dec. 31, 2014 was eligible for the 60% (or 75%) rate. A QBE for purposes of the QSBS rules is a corporation that meets the requirements of a QBE under the empowerment zone rules, except that the DC Enterprise Zone isn't treated as an empowerment zone.FTC 2d/Fin ¶I-9100; FTC 2d/Fin ¶I-9100.1B; USTR ¶12,024; TaxDesk ¶246,602;
New Law. The 2010 Small Business Act provides that for QSBS acquired after Sept. 27, 2010 and before Jan. 1, 2011— (Code Sec. 1202(a)(4) as amended by 2010 Small Business Act §2011(a))
(1) the 50% gain exclusion for QSBS for regular tax purposes is increased to 100%; (Code Sec. 1202(a)(4)(A) )
(2) the 60% gain exclusion for QSBS issued by a QBE (see above) doesn't apply; (Code Sec. 1202(a)(4)(B) )
(3) and the treatment of a percentage of the excluded gain for QSBS as an AMT preference item (see above) doesn't apply. (Code Sec. 1202(a)(4)(C) )
Additionally, the 2010 Small Business Act changes the last day on which QSBS can be acquired to be eligible for the 75% gain exclusion from Dec. 31, 2010 to Sept. 27, 2010 . (Code Sec. 1202(a)(3) as amended by 2010 Small Business Act §2011(b)(2))
RIA observation: Code Sec. 1202(a)(4)(B) (item (2) on the above list) assures that for QSBS acquired after Sept. 27, 2010 and before Jan. 1, 2011 and issued by a QBE, the 100% exclusion provided by Code Sec. 1202(a)(4)(A) (item (1) on the above list) applies, and not the 60% exclusion that would have otherwise applied to QSBS issued by a QBE under pre-2010 Small Business Act law (see above).
RIA observation: The date change made by the 2010 Small Business Act to Code Sec. 1202(a)(3) (see above) assures that for QSBS acquired after Sept. 27, 2010 and before Jan. 1, 2011, the 100% exclusion provided by Code Sec. 1202(a)(4)(A) applies, and not the 75% exclusion that would have otherwise applied under pre-2010 Small Business Act law (see above).
RIA observation: For QSBS acquired after Sept. 27, 2010 and before Jan. 1, 2011, no regular tax or AMT is imposed on the sale of QSBS held for more than five years (see above).
RIA illustration : On Oct. 1, 2010, T, an individual, acquires at original issuance 100 shares of QSBS at a total cost of $100,000. The stock isn't acquired under an option, or other right or obligation, acquired before Jan. 1, 2001. T sells all of the shares on Oct 2, 2015 for $1.1 million. Assuming that none of the possible income exclusion is barred by the “basis-or-dollar-amount limit rule” (see above), T can exclude from income all of the $1 million of gain for regular tax and AMT purposes.
RIA observation: If pre-2010 Small Business Act law had applied in the above illustration, the maximum effective tax rates on the $1 million of gain would have been a regular tax rate of 7% (under the 75% exclusion, see above) and an AMT rate of 12.88% (because the stock is 28% preference stock, i.e., stock disposed of after Dec. 31, 2010 that wasn't acquired under an option, or other right or obligation, acquired before Jan. 1, 2001, see above).
RIA observation: Unless Congress extends beyond Dec. 31, 2010, the deadline for acquiring QSBS eligible for the 100% gain exclusion, the 50% and 60% gain exclusion rules will again be in effect, and the percentage of otherwise-excluded gain treated as an AMT preference item will be, in most cases, 28% (see above).
Effective: Stock acquired after Sept. 27, 2010 (2010 Small Business Act §2011(c)) and before Jan. 1, 2011. (Code Sec. 1202(a)(4) as amended by 2010 Small Business Act §2011(a))

5-year carrybacks are allowed for unused eligible small business credits determined in the first tax year beginning in 2010
Code Sec. 39(a)(3)(A), as amended by 2010 Small Business Act §2012(b)
Code Sec. 39(a)(4), as amended by 2010 Small Business Act §2012(a)
Generally effective: Credits determined for the taxpayer's first tax year beginning in 2010
Committee Reports, see ¶5602
Code Sec. 38 provides a tax credit (the general business credit or GBC) that consists of the component credits listed in Code Sec. 38(b) , see FTC 2d/Fin ¶L-15201; USTR ¶384.01; TaxDesk ¶380,501; .
Under Code Sec. 38(c)(1) (the tax liability limit), the GBC is limited to the excess, if any, of the taxpayer's “net income tax” (generally, the taxpayer's regular income tax and alternative minimum tax (AMT), reduced by most non-refundable credits other than the GBC) over the greater of (1) the taxpayer's tentative minimum tax or (2) 25% of the portion of the taxpayer's “net regular tax liability” (generally, the regular income tax reduced by most non-refundable credits other than the GBC) that exceeds $25,000 (the 25%-in-excess-of-$25,000 rule), see FTC 2d/Fin ¶L-15202; USTR ¶384.02; TaxDesk ¶380,502; .
Code Sec. 39 provides that amounts of GBC that aren't used because of the tax liability limit can be carried back and carried forward for specified periods. Under pre-2010 Small Business Act law, the carryback period was, generally, one tax year, and the carryforward period was, generally, 20 tax years. FTC 2d/Fin ¶L-15200; FTC 2d/Fin ¶L-15209; USTR ¶394.01; TaxDesk ¶380,509; Specifically,Code Sec. 39(a)(1) provides that the unused credit is a carryback to the tax year preceding the unused credit year and a carryforward to each of the 20 tax years following the unused credit year. Additionally, Code Sec. 39(a)(2)(A) provides that the unused credit is carried to the earliest of the 21 tax years to which the credit can be carried, and Code Sec. 39(a)(2)(B) provides that the unused credit is carried to each of the other 20 tax years to the extent that the unused credit can't be taken into account for an earlier year because of Code Sec. 39(b) and Code Sec. 39(c) (which, in substance, apply the tax liability limit to carrybacks and carryforwards), see FTC 2d/Fin ¶L-15209; USTR ¶394.01; TaxDesk ¶380,509; .
However, under Code Sec. 39(d) , no component credit is allowed to be carried back to any tax year before the first tax year for which the credit is allowable (i.e., any tax year before the tax year that the legislation which provides the component credit first allows the credit (the Code Sec. 39(d) limitation)), see FTC 2d/Fin ¶L-15209; USTR ¶394.01; TaxDesk ¶380,509; .
Under an exception to the generally applicable one-year carryback period, Code Sec. 39(a)(3) provides that an unused portion of the GBC that is attributable to the marginal well production credit (the marginal well portion) is a carryback to each of five tax years preceding the unused credit year (instead of to the tax year preceding the unused credit year, see above). Additionally, the unused marginal well portion is carried to the earliest of the 25 tax years (instead of 21 tax years, see above) to which the portion can be carried, and to each of the other 24 tax years (instead of 20 tax years, see above) to the extent that the unused marginal well portion can't be taken into account for an earlier year because of Code Sec. 39(b) and Code Sec. 39(c) (see above), see FTC 2d/Fin ¶L-15209.1; USTR ¶394.01; TaxDesk ¶380,509.1; .
Code Sec. 39(a)(3) also provides that the five-year carryback period and other rules discussed immediately above apply notwithstanding the Code Sec. 39(d) limitation (and, thus, an unused marginal well portion can be carried back to years otherwise barred by the Code Sec. 39(d) limitation), see FTC 2d/Fin ¶L-15209.1; USTR ¶394.01; TaxDesk ¶380,509.1; .
In addition, Code Sec. 39(a)(3) provides that, for the marginal well portion, the carryback and carryforward rules apply separately from the business credit, except for the marginal well portion (the marginal well separate application rule), see FTC 2d/Fin ¶L-15209.1; USTR ¶394.01; TaxDesk ¶380,509.1; .
Under Code Sec. 196 , some components of the GBC, if not allowed by the end of the carryforward period, can be deducted at that time, see FTC 2d/Fin ¶L-15212; USTR ¶1964; TaxDesk ¶380,510; .
New Law. “Eligible small business credits” (as defined below and in ¶301 ) that are determined in the first tax year of the taxpayer beginning in 2010 but are unused (i.e., aren't allowed due to the tax liability limit described above): (Code Sec. 39(a)(4) as amended by 2010 Small Business Act §2012(a))
(1) are carried back to each of the five tax years preceding the unused credit year (instead of to the tax year preceding the unused credit year as provided in Code Sec. 39(a)(1) , see above), (Code Sec. 39(a)(4)(A)(i) )
(2) are carried, in their entire amount, to the earliest of the 25 tax years (instead of 21 tax years as provided in Code Sec. 39(a)(2)(A) , see above) to which the credits can be carried, and(Code Sec. 39(a)(4)(A)(ii) )
(3) are carried to each of the other 24 tax years (instead of 20 tax years as provided in Code Sec. 39(a)(2)(B) , see above) to the extent that the eligible small business credits can't be taken into account for an earlier year because of Code Sec. 39(b) and Code Sec. 39(c) (which, in substance, apply the tax liability limit to carrybacks and carryforwards, see above). (Code Sec. 39(a)(4)(A)(iii) )
RIA illustration 1: T, an eligible small business (see “Eligible small business credits” below), has a tax year that ends on June 30. For its tax year beginning July 1, 2010 (the 2011 tax year), T has determined an eligible small business credit of $100,000. However, because of the tax liability limit (see above), T isn't allowed any of the $100,000 of unused eligible small business credit in the 2011 tax year. T carries the entire $100,000 of unused eligible small business credit back to the tax year ending June 30, 2006 (the 2006 tax year), which is the both the earliest year in the five-year carryback period and the earliest tax year in which the tax liability limit doesn't bar the allowance of the $100,000 credit.
RIA illustration 2: The facts are as in illustration (1) except that, because of the tax liability limit, T is allowed only $30,000 of the $100,000 of unused eligible small business credit for the 2006 tax year. T is allowed the other $70,000 of the credit in the tax year ending June 30, 2007 (the 2007 tax year), to the extent that the tax liability limit doesn't bar the allowance of the $70,000 of credit in the 2007 tax year.
The rules discussed above apply notwithstanding Code Sec. 39(d) . (Code Sec. 39(a)(4)(A) )
RIA observation: Thus, as is true for the marginal well production credit portion of the GBC, unused eligible small business credits can be carried back to years otherwise barred by the Code Sec. 39(d) limitation (i.e., to a tax year before the first tax year that the carried-back component credit of the GBC was allowable, see above).
RIA illustration 3: The facts are as in illustration (1) except that it is additionally specified that the $100,000 of unused eligible small business credit consists solely of the agricultural chemicals security credit, which is effective only for amounts paid or incurred after May 22, 2008, see FTC 2d/Fin ¶L-18301; USTR ¶45O4; TaxDesk ¶384,064; . The $100,000 of credit is allowed in the 2006 tax year because the Code Sec. 39(d) limitation doesn't bar the carryback of the credit to that year.
Eligible small business credits.
For purposes of the rules discussed above, “eligible small business credits” are as defined in Code Sec. 38(c)(5)(B) . (Code Sec. 39(a)(4)(B) ) Thus, eligible small business credits are the sum of the general business credits as determined for the tax year for an eligible small business. (Com Rept, see ¶5602)
RIA observation: That is, under Code Sec. 38(c)(5)(B) as amended by the 2010 Small Business Act, eligible small business credits (ESB credits), for a tax year beginning in 2010, include all of the component credits of the GBC, but only as determined with respect to eligible small businesses (ESBs). ESBs are businesses that (1) are either corporations the stock of which isn't publicly traded, partnerships or sole proprietorships and (2) have average annual gross receipts, for the three-tax-year period preceding the tax year, of no more than $50 million. For further discussion, see ¶301 .
For the rule that requires that Code Sec. 39 (the carryback and carryforward rules, see above) apply separately to eligible small business credits, see ¶301 .
Coordination with marginal well production credit.
The marginal well separate application rule (see above) is amended to provide that for the marginal well portion of the GBC, the carryback and carryforward rules apply separately from the business credit, except for the marginal well portion or the eligible small business credits. (Code Sec. 39(a)(3)(A) as amended by 2010 Small Business Act §2012(b))
Effective: Credits determined in tax years beginning after Dec. 31, 2009 (2010 Small Business Act §2012(c)) but only for the first tax year of the taxpayer beginning in 2010.(Code Sec. 39(a)(4)(A) )
Eligible small businesses (ESBs) can offset AMT liability with general business credits in tax years beginning in 2010
Code Sec. 38(c)(5), as amended by 2010 Small Business Act §2013(a)
Code Sec. 38(c)(2)(A)(ii)(II), as amended by 2010 Small Business Act §2013(c)(1)
Code Sec. 38(c)(3)(A)(ii)(II), as amended by 2010 Small Business Act §2013(c)(2)
Code Sec. 38(c)(4)(A)(ii)(II), as amended by 2010 Small Business Act §2013(c)(3)
Generally effective: Credits determined in tax years beginning after Dec. 31, 2009, and to carrybacks of those credits
Committee Reports, see ¶5603
Code Sec. 38 provides a tax credit (the general business credit) that consists of the component credits listed in Code Sec. 38(b) , see FTC 2d/Fin ¶L-15201; USTR ¶384.01; TaxDesk ¶380,501; .
Under Code Sec. 38(c)(1) (the tax liability limitation), the general business credit is limited to the excess, if any, of the taxpayer's “net income tax” (generally, the taxpayer's regular income tax and alternative minimum tax (AMT), reduced by most non-refundable credits other than the general business credit) over the greater of:
(1) the taxpayer's tentative minimum tax for the tax year (see the observation immediately below), or
(2) 25% of the portion of the taxpayer's “net regular tax liability” (generally, the regular income tax reduced by most non-refundable credits other than the general business credit) that exceeds $25,000 (the 25%-in-excess-of-$25,000 rule). FTC 2d/Fin ¶L-15202; USTR ¶384.02; TaxDesk ¶380,502;
RIA observation: Under Code Sec. 55 , the tentative minimum tax is the taxpayer's alternative minimum taxable income (in excess of an exemption amount) multiplied by a percentage, and the taxpayer's actual AMT is the excess of the tentative minimum tax over the taxpayer's regular tax (after the regular tax is reduced by the foreign tax credit and certain other amounts), see FTC 2d/Fin ¶A-8101; , FTC 2d/Fin ¶A-8103; , FTC 2d/Fin ¶A-8105; USTR ¶554.01; TaxDesk ¶691,001; , TaxDesk ¶691,003; , TaxDesk ¶691,005; . Thus, a taxpayer has an AMT liability only in those tax years in which the tentative minimum tax exceeds the regular tax (reduced as described above). Accordingly, in a tax year in which a taxpayer has an AMT liability, the general business credit generally isn't allowed against either the AMT or the regular tax (if any). And, in a tax year in which the taxpayer doesn't have an AMT liability, but the tentative minimum tax is in excess of the amount computed under the 25%-in-excess-of-$25,000 rule (above), the excess may limit the extent to which the general business credit is allowed against the regular tax (if any).
Under pre-2010 Small Business Act law, the following general business credits could offset AMT liability:
... the empowerment zone employment credit (including renewal community employment credits for tax years beginning before 2010) could offset 25% of AMT under Code Sec. 38(c)(2) (see FTC ¶L-15202.1; USTR ¶384.02; TaxDesk ¶380,503; );
... the New York Liberty Zone employment credit (that was in effect for certain wages paid or incurred before 2004) could offset 100% of AMT under Code Sec. 38(c)(3) (see FTC ¶L-15202.2; USTR ¶384.02; TaxDesk ¶380,503.5; ); or
... certain enumerated specified credits could offset 100% of AMT under Code Sec. 38(c)(4) , see FTC ¶L-15202.3; USTR ¶384.02; TaxDesk ¶380,503.1; .
Under Code Sec. 39 , amounts of otherwise allowable general business credits that aren't allowed because of the tax liability limit can, generally, be carried back one year to the tax year before the unused credit year, and carried forward to each of the 20 years following the unused credit year, see FTC 2d/Fin ¶L-15209; USTR ¶394.01; TaxDesk ¶380,509; . And, under Code Sec. 196 , some components of the general business credit, if not allowed by the end of the carryforward period, can be deducted at that time, see FTC 2d/Fin ¶L-15212; USTR ¶1964; TaxDesk ¶380,510; .
New Law. For eligible small business (ESB) credits (defined below) determined in tax years beginning in 2010 (Code Sec. 38(c)(5)(A) as amended by 2010 Small Business Act §2013(a)) ,Code Sec. 38 and Code Sec. 39 are applied separately with respect to ESB credits. (Code Sec. 38(c)(5)(A)(i) )
Specifically, in applying Code Sec. 38(c)(1) (the limitation based on a taxpayer's tax liability, see FTC 2d/Fin ¶L-15202; USTR ¶384.02; TaxDesk ¶380,502; ) to ESB credits (Code Sec. 38(c)(5)(A)(ii) ) in tax years beginning in 2010: (Code Sec. 38(c)(5)(A) )
(1) the tentative minimum tax is treated as being zero, and (Code Sec. 38(c)(5)(A)(ii)(I) )
(2) the limitation based on a taxpayer's tax liability under Code Sec. 38(c)(1) (as modified by item (1), above) is reduced by the credit allowed under Code Sec. 38(a) for the tax year (i.e., the sum of the current year, carryforward, and carryback business credit amounts), other than ESB credits. (Code Sec. 38(c)(5)(A)(ii)(II) )
Since the 2010 Small Business Act provides that the tentative minimum tax is treated as being zero for ESB credits (see item (1) above), an ESB credit can offset both regular and AMT liability. (Com Rept, see ¶5603)
For five-year carryback of ESB credits permitted under the 2010 Small Business Act, see ¶203 .
RIA observation: As explained below, ESB credits include all of the credits listed in Code Sec. 38(b) (the list of the credits comprising the current year business credit, see FTC 2d/Fin ¶L-15201; USTR ¶384.01; TaxDesk ¶380,501; ). As a practical matter, a taxpayer's current year business credit for a tax year beginning in 2010 won't include any general business credits other than ESB credits. Thus, for tax years beginning in 2010, the phrase “other than the ESB credits” in Code Sec. 38(c)(5)(A)(ii)(II) (see item (2) above) is presumably only relevant for determining the treatment of carryforwards and carrybacks of credits other than ESB credits from other tax years (i.e., from a tax year not beginning in 2010).
RIA observation: The rules for ESB credits described in items (1) and (2) above are essentially identical to the rules that permit certain specified credits to offset AMT liability, see FTC ¶L-15202.3; USTR ¶384.02; TaxDesk ¶380,503.1; .
RIA illustration 1: T, a sole proprietor, is an ESB (see below) and uses the calendar year as his tax year. For 2010, T has (1) a regular tax liability of $30,000 (before taking into account any credits), (2) an AMT of $15,000 (before taking into account any credits) and (3) a tentative minimum tax of $45,000. T has ESB credits of $50,000 and no other tax credits.
Under Code Sec. 38(c)(5)(A)(i) , the tax liability limitation is separately computed and applied. The limitation is equal to the excess of $45,000 (T's net income tax for the year) over the greater of: (a) $0 (T's tentative minimum tax treated as being zero), or (b) $1,250 (25% of the excess of T's net regular tax liability of $30,000 over $25,000). Since (b) is greater than (a), T's $45,000 of net income tax for the year is reduced by $1,250 and, thus, the tax liability limit is $43,750. Thus, for 2010, T is allowed $43,750 of his $48,000 of ESB credits in reduction of his regular tax liability and AMT. The $4,250 ($48,000 minus $43,750) of disallowed ESB credits can be separately carried back or forward to other tax years to the extent permitted by Code Sec. 39 (see above and ¶203 ).
ESB credits defined.
For purposes of Code Sec. 38(c) , the term “ESB credits” means the sum of the credits listed in Code Sec. 38(b) (the list of the component credits of the current year business credit, see FTC 2d/Fin ¶L-15201; USTR ¶384.01; TaxDesk ¶380,501; ) that are determined for the tax year with respect to an ESB (defined below). (Code Sec. 38(c)(5)(B) )
The ESB credits cannot be taken into account under:
... the rules permitting the empowerment zone employment credit (including the renewal community employment credit that applied for tax years beginning before 2010) to offset 25% of AMT under Code Sec. 38(c)(2) ,
... the rules permitting the New York Liberty Zone employment credit (for certain wages paid or incurred before 2004) to offset AMT under Code Sec. 38(c)(3) , or
... the rules permitting specified credits to offset AMT under Code Sec. 38(c)(4) . (Code Sec. 38(c)(5)(B) )
RIA observation: Thus, any credit meeting the definition of an ESB credit can't be taken into account as an empowerment zone credit, a New York Liberty Zone employment credit, or as a specified credit under Code Sec. 38(c)(2) ,Code Sec. 38(c)(3) , or Code Sec. 38(c)(4) . Due to the five-year carryback for ESB credits described at ¶203 , it is generally more advantageous for a taxpayer's credits that qualify as ESB credits to be taken into account as ESB credits rather than as empowerment zone employment credits, New York Liberty Zone employment credits, or specified credits, since these credits can only be carried back one year. Also, the treatment of an empowerment zone employment credit as an ESB credit permits that credit to offset 100% (instead of only 25%) of AMT.
ESB defined.
For purposes of Code Sec. 38(c) , an ESB is, with respect to any tax year: (Code Sec. 38(c)(5)(C) )
... a corporation the stock of which is not publicly traded, (Code Sec. 38(c)(5)(C)(i) )
... a partnership, or (Code Sec. 38(c)(5)(C)(ii) )
... a sole proprietorship, (Code Sec. 38(c)(5)(C)(iii) )
if the average annual gross receipts of the corporation, partnership, or sole proprietorship for the three-tax-year period preceding the tax year does not exceed $50,000,000. (Code Sec. 38(c)(5)(C) ) For example, a calendar year corporation meets the $50 million gross receipts test for the 2010 tax year, if as of Jan. 1, 2010, its average annual gross receipts for the three-tax-year period ending on Dec. 31, 2009, does not exceed $50 million. (Com Rept, see ¶5603)
RIA observation: A fiscal year taxpayer meets the $50 million gross receipts test for its tax year beginning in 2010 if its annual gross receipts for its tax years beginning in 2007, 2008, and 2009 (the three-tax-year testing period) does not exceed $50 million.
RIA illustration 2: ABC Corporation, a calendar year taxpayer, had gross receipts of $75 million in 2007, $45 million in 2008, and $36 million in 2009. ABC's average annual gross receipts for the three-tax-year testing period are $52 million [($75 million + $45 million + $36 million) ÷ 3]. Since ABC's gross receipts for the three-tax-year testing period exceed $50 million, ABC isn't an ESB and its general business credits can't offset the AMT under Code Sec. 38(c)(5) .
RIA observation: Although ABC's general business credits aren't ESB credits in illustration (2), any credits that are specified credits or empowerment zone employment credits can still offset ABC's AMT liability.
For purposes of applying the $50 million gross receipts test described above, rules similar to the rules of Code Sec. 448(c)(2) and Code Sec. 448(c)(3) (relating to the $5 million gross receipts exception to the prohibition on the use of the cash method of accounting by certain entities, see FTC 2d/Fin ¶G-2069; et seq. USTR ¶4484; TaxDesk ¶440,806; et seq.) apply. (Code Sec. 38(c)(5)(C) ) Thus, an ESB is, with respect to any tax year, a corporation, the stock of which is not publicly traded, or a partnership, which meets the gross receipts test of Code Sec. 448(c) , substituting $50 million for $5 million each place it appears. For a sole proprietorship, the gross receipts test is applied as if it were a corporation. (Com Rept, see ¶5603)
RIA observation: Thus, for purposes of applying the gross receipts test in Code Sec. 38(c)(5)(C) , the following rules apply:
... the Code Sec. 448(c)(2) rule aggregating gross receipts of related entities in determining whether the gross receipts test is met (see FTC 2d/Fin ¶G-2071; USTR ¶4484; TaxDesk ¶440,808; ). For this purpose, entities are related if they would be treated as a single employer under Code Sec. 52(a) (aggregation of members of controlled groups of corporations, see FTC 2d/Fin ¶L-17787; USTR ¶514; TaxDesk ¶380,719; ) or Code Sec. 52(b) (aggregation of commonly controlled businesses, whether or not incorporated, see FTC 2d/Fin ¶L-17787; USTR ¶514; TaxDesk ¶380,719; ), or under Code Sec. 414(m) (aggregation of certain affiliated organizations that provide services, see FTC 2d/Fin ¶H-7953; USTR ¶4144.05; ) or Code Sec. 414(o) (aggregation under authority of IRS to prevent avoidance of employee benefit requirements through the use of separate organizations, employee leasing or other means, see FTC 2d/Fin ¶H-7925; USTR ¶4144.01; TaxDesk ¶295,340; ). Thus, even if a taxpayer would have been an ESB based on its own gross receipts, its credits aren't ESB credits, if taking into account the gross receipts of all related entities, the total average gross receipts for the three-tax-year testing period exceeded $50 million. Also, gross receipts attributable to transactions between the related entities aren't taken into account for purposes of the $50 million gross receipts test.
... the Code Sec. 448(c)(3)(A) rule regarding the determination of gross receipts for corporations not in existence for the entire three-year period (see FTC 2d/Fin ¶G-2069; USTR ¶4484; TaxDesk ¶440,807; ). Thus, if a taxpayer (for example, a corporation) hasn't been in existence for the entire three-year period, the gross receipts test is applied on the basis of the period in which the corporation has been in existence.
... the Code Sec. 448(c)(3)(B) rule annualizing gross receipts in the case of a short tax year (see FTC 2d/Fin ¶G-2069; USTR ¶4484; TaxDesk ¶440,807; ). Thus, the gross receipts for any tax year of less than 12 months are annualized by multiplying the gross receipts for the short period by twelve and then dividing the result by the number of months in the short period.
... the Code Sec. 448(c)(3)(C) rule reducing gross receipts for returns and allowances (see FTC 2d/Fin ¶G-2070; USTR ¶4484; TaxDesk ¶440,808; ).
... the Code Sec. 448(c)(3)(D) rule taking predecessor corporations into account in determining whether a corporation meets the gross receipts test (see FTC 2d/Fin ¶G-2069; USTR ¶4484; TaxDesk ¶440,807; ).
RIA illustration 3: Partnership X and Partnership Y are treated as a single entity under the Code Sec. 448(c)(2) aggregation rules. Partnership X had gross receipts of $30 million in 2007, $25 million in 2008, and $15 million in 2009. Partnership Y had gross receipts of $20 million in 2007, $35 million in 2008, and $19 million in 2009. Each partnership uses the calendar year as its tax year. Assume Partnership X has $5 million of current year business credits for 2010 and Partnership Y doesn't have any general business credits for 2010.
For purposes of determining whether the average annual gross receipts exceed $50 million, Partnership X and Partnership Y's average gross receipts for the three-tax-year testing period are $48 million [($30 million + $25 million + $15 million + $20 million + $35 million + $19 million) ÷ 3]. Since Partnership X and Partnership Y's average annual gross receipts ($48 million) for the three-tax-year testing period don't exceed $50 million, Partnership X and Partnership Y are both ESBs. Thus, Partnership X's general business credits are ESB credits. For the requirement that partners also must satisfy the gross receipts requirement, see below.
RIA observation: For the first tax year of an entity's existence, the entity will qualify as an ESB, unless its gross receipts have to be aggregated with an existing entity (or entities) under Code Sec. 448(c)(2) , or the entity is treated as having a predecessor entity under Code Sec. 448(c)(3)(D) that had average annual gross receipts in excess of $50 million for the three-tax year testing period.
Partners and S corporation shareholders.
Credits determined with respect to a partnership or S corporation are not treated as ESB credits by any partner or shareholder unless the partner or shareholder meets the gross receipts test under Code Sec. 38(c)(5)(C) for the tax year in which the credits are treated as current year business credits. (Code Sec. 38(c)(5)(D) ) Thus, credits determined with respect to a partnership or S corporation are not treated as ESB credits by a partner or shareholder unless the partner or shareholder meets the gross receipts test for the tax year in which the credits are treated as current year business credits. (Com Rept, see ¶5603)
RIA observation: Thus, for ESB credits of a partnership or an S corporation, the gross receipts requirement has to be satisfied at the entity level and at the partner or S shareholder level.
RIA illustration 4: The facts are the same as in illustration (3). Partnership X has two individual partners, D and E, who each own 50% of Partnership X.
For the three-tax-year testing period, D had average annual gross receipts of $40 million and E had average annual gross receipts of $51 million. Since D's average annual receipts don't exceed $50 million, D can use his distributive share ($2.5 million) of X's ESB credits to offset any AMT liability. On the other hand, E, whose average annual gross receipts for the three-tax-year testing period exceed $50 million, can't use his distributive share ($2.5 million) of Partnership X's ESB credits to offset any AMT liability, unless the credits are specified credits (that can offset 100% of AMT) or empowerment zone employment credits (that can offset 25% of AMT).
RIA observation: Code Sec. 38(c)(5)(D) doesn't expressly provide any rules for determining the gross receipts of individual partners and S corporation shareholders. The rules provided in Code Sec. 448(c)(2) andCode Sec. 448(c)(3) (that are incorporated by reference in Code Sec. 38(c)(5)(C) , see above) don't address issues related to individuals because the prohibition on the use of the cash method of accounting under Code Sec. 448 applies to entities rather than individuals, see FTC 2d/Fin ¶G-2054; et seq. USTR ¶4484; TaxDesk ¶440,806; . Thus, IRS may need to provide guidance on certain issues including:
... whether the gross receipts of an individual partner or shareholder would include his pro-rata share of the gross receipts of the partnership or S corporation even if those receipts haven't been distributed to the partner or S shareholder.
... whether the gross receipts of an individual partner would include the gross receipts of his spouse.
Ordering rules.
The 2010 Small Business Act makes conforming changes to the ordering rules used for calculating the tax liability limitation under Code Sec. 38(c) for the following credits by inserting “ESB credits” in the list of credits that require separate calculations for purposes of Code Sec. 38 and Code Sec. 39 :
... the rule permitting the empowerment zone employment credit to offset 25% of AMT. (Code Sec. 38(c)(2)(A)(ii)(II) as amended by 2010 Small Business Act §2013(c)(1))
... rules permitting the New York Liberty Zone employment credit (that was in effect for certain wages paid or incurred before 2004) to offset AMT. (Code Sec. 38(c)(3)(A)(ii)(II) as amended by 2010 Small Business Act §2013(c)(2))
... rules permitting specified credits to offset AMT. (Code Sec. 38(c)(4)(A)(ii)(II) as amended by 2010 Small Business Act §2013(c)(3))
RIA observation: Presumably, the effects of the amendments to Code Sec. 38(c)(2)(A)(ii)(II) , Code Sec. 38(c)(3)(A)(ii)(II) , and Code Sec. 38(c)(4)(A)(ii)(II) are to require that the taxpayer separately apply the general business credit tax liability limitations on ESB credits after doing:
... the combined calculation required for most other credits that make up the general business credit;
... the separate calculation required for the empowerment zone employment credit (including the renewal community employment credit that applied for tax years beginning before 2010) under Code Sec. 38(c)(2)(A) ;
... the separate calculation of the general business credit tax liability limitations on the New York Liberty Zone business employee credit for certain wages paid or incurred before 2004 under Code Sec. 38(c)(3)(A) ; and
... the separate calculation of the general business credit tax liability limitations on the specified credits under Code Sec. 38(c)(4)(A) .
For a tax year beginning in 2010, the above rules will presumably only affect a taxpayer's carryforwards of the empowerment zone employment credit, the New York Liberty Zone business employee credit, and the specified credits, because the ESB credits for that tax year will include those credits.
RIA observation: Thus, as is true for the empowerment zone employment credit, the New York Liberty Zone business employee credit, and the specified credits, carrybacks and carryforwards of any unused ESB credits are calculated separately (rather than in a combined calculation). For five-year carryback for ESB credits, see ¶203 .
Redesignation.
The 2010 Small Business Act redesignated pre-2010 Small Business Act Code Sec. 38(c)(5) (providing special rules for determining the general business credit of married individuals, controlled groups, estates and trusts, and banks, regulated investment companies, and real estate investment trusts) as Code Sec. 38(c)(6) . (2010 Small Business Act §2013(a))
Effective: Credits determined in tax years beginning after Dec. 31, 2009, and to carrybacks of those credits. This effective date applies to the rules of 2010 Small Business Act §2013(a) (i.e.,Code Sec. 38(c)(5) , as discussed above). (2010 Small Business Act §2013(d))
RIA observation: The 2010 Small Business Act doesn't provide an effective date for the conforming changes made to the ordering rules (see above) by 2010 Small Business Act §2013(c) . Presumably, the effective date for those changes is Sept. 27, 2010.
Rules for apportioning the limitation on the minimum tax credit among members of a controlled group of corporations are corrected
Code Sec. 55(e)(5), as amended by 2010 Small Business Act §2013(b)
Generally effective: Sept. 27, 2010
Committee Reports, see ¶None
In computing the otherwise allowable minimum tax credit (see FTC 2d/Fin ¶A-8800; et seq. USTR ¶554.01; TaxDesk ¶691,500; et seq.) for a tax year that a corporation is exempt from the alternative minimum tax (AMT) as a small corporation (as defined in FTC 2d/Fin ¶A-8140; et seq. USTR ¶554.01; TaxDesk ¶691,200; et seq. ), the corporation has to reduce its regular tax liability for that year (after reduction by specified credits) by 25% of the excess of the liability over $25,000. Under pre-2010 Small Business Act law, Code Sec. 55(e)(5) provided that the $25,000 amount was apportioned among members of a controlled group of corporations under rules similar to the rules of Code Sec. 38(c)(3)(B) for purposes of computing the limit on the general business credit. FTC 2d/Fin ¶A-8807; USTR ¶554.01; TaxDesk ¶691,507;
RIA observation: The reference to Code Sec. 38(c)(3)(B) in Code Sec. 55(e)(5) is incorrect because Code Sec. 38(c)(3)(B) contains the definition of the New York Liberty business employee credit rather than rules for apportioning the limit on the general business credit among members of a controlled group of corporations. The incorrect reference resulted from Congress's failure to change the reference in Code Sec. 55(e)(5) to reflect two earlier redesignations of the rules formerly provided in Code Sec. 38(c)(3)(B) by 2002 Job Creation and Worker Assistance Act §301(b)(1) (Sec. 301(b)(1), PL 107-147, 3/9/2002 ) and 2004 Jobs Act § 711(a) (Sec. 711(a), PL 108-357, 10/22/2004 ). Under pre-2010 Small Business Act law, the apportionment rules were provided in Code Sec. 38(c)(5)(B) , see FTC 2d/Fin ¶L-15202.2; USTR ¶384.02; TaxDesk ¶380,503.5; . For the redesignation of Code Sec. 38(c)(5)(B) by the 2010 Small Business Act as Code Sec. 38(c)(6)(B) , see ¶301 .
New Law. The 2010 Small Business Act strikes the reference to Code Sec. 38(c)(3)(B) in Code Sec. 55(e)(5) and inserts a reference to Code Sec. 38(c)(6)(B) .(Code Sec. 55(e)(5) as amended by 2010 Small Business Act §2013(b))
RIA observation: According to a Senate Summary of Changes Made in the Substitute Amendment (dated July 21, 2010), the 2010 Small Business Act provides a correct cross reference to the general business credit provision on controlled groups from elsewhere in the Code.
Effective: Sept. 27, 2010

Employer-provided cell phones don't require strict “listed property” substantiation for employer's deduction and employee's exclusion as fringe benefit
Code Sec. 280F(d)(4)(A), as amended by 2010 Small Business Act §2043(a)
Code Sec. 274(d), 2010 Small Business Act §2043(a)
Code Sec. 280F(d)(3), 2010 Small Business Act §2043(a)
Code Sec. 132, 2010 Small Business Act §2043(a)
Code Sec. 179, 2010 Small Business Act §2043(a)
Generally effective: Tax years beginning after Dec. 31, 2009
Committee Reports, see ¶5611
Under Code Sec. 274(d) , no deduction or credit is allowed for an item of “listed property” (as defined in Code Sec. 280F(d)(4) ) unless the taxpayer substantiates, by adequate records or by the taxpayer's own statement supported by sufficient corroborating evidence, the following elements for the item: the amount of each separate expenditure for the item (e.g., the cost of buying it), the amount of each business or investment use of the item based on the appropriate measure (e.g., time), the total use of the item for the tax period, the date of each expenditure for or use of the item, and the business purpose for each expenditure for or use of the item. ( FTC 2d/Fin ¶L-4644; USTR ¶2744.10; TaxDesk ¶295,333; )
Additionally, if, for the year listed property is placed in service, it isn't used more than 50% for business purposes, the property: (1) doesn't qualify for the Code Sec. 179 expensing election (see FTC 2d/Fin ¶L-9900; et seq. USTR ¶1794; et seq. TaxDesk ¶268,400; et seq.), and (2) is depreciable only under straight-line depreciation using the alternative depreciation (ADS) recovery periods (see FTC 2d/Fin ¶L-9402; USTR ¶280F4; TaxDesk ¶267,502; ). ( FTC 2d/Fin ¶L-10018; USTR ¶280F4; TaxDesk ¶267,615; )
Except as otherwise provided, employer-provided fringe benefits are included in an employee's gross income as compensation for services. The employee must include in gross income the amount by which the fair market value of the fringe benefit exceeds the sum of (a) any amounts paid for the benefit by or for the employee, and (b) any amount specifically excluded by a Code section. ( FTC 2d/Fin ¶H-1055; USTR ¶1324; TaxDesk ¶134,003; ) A specific exclusion is provided for working condition fringe benefits (WCFBs). A WCFB is any property or services provided to an employee by the employer to the extent the cost of the property or services would have been deductible by the employee under either Code Sec. 162 (as trade or business expenses) or Code Sec. 167 (as depreciation expenses), taking into account the appropriate substantiation requirements, if the employee had paid for the property or services himself. Thus, for example, if the employer-provided property is “listed property,” the employee can't exclude the item as a WCFB unless the Code Sec. 274(d) substantiation requirements are met. ( FTC 2d/Fin ¶H-1701; USTR ¶1324.05; TaxDesk ¶134,010; )
And, under Code Sec. 280F(d)(3) , an employee who owns or leases listed property that he uses in his employment isn't allowed any depreciation deduction, expensing allowance, or deduction for lease payments for that use unless it's for the convenience of the employer and required as a condition of employment. ( FTC 2d/Fin ¶L-10022; USTR ¶280F4; TaxDesk ¶267,618; )
Under pre-2010 Small Business Act law, “listed property” as defined by Code Sec. 280F(d)(4) included cellular telephones (cell phones) and other similar telecommunications equipment (e.g., PDAs and Blackberry devices). (FTC 2d/Fin ¶L-10000; FTC 2d/Fin ¶L-10002; USTR ¶280F4; TaxDesk ¶267,616; ) This meant that the Code Sec. 274(d) substantiation requirements had to be met in order for employers to be able to deduct the cost of cell phones they provided to employees for employment-related business use, and for employees to treat employer-provided cell phones as excludible WCFBs. Employees couldn't deduct the costs of using their own cell phones for work unless a “convenience of the employer” test was met. Responding to complaints by individual businesses as well as business groups that treating cell phones as listed property was archaic and unreasonably burdensome, IRS issued Notice 2009-46 , which proposed simplified substantiation procedures for employer-provided cell phones and requested comments on those proposals (see FTC 2d/Fin ¶L-4644.1; TaxDesk ¶295,333.1; ).
New Law. The 2010 Small Business Act (the Act) removes cellular telephones (cell phones) and other similar telecommunications equipment from the categories of “listed property” under Code Sec. 280F(d)(4) .(Code Sec. 280F(d)(4)(A) as amended by 2010 Small Business Act §2043(a)) Thus, the heightened substantiation requirements and special depreciation rules that apply to listed property don't apply to cell phones. (Com Rept, see ¶5611)
RIA observation: According to the Senate Finance Committee Summary dated July 21, 2010, the Act “delists” cell phones so their cost can be deducted or depreciated like other business property costs, without onerous recordkeeping requirements. This means employers may deduct the cost of providing cell phones to their employees for employment-related business use, without having to satisfy the strict substantiation requirements for listed property. To support a deduction for the cell phones, the employer need only substantiate their cost, in much the same way as the employer supports the deduction for other types of business equipment (see FTC 2d/Fin ¶L-4501; et seq. USTR ¶1624; TaxDesk ¶257,001; et seq.).
RIA observation: The removal of cell phones from the Code Sec. 280F(d)(4) categories of “listed property” has important tax consequences for employers providing cell phones to employees for employment-related business use, employees using cell phones in connection with their employment, and self-employed individuals using cell phones in their businesses.
RIA observation: The “delisting” of cell phones also means that cell phones are no longer subject to the limitations described above for listed property that isn't used more than 50% for business purposes. That is, a taxpayer won't be denied a Code Sec. 179 expensing election for a cell phone (see FTC 2d/Fin ¶L-9900; et seq. USTR ¶1794; et seq. TaxDesk ¶268,400; et seq.), and won't be limited to using straight-line depreciation under the ADS system for a cell phone (see FTC 2d/Fin ¶L-9402; USTR ¶280F4; TaxDesk ¶267,502; ), solely because the cell phone isn't used more than 50% for business purposes in the year it's placed in service (see FTC 2d/Fin ¶L-10018; USTR ¶280F4; TaxDesk ¶267,615; ).
RIA observation: The Act also makes it easier for employees to claim deductions for their own cell phones if used for employment-related purposes. The elimination of “listed property” treatment means that the employee's use of his own cell phone won't have to be “for the convenience of the employer” and “as a condition of employment” (required under Code Sec. 280F(d)(3) for listed property) for the deductions (e.g., depreciation, expensing, lease payments) to be available. But the employee's use of his cell phone still must be in connection with the performance of services as an employee; i.e., the deductions are available only to the extent the cell phone is used for employment-related purposes. The costs associated with the employee's personal use of his own cell phone continue to be personal expenses, which are nondeductible under Code Sec. 262(a) (see FTC 2d/Fin ¶L-1009; USTR ¶2624; TaxDesk ¶255,507; ).
Employer-provided cell phones as an excludible fringe benefit.
RIA observation: For employees, the elimination of “listed property” treatment for cell phones makes it easier to claim employer-provided cell phones as excludible WCFBs. The Code Sec. 274(d) substantiation requirements no longer apply to the cell phones, so the employee won't have to meet those requirements to be allowed a Code Sec. 162 deduction for the phone. This, in turn, means the employee can exclude the cost of the phone as a WCFB, without having to keep the detailed records that Code Sec. 274(d) requires for listed property.
The Act doesn't affect IRS's authority to determine the appropriate characterization of cell phones as a WCFB under Code Sec. 132(d) . (Com Rept, see ¶5611)
RIA observation: Although the Act makes it easier for employees to claim the WCFB exclusion for employer-provided cell phones, it doesn't address the employee's personal use of the phone. It doesn't appear that a cell phone used for some personal use as well as for employment-related business use would pass muster as a WCFB. As explained above, a WCFB is any property or service provided to an employee of the employer to the extent that, if the employee paid for the property or services, the amount paid would be allowable as a deduction under Code Sec. 162 or Code Sec. 167 (see FTC 2d/Fin ¶H-1701; USTR ¶1324.05; TaxDesk ¶134,010; ). However, under Code Sec. 262(a) , no deduction is allowed for personal, living, or family expenses, unless otherwise provided (see FTC 2d/Fin ¶L-1009; USTR ¶2624; TaxDesk ¶255,507; ). Thus, absent a specific exclusion for personal cell phone use (e.g., as a de minimis fringe benefit, see below), an employee's exclusion for an employer-provided cell phone is limited to an amount based on his employment-related business use of the phone.
The Act doesn't affect IRS's authority to determine that the personal use of cell phones that are provided primarily for business purposes may qualify as a de minimis fringe benefit. (Com Rept, see ¶5611)
RIA observation: Code Sec. 132(a)(4) provides a specific exclusion from gross income for de minimis fringe benefits. As defined in Code Sec. 132(e) , a de minimis fringe benefit is any property or service whose value is so small that accounting for it is unreasonable or administratively impracticable, taking into account the frequency with which similar fringe benefits are provided by the employer to its employees (see FTC 2d/Fin ¶H-1801; et seq. USTR ¶1324.06; TaxDesk ¶134,013; et seq.). IRS could declare an employee's personal use of an employer-provided cell phone to be a tax-free de minimis fringe benefit.
Effective: Tax years beginning after Dec. 31, 2009. (2010 Small Business Act §2043(b))
RIA recommendation: Taxpayers that are subject to estimated tax in 2010, and that expect to report cell phone-related expenses for any of the remaining estimated tax installments for a tax year beginning after Dec. 31, 2009 (e.g., the installment for the fourth quarter of 2010, for calendar year taxpayers, see FTC 2d/Fin ¶S-5241; USTR ¶66,544.02; TaxDesk ¶571,335; ), should take advantage of the relaxed substantiation requirements for cell phones used for business purposes. That is, taxpayers may claim otherwise allowable deductions for the cell phones without having to comply with the strict “listed property” substantiation requirements.

Health insurance costs for self and family are deductible in computing 2010 self-employment tax
Code Sec. 162(l)(4), as amended by 2010 Small Business Act §2042(a)
Generally effective: Tax years beginning after Dec. 31, 2009, and before Jan. 1, 2011
Committee Reports, see ¶5610
Income tax deduction for self-employed individual's health insurance costs.
A self-employed individual can deduct as a trade or business expense the amount paid during the tax year for health insurance for:
... the taxpayer;
... the taxpayer's spouse;
... the taxpayer's dependents; and
... effective Mar. 30, 2010, any child of the taxpayer who hasn't attained age 27 as of the end of the tax year. ( FTC 2d/Fin ¶L-3510; USTR ¶1624.403; TaxDesk ¶304,420; )
The deduction isn't available for any month for which the taxpayer is eligible to participate in a subsidized health plan maintained by an employer of the taxpayer or of the taxpayer's spouse, dependent, or under-age-27 child. ( FTC 2d/Fin ¶L-3510; USTR ¶1624.403; TaxDesk ¶304,420; )
The deduction is limited to the earned income (within the meaning of Code Sec. 401(c) , i.e., net earnings from self-employment) from the trade or business for which the health insurance plan was established. ( FTC 2d/Fin ¶L-3511; USTR ¶1624.403; TaxDesk ¶304,420; )
Health insurance costs not deductible for self-employment tax.
With certain exceptions, each U.S. citizen or resident alien who has self-employment income for the tax year must pay a 15.3% self-employment (SE) tax consisting of:
(1) a 12.4% old-age, survivors, and disability insurance (OASDI) tax, commonly referred to as “social security tax”; and
(2) a 2.9% hospital insurance (HI) tax, commonly referred to as “Medicare tax.”
Both taxes are applied to net earnings from self-employment above a “floor” amount. There is also an annually-adjusted “ceiling” limitation on the OASDI tax ($106,800 in 2010), but no ceiling on the HI tax. ( FTC 2d/Fin ¶A-6001; USTR ¶14,014; TaxDesk ¶575,501; )
Net earnings from self-employment are generally an individual's trade or business income, less the deductions permitted by the Code that are attributable to that trade or business, plus the individual's distributive share of partnership income or loss. ( FTC 2d/Fin ¶A-6101; USTR ¶14,024; TaxDesk ¶576,012; )
However, under pre-2010 Small Business Act law, a self-employed individual's health insurance costs, although deductible for income tax purposes, weren't deductible in determining net earnings from self-employment. FTC ¶A-6113; USTR ¶1624.403; TaxDesk ¶576,023;
RIA observation: Thus, business owners couldn't deduct the cost of health insurance for themselves and their family members for purposes of calculating self-employment tax. (Senate Finance Summary, July 21, 2010)
New Law. Under the 2010 Small Business Act, the rule disallowing a deduction of a self-employed individual's health insurance costs in determining net earnings from self-employment applies only for tax years beginning before Jan. 1, 2010, or after Dec. 31, 2010.(Code Sec. 162(l)(4) as amended by 2010 Small Business Act §2042(a))
Thus, for the taxpayer's first tax year beginning after Dec. 31, 2009, the income tax deduction allowed to self-employed individuals for the cost of health insurance for themselves, their spouses, dependents, and children who haven't attained age 27 as of the end of the tax year is also allowed in calculating net earnings from self-employment for purposes of self-employment tax. (Com Rept, see ¶5610)
RIA observation: By reducing the after-tax cost of health insurance coverage, the provision makes it easier for the self-employed to afford coverage or to increase their existing coverage.
RIA illustration : For 2010, a self-employed individual (X) paid $13,770 for health insurance coverage for himself, his spouse, his 13-year-old son, and his 11-year-old daughter. As a result of the new provision, X can deduct the $13,770 in computing his net earnings from self-employment.
The 15.3% self-employment tax rate applied to the $13,770 of premiums is $2,107. But X's actual tax saving will be less.
If X's net earnings from self-employment are at least $120,570 (the $106,800 OASDI ceiling plus the $13,770 deduction), there will be no reduction in X's 12.4% OASDI tax. Only X's 2.9% HI tax, which has no ceiling, will be reduced.
In addition, an above-the-line income tax deduction is allowed for one-half of self-employment tax. (See FTC 2d/Fin ¶K-4401; USTR ¶1644.07; TaxDesk ¶326,002; ) So, any reduction in X's self-employment tax as a result of the new provision will cause an increase in X's income tax.
Effect on earned income limitation.
It's intended that earned income, within the meaning of Code Sec. 401(c) , be computed without regard to the self-employment tax deduction for health insurance costs. Thus, the self-employment tax deduction won't affect the earned income limitation on the income tax deduction for self-employed individual's health insurance costs. However, a technical correction may be needed to achieve this result. (Com Rept, see ¶5610)
Effective: Tax years beginning after Dec. 31, 2009 (2010 Small Business Act §2042(b)) , and before Jan. 1, 2011 (Code Sec. 162(l)(4) ) , i.e., the above rule only applies for the taxpayer's first tax year beginning after Dec. 31, 2009.(Com Rept, see ¶5610)
RIA recommendation: Because the rule permitting deduction of health insurance costs for purposes of the self employment tax is retroactive to the beginning of 2010, individuals who didn't reduce their earned income from self-employment for these amounts in calculating their 2010 estimated tax should consider recalculating and adjusting any remaining estimated tax payments for 2010 (e.g., for the installment for the fourth quarter of 2010, for most calendar year taxpayers, see FTC 2d/Fin ¶S-5241; USTR ¶66,544.02; TaxDesk ¶571,335; ).

Retirement plan distributions may be rolled over to a designated Roth account, but not tax-free; 2010 rollovers are taxed in 2011 and 2012
Code Sec. 402A(c)(4), as amended by 2010 Small Business Act §2112
Generally effective: Distributions made after Sept. 27, 2010
Committee Reports, see ¶5617
A qualified profit-sharing plan may include a cash or deferred arrangement, i.e., a 401(k) plan, which allows employees to make an election between receiving cash or having “elective contributions” made to the plan. Similarly, a 403(b) plan may allow employees to enter into a salary reduction agreement, under which employees may make an election between receiving cash or having “salary reduction contributions” made to the plan. The amount of elective deferrals (including elective contributions to a 401(k) plan and salary reduction contributions under a 403(b) plan) that an employee is permitted under either a 401(k) plan or a 403(b) plan is limited to an aggregate amount for a tax year ($16,500 for 2010), with an additional annual “catch-up” amount ($5,500 for 2010) for employees over age 50. ( FTC 2d/Fin ¶H-8975; ; FTC 2d/Fin ¶H-8975.1; ; FTC 2d/Fin ¶H-9151; ; FTC 2d/Fin ¶H-12471; USTR ¶4014.176; ; USTR ¶4024; ; USTR ¶4034.11; TaxDesk ¶284,011; ; TaxDesk ¶284,025; Pension Analysis ¶28,125.1; ; Pension Analysis ¶28,402; ; Pension Analysis ¶36,072; Pension & Benefits Explanations ¶401-4.176; ; Pension & Benefits Explanations ¶402-4; ; Pension & Benefits Explanations ¶403-4.11; )
If an “applicable retirement plan” (such as a 401(k) plan or a 403(b) annuity plan) includes a “qualified Roth contribution program,” then plan participants may elect to make either (i) non-excludable contributions to a “designated Roth account” in the plan, or (ii) excludable elective or salary reduction contributions in a non-Roth account. A participant who receives a plan distribution from a 401(k) plan or 403(b) plan generally must include in gross income the amount of elective or salary reduction contributions received in the distribution, and the earnings on these contributions. In contrast, after a five-tax-year holding period, a participant may receive from a designated Roth account qualified distributions—of both the elective or salary reduction contributions and the earnings on the elective deferrals—that are completely excludable from gross income. Qualified distributions from a designated Roth account must be made after the participant reaches age 59-1/2, dies, or becomes disabled. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12295; ; FTC 2d/Fin ¶H-12295.1; et seq. USTR ¶4014.1745; ; USTR ¶402A4; TaxDesk ¶283,401; et seq. Pension Analysis ¶35,251.1; et seq. Pension & Benefits Explanations ¶401-4.1745; ; Pension & Benefits Explanations ¶402A-4; )
A participant may receive a distribution of elective contributions under a 401(k) plan, or salary reduction contributions under a 403(b) plan, only after attainment of age 59-1/2, severance from employment, plan termination, hardship, disability, or death. ( FTC 2d/Fin ¶H-8975; ; FTC 2d/Fin ¶H-8978; ; FTC 2d/Fin ¶H-9200; ; FTC 2d/Fin ¶H-9201; ; FTC 2d/Fin ¶H-12479; USTR ¶4014.1763; ; USTR ¶4034.12; TaxDesk ¶284,005; Pension Analysis ¶28,128; ; Pension Analysis ¶28,502; ; Pension Analysis ¶36,080; Pension & Benefits Explanations ¶403-4.1763; ; Pension & Benefits Explanations ¶403-4.12; )
Eligible rollover distributions from eligible retirement plans (i.e., generally, plan distributions other than periodic distributions, minimum required distributions, or hardship distributions) may be contributed, without an annual dollar limit, to a 401(k) plan or a 403(b) plan and certain other plans, if certain requirements are met. Distributions rolled over to an eligible retirement plan generally are not includible in gross income. ( FTC 2d/Fin ¶H-3300; ; FTC 2d/Fin ¶H-3305.1; ; FTC 2d/Fin ¶H-11400; ; FTC 2d/Fin ¶H-11402; ; FTC 2d/Fin ¶H-12400; ; FTC 2d/Fin ¶H-12491; USTR ¶4024.04; ; USTR ¶4034.03; ; USTR ¶4574; TaxDesk ¶135,714; ; TaxDesk ¶144,001; ; TaxDesk ¶284,706; Pension Analysis ¶32,803; ; Pension Analysis ¶36,092; ; Pension Analysis ¶40,406.1; Pension & Benefits Explanations ¶402-4; ; Pension & Benefits Explanations ¶403-4.03; ; Pension & Benefits Explanations ¶457-4; )
Under pre-2010 Small Business Act law, rollovers to a designated Roth account could have been made only from another designated Roth account. FTC 2d/Fin ¶H-12290.17A; FTC 2d/Fin ¶H-12295.3; USTR ¶4014.1745; Pension Analysis ¶35,251.3; Pension & Benefits Explanations ¶401-4.1745;
Individuals who receive eligible rollover distributions from qualified Code Sec. 401(a) plans, 403(b) annuities, traditional IRAs, and governmental section 457 plans, may roll over these distributions directly into a Roth IRA, subject to the respective requirements for rollovers from these plans. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12290.17; USTR ¶408A4; TaxDesk ¶283,318; Pension Analysis ¶35,218; Pension & Benefits Explanations ¶408A-4; )
RIA observation: Thus, eligible rollover distributions from a qualified Code Sec. 401(a) plan, a 403(b) annuity plan, and a governmental section 457 plan, may be rolled over to a Roth IRA—but under pre-2010 Small Business Act law, these distributions could not have been rolled over to a designated Roth account.
The tax-free treatment that ordinarily applies for rollovers from eligible retirement plans does not apply to a qualified rollover contribution from an eligible retirement plan to a Roth IRA. Rather, for any distribution made with respect to an individual from an eligible retirement plan that is contributed to his Roth IRA in a qualified rollover contribution, the individual must include in gross income any amount that would have been includible in gross income if it were not part of a qualified rollover contribution. The Code Sec. 72(t) 10% early withdrawal tax does not apply to the rolled over amounts includible in gross income. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12290.20; USTR ¶408A4; TaxDesk ¶283,326; Pension Analysis ¶35,221; Pension & Benefits Explanations ¶408A-4; )
However, any portion of a distribution from a Roth IRA that: (i) is allocable to a qualified rollover contribution that was made to the Roth IRA from an applicable retirement plan, (ii) is made within the five-tax-year period beginning with the tax year in which the rollover contribution was made, and (iii) was includible in gross income as part of the qualified rollover contribution, is subject to the 10% early withdrawal tax, as if the distribution were includible in income. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12290.38; USTR ¶408A4; TaxDesk ¶283,346; Pension Analysis ¶35,239; Pension & Benefits Explanations ¶408A-4; )
Any amount that is includible in an individual's gross income for a tax year beginning in 2010 by reason of a distribution from an eligible retirement plan that is rolled over to a Roth IRA in a qualified rollover contribution, must be included in gross income ratably over the two-year period beginning with the first tax year beginning in 2011. An individual may elect out of the two-year ratable inclusion in gross income of the taxable portion of a 2010 distribution rolled over to a Roth IRA. However, the ratable inclusion of distribution income in gross income in 2011 and 2012 is accelerated if rollover amounts are distributed from the Roth IRA before 2012, or generally, if the individual dies before 2012. ( FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12290.20B; et seq. USTR ¶408A4; TaxDesk ¶283,326.1; et seq. Pension Analysis ¶35,221B; et seq. Pension & Benefits Explanations ¶408A-4; )
The employer maintaining a plan, the plan administrator, or the person issuing annuities, under which designated distributions may be made, or all of these persons (whichever is appropriate), must include additional information in reports required underCode Sec. 408(i) or Code Sec. 6047 that IRS may require to ensure the proper reporting of gross income from distributions rolled over to Roth IRAs. ( FTC 2d/Fin ¶S.3399.4; et seq. USTR ¶4084.04; ; USTR ¶408A4.04; TaxDesk ¶813,032; ; TaxDesk ¶813,039; Pension Analysis ¶56,315; ; Pension Analysis ¶56,352; Pension & Benefits Explanations ¶408-4; ; Pension & Benefits Explanations ¶408A-4; )
New Law. The 2010 Small Business Act provides that, for an “applicable retirement plan”—a qualified 401(k) plan, 403(b) annuity plan, or governmental section 457 plan (see ¶502 )—that maintains a qualified Roth contribution program, a distribution to an individual from (i) the portion of the plan that is not a designated Roth account, may be rolled over, in a qualified rollover contribution (within the meaning of Code Sec. 408A(e) , i.e., the Roth IRA rules), to (ii) the designated Roth account maintained under the plan for the benefit of the individual to whom the distribution was made. (Code Sec. 402A(c)(4)(B) as amended by 2010 Small Business Act §2112(a)) However, the rollover is not tax-free, see below.
RIA observation: Under the Roth IRA rules, a “qualified rollover contribution” means a rollover contribution from (i) another Roth IRA, or (ii) an eligible retirement plan, provided the rollover rules for that type of eligible retirement plan (e.g., Code Sec. 402(c) , for qualified plans) are met. Thus, a qualified rollover contribution to a designated Roth account is a rollover contribution from an applicable retirement plan that maintains a qualified Roth contribution program.
A plan that includes a designated Roth program is permitted, but not required, to allow rollover contributions (described above) to a designated Roth account. (Com Rept, see ¶5617)
A rollover contribution to a designated Roth account, if elected by an employee (or his surviving spouse), may be made through a direct rollover, i.e., the transfer of assets from the account that is not a designated Roth account, to the designated Roth account. (Com Rept, see ¶5617)
Any distribution from an applicable retirement plan (other than from a designated Roth account) that is contributed in a qualified rollover contribution to the designated Roth account, is not taken into account as a designated Roth contribution. (Code Sec. 402A(c)(4)(C) )
RIA observation: Thus, qualified rollover contributions to a designated Roth account do not count towards the maximum limit on the amount of elective deferrals for the tax year that an employee may designate as “designated Roth contributions.”
Requirements for rollovers to designated Roth accounts.
To be eligible for rollover to a designated Roth account, a distribution must be (i) an eligible rollover distribution, (ii) otherwise allowed under the plan, and (iii) allowable in the amount and form elected. For example, an amount in a 401(k) plan account that is subject to distribution restrictions cannot be rolled over to a designated Roth account under the new rollover rules. However, an employer may expand its distribution options beyond those currently allowed by the plan—e.g., a 401(k) plan can be amended to provide for in-service distributions, or distributions before normal retirement age—in order to allow employees to make a direct rollover of plan amounts to the designated Roth account within that plan. Indeed, a plan may condition an employee's eligibility for a new distribution option (e.g., eligibility for in-service distributions) on the employee's election to have the distribution directly rolled over to the designated Roth account.(Com Rept, see ¶5617)
RIA caution: If a 401(k) plan is so amended to allow in-service distributions, on (or not on) condition that the distributions be rolled over to a designated Roth account, the Code Sec. 401(k)(2)(B) distribution restrictions continue to apply, generally precluding 401(k) plan distributions before the employee's (i) attainment of age 59-1/2, (ii) severance from employment, (iii) death or disability, or (iv) hardship.
Plan amendments.
If a plan allows rollover contributions to a designated Roth account, the plan must be amended to reflect this plan feature. Congress intends that IRS will provide employers with a remedial amendment period that allows employers to offer this rollover option to employees (and surviving spouses) for 2010 distributions, with sufficient time to amend the plan to reflect this option. (Com Rept, see ¶5617)
Designated Roth account vs. Roth IRAs.
Although there are many similarities between the treatment of Roth IRAs and designated Roth accounts, one difference is that, in determining the taxation of Roth IRA distributions that are not qualified distributions, after-tax contributions are considered recovered before income. This basis-first recovery rule for Roth IRAs does not apply to distributions from designated Roth accounts. Another difference is that a first-time home buyer expense can be a qualified distribution from a Roth IRA (even without the occurrence of another event, such as the individual reaching age 59-1/2), but cannot by itself be a qualified distribution from a designated Roth account. (Com Rept, see ¶5617)
RIA observation: A taxpayer who can roll over an amount from an applicable employer plan to either a Roth IRA or a designated Roth account, might consider whether taking withdrawals from the Roth account or Roth IRA within the five-tax-year holding period for qualified distributions would result in additional tax on a distribution from a designated Roth account (because of the unavailability of the basis-first recovery rule). Also, a taxpayer who is contemplating a withdrawal from the Roth account or Roth IRA to purchase a home as a first-time home buyer, but who hasn't yet reached age 59-1/2, should consider that such a withdrawal can be a qualified distribution from a Roth IRA, but not from a designated Roth account, if the taxpayer has not reached age 59-1/2.
Rollovers to a designated Roth account are taxable.
Under the 2010 Small Business Act, the tax-free treatment of rollovers that ordinarily applies (under Code Sec. 402(c) for qualified plans, under Code Sec. 403(b)(8) for 403(b) annuities, and under Code Sec. 457(e)(16) for governmental section 457 plans) does not apply for distributions rolled over from an applicable retirement plan to a designated Roth account (as described above). Rather, the amount that an individual receives in a distribution from an applicable retirement plan that would be includible in gross income if it were not part of a qualified rollover distribution, must be included in his gross income. (Code Sec. 402A(c)(4)(A)(i) )
If a direct rollover is made by a transfer of property to a designated Roth account, then the amount of the distribution is the fair market value of the property on the date of the transfer. (Com Rept, see ¶5617)
Early withdrawal tax.
The Code Sec. 72(t) 10% tax on early withdrawals (which generally applies to the taxable portion of a plan or IRA distribution made before the participant has reached age 59-1/2, unless an exception applies) does not apply to distributions from applicable retirement plans that are contributed to a designated Roth account in a qualified rollover contribution. (Code Sec. 402A(c)(4)(A)(ii) )
However, although the Code Sec. 72(t) 10% early withdrawals tax generally does not apply to the portion of an early withdrawal that is rolled over in a qualified rollover contribution to a designated Roth account, a “recapture” rule applies to distributions within a specified five-tax-year holding period (under the rules of Code Sec. 408A(d)(3)(F) ). (Code Sec. 402A(c)(4)(D) )
RIA observation: Thus, any portion of a distribution from a designated Roth account that: (i) is allocable to a qualified rollover contribution from an applicable retirement plan other than a designated Roth account, (ii) is made within the five-tax-year period beginning with the tax year in which the rollover contribution was made, and (iii) was includible in gross income as part of the qualified rollover contribution, is subject to the 10% early withdrawal tax, as if the (latter) distribution were includible in income.
RIA observation: A participant who receives a distribution in Year 1 and rolls it over to a designated Roth account generally has basis in that account, to the extent of the amount includible in gross income from the distribution rolled over. Thus, a designated Roth account distribution received before the end of the specified five-tax-year holding period (for example, in Year 3) ordinarily, in part, would not be includible in the participant's gross income (to the extent the distribution is a return of basis). But under the recapture rules, the 10% early withdrawal tax would apply to the Year 3 distribution as if the Year 3 distribution were includible in income, up to the amount of the qualified rollover contribution that was includible in income in Year 1. As a result, the 10% early withdrawal tax will apply to the Year 3 distribution, up to the amount of the rollover distribution includible in gross income in Year 1.
Reporting.
The employer maintaining a plan, the plan administrator, or the person issuing annuities under which designated distributions may be made, or all of these persons (whichever is appropriate), must include additional information in reports required under Code Sec. 408(i) orCode Sec. 6047 that IRS may require to ensure the proper reporting of gross income from distributions rolled over to designated Roth accounts, as described above (as provided in Code Sec. 408A(d)(3)(D) ).(Code Sec. 402A(c)(4)(D) )
2010 rollover distribution taxed in 2011 and 2012.
Any amount that is includible in a taxpayer's gross income for any tax year beginning in 2010 by reason of a distribution from an applicable retirement plan that is rolled over to a designated Roth account (as described above) is included in gross income ratably over the two-year period beginning in the first tax year beginning in 2011. However, the taxpayer may elect to not have this two-year deferral apply (and thus, to include the taxable portion in gross income in the 2010 tax year). Any such election for any distributions made during a tax year may not be changed “after the due date for such taxable year.” (Code Sec. 402A(c)(4)(A)(iii) )
RIA observation: Presumably, the “due date for such taxable year” refers to the due date for 2010, i.e., for most individuals, Apr. 15, 2011. Neither the Act nor the Committee Reports indicate that the “due date” includes extensions.
Distributions or death before 2012.
The deferral of the tax on applicable retirement plan distributions to an individual that are rolled over to a designated Roth account in 2010 must be accelerated (under the rule of Code Sec. 408A(d)(3)(E) ) if the individual receives distributions from the designated Roth account in 2010 or 2011. Acceleration is also required if the individual dies before 2012, unless a surviving spouse acquires the entire account and elects to continue the deferral. These rules apply to a distribution from an applicable retirement plan that is rolled over to a designated Roth account (as described above). (Code Sec. 402A(c)(4)(D) )
Effective: Distributions made after Sept. 27, 2010. (2010 Small Business Act §2112(b))
¶ 502. Governmental section 457 plans can include a “qualified Roth contribution program”
Code Sec. 402A(e)(1)(C), as amended by 2010 Small Business Act §2111(a)
Code Sec. 402A(e)(2)(B), as amended by 2010 Small Business Act §2111(b)
Generally effective: Tax years beginning after Dec. 31, 2010
Committee Reports, see ¶5616
An “applicable retirement plan,” such as a 401(k) plan or a 403(b) annuity plan, has the option of including a “qualified Roth contribution program.” Under this program, plan participants are allowed to elect to make non-excludable “designated Roth contributions” to a “designated Roth account” in the plan, instead of excludable elective deferrals in a non-Roth account. A participant who elects to forego the exclusion from gross income for elective deferrals and makes designated Roth contributions instead, may receive qualified distributions from the designated Roth account that are excludable from gross income, after (i) waiting for a five-year holding period, and (ii) reaching age 59-1/2. Distributions after the five-tax-year holding period may also be qualified distributions if made on account of the participant's death or disability.
A “designated Roth contribution”—any contribution that a participant makes to a designated Roth account under a qualified Roth contribution program—is treated as an “elective deferral,” even though it is not excludable from gross income. An “elective deferral” under the qualified Roth contribution program rules means (i) employer contributions to 401(k) plans that would not be includible in employees' gross income (but for the Code Sec. 402A designated Roth account rules); and (ii) employer contributions to purchase a 403(b) annuity contract under a salary reduction agreement. FTC 2d/Fin ¶H-12290; ; FTC 2d/Fin ¶H-12295; ; FTC 2d/Fin ¶H-12295.1; et seq. USTR ¶4014.1745; ; USTR ¶402A4; TaxDesk ¶283,401; et seq. Pension Analysis ¶35,251.1; et seq. Pension & Benefits Explanations ¶401-4.1745; ; Pension & Benefits Explanations ¶402A-4; )
Under pre-2010 Small Business Act law, only qualified Code Sec. 401(a) plans and 403(b) annuity plans were “applicable retirement plans” that could have offered a qualified Roth contribution program. Thus, designated Roth contributions included only elective deferrals under a 401(k) plan or a 403(b) annuity plan. FTC 2d/Fin ¶H-12295; FTC 2d/Fin ¶H-12295.2; FTC 2d/Fin ¶H-12295.4; USTR ¶402A4; TaxDesk ¶283,402; TaxDesk ¶283,404; Pension Analysis ¶35,251.2; Pension Analysis ¶35,251.4; Pension & Benefits Explanations ¶402A-4;
New Law. The 2010 Small Business Act adds governmental section 457 plans (i.e., Code Sec. 457(b) eligible deferred compensation plans of a Code Sec. 457(e)(1)(A) eligible employer) to the definition of “applicable retirement plans” that can offer a qualified Roth contribution program. (Code Sec. 402A(e)(1)(C) as amended by 2010 Small Business Act §2111(a))
Thus, a section 457 plan maintained by a state, its political subdivision, agency, or instrumentality, or the state subdivision's agency or instrumentality, can include a qualified Roth contribution program. (Com Rept, see ¶5616)
RIA observation: Thus, governmental section 457 plans may allow participants to make contributions to a designated Roth account.
To be consistent with permitting governmental section 457 plans to provide a qualified Roth contribution program, the 2010 Small Business Act amends the definition of “elective deferral” to include any elective deferral of compensation by an individual under a governmental section 457 plan. (Code Sec. 402A(e)(2)(B) )
Effective: Tax years beginning after Dec. 31, 2010. (2010 Small Business Act §2111(c))

Partial annuitization of nonqualified annuity contracts is possible after 2010
Code Sec. 72(a), as amended by 2010 Small Business Act §2113
Generally effective: Amounts received in tax years after Dec. 31, 2010
Committee Reports, see ¶5618
Amounts “received as an annuity” under a life insurance, endowment, or annuity contract are includible in gross income, unless an exception is available. The payment may be over a specific period or during one or more lives. FTC 2d/Fin ¶J-5001; USTR ¶724; Pension Analysis ¶32,252; Pension & Benefits Explanations ¶74-4;
Under the annuity rule, a portion of each payment received is excluded based on an “exclusion ratio” (i.e., the “investment in the contract” divided by the “expected return”). The excludable amount of each payment is computed by multiplying it by the exclusion ratio. The “investment in the contract” is determined as of the “annuity starting date.” FTC 2d/Fin ¶J-5101; USTR ¶724; Pension Analysis ¶32,352; Pension & Benefits Explanations ¶72-4;
Before the 2010 Small Business Act, IRS, in Rev. Proc. 2008-24 , had ruled on the treatment of the partial exchange of annuity contracts, but IRS specifically said that the ruling did not apply to partial annuitization, which is the conversion of only a portion of an annuity, endowment or life insurance contract into annuity payments. In Rev. Proc. 2010-3 , IRS identified partial annuitization as a no ruling area that is under study by IRS.
New Law. Under the 2010 Small Business Act, the basic annuity taxation rule described above is retained without change. (Code Sec. 72(a)(1) as amended by 2010 Small Business Act §2113(a)) However, the 2010 Small Business Act adds a new rule that will permit the partial annuitization of a nonqualified annuity, endowment, or life insurance contract.
Under this new rule, if any amount is received as an annuity for a period of 10 years or more, or during one or more lives, under any portion of an annuity, endowment, or life insurance contract:
• that portion will be treated as a separate contract for annuity taxation purposes;
• for purposes of applying Code Sec. 72(b) (dealing with the calculation of the exclusion ratio for annuity distributions), Code Sec. 72(c) (definitions of “investment in the contract,” “expected return,” and “annuity starting date”), and Code Sec. 72(e) (dealing with the taxation of distributions from an annuity, endowment, or life insurance contract, that are not received as an annuity), the investment in the contract will be allocated pro rata between each portion of the contract from which amounts are received as an annuity, and the portion of the contract from which amounts are not received as an annuity, and
• a separate annuity starting date under Code Sec. 72(c)(4) (which defines “annuity starting date”) will be determined for each portion of the contract from which amounts are received as an annuity. (Code Sec. 72(a)(2) )
RIA observation: Thus, in its summary of the 2010 Small Business Act, dated July 21, 2010, the Senate Finance Committee indicates that the provision will allow holders of nonqualified annuities to elect to receive a portion of an annuity contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis.
RIA observation: Since “any portion” of an annuity contract is not defined, IRS guidance is needed to expand on this area of the new partial annuitization rule. Theoretically, “any portion” of a variable annuity could be a percentage of all the mutual fund assets in which the annuity is invested, or one mutual fund could be selected to annuitize.
RIA observation: The new partial annuitization rule does not apply to the special rules for qualified employer retirement plans under Code Sec. 72(d) .
The new rule is not intended to change the current-law rules for amounts received as an annuity (or as a lump sum) from Code Sec. 401(a) qualified plans, Code Sec. 403(a) annuity plans, Code Sec. 403(b) annuity plans, or individual retirement plans. (Com Rept, see ¶5618)
Effective: For amounts received in tax years beginning after Dec. 31, 2010. (2010 Small Business Act §2113(b))


Exception to pre-levy CDP hearing requirement extended to tax liability of certain federal contractors
Code Sec. 6330(f)(4), as amended by 2010 Small Business Act §2104(a)
Code Sec. 6330(h), as amended by 2010 Small Business Act §2104(b)
Generally effective: Levies issued after Sept. 27, 2010
Committee Reports, see ¶5615
IRS may not levy against a person's property or right to property unless it notifies the person in writing of his right to a hearing before the levy, i.e., a pre-levy Collection Due Process hearing (CDP hearing). The written notification informing a taxpayer of his right to a pre-levy CDP hearing accompanies the written notice of intent to levy. FTC 2d/Fin ¶V-5255; USTR ¶63,304; TaxDesk ¶902,505; .
IRS, however, doesn't have to hold a pre-levy CDP hearing if it determines that collection of tax is in jeopardy or before levying on a state to collect a federal tax liability from a state tax refund or in the case of a “disqualified employment tax levy.” In those cases, however, the taxpayer must be given an opportunity for a post-levy CDP hearing within a reasonable time period after the levy. FTC 2d/Fin ¶V-5257; USTR ¶63,304; TaxDesk ¶902,507; .
Under pre-2010 Small Business Act law, a “disqualified employment tax levy” was any levy to collect employment taxes for any tax period if the person subject to the levy (or a predecessor) requested a hearing under Code Sec. 6330 for unpaid “employment taxes” (taxes under Chapters 21, 22, 23 or 24 of the Code) arising in the most recent two-year period before the beginning of the tax period for which the levy was served. FTC 2d/Fin ¶V-5257; USTR ¶63,304; TaxDesk ¶902,507;
The Federal Payment Levy Program (FPLP) is an automated levy program that IRS has implemented with the Department of the Treasury, Financial Management Service (FMS). The FPLP was developed as the means to administer the continuous levy provision. Thus, no paper levy documents are served to levy under this provision. FTC 2d/Fin ¶V-5217; . Before making payments to federal contractors, an automated check for federal tax liabilities generally occurs using the FPLP. When a tax liability is identified, IRS issues a CDP notice to the contractor, but can't levy the payment until the CDP requirements are complete. Thus, under pre-2010 Small Business Act law, the chance to levy payments to the contractor might be lost because the CDP requirements couldn't be completed before the payment was made.
Under the continuous levy program, the effect of a levy on “specified payments” payable to or received by a taxpayer is continuous from the date the levy is first made until the levy is released. Notwithstanding Code Sec. 6334 (which provides exemptions from levy), this continuous levy will attach to up to 15% of any specified payment due to the taxpayer. However, the 15% maximum rate discussed above is increased to 100% in the case of any specified payment that is due to a vendor of goods or services sold or leased to the federal government. FTC 2d/Fin ¶V-5216; USTR ¶63,314.03; TaxDesk ¶902,216; .
A specified payment is: (a) any federal payment for which eligibility isn't based on a payee's income or assets (or both); (b) the minimum exempted amount of salary and wages; (c) worker's compensation payments; (d) annuity or pension payments under the Railroad Retirement Act and benefits under the Railroad Unemployment Insurance Act; (e) unemployment benefits; and (f) certain means-tested public assistance payments. FTC 2d/Fin ¶V-5217; USTR ¶63,314.03; TaxDesk ¶902,216; .
New Law. The 2010 Small Business Act provides that IRS also won't have to hold a pre-levy CDP hearing if IRS has served a “federal contractor levy.” (Code Sec. 6330(f)(4) as amended by 2010 Small Business Act §2104(a)) A federal contractor levy is any levy if the person subject to the levy (or any predecessor of that person) is a federal contractor. (Code Sec. 6330(h)(2) as amended by 2010 Small Business Act §2104(b)) Thus, IRS will be allowed to issue levies before a CDP hearing for federal taxes owed by federal contractors identified under the FPLP. When a levy is issued before a CDP hearing, the taxpayer will have an opportunity for a CDP hearing within a reasonable time after the levy. (Com Rept, see ¶5615)
RIA observation: Although IRS will be allowed to issue levies without a pre–levy CDP hearing regardless of whether the tax liability is identified through the FPLP, as a practical matter most federal contractor levies are likely to result from the FPLP.

Certain recipients of rental income from realty paying rental expenses of $600 or more in a post-2010 tax year will be subject to information reporting
Code Sec. 6041(h), as amended by 2010 Small Business Act §2101(a)
Generally effective: Payments made after Dec. 31, 2010
Committee Reports, see ¶5612
Code Sec. 6041(a) requires information reporting to IRS by all persons engaged in a trade or business who make certain payments in the course of that trade or business of $600 or more in any tax year to another person. Payments subject to information reporting are rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments and other fixed or determinable income (with certain exceptions set forth in Code Sec. 6041(a) ). For payments made after Dec. 31, 2011, payments subject to information reporting will also include amounts in consideration for property and gross proceeds. FTC 2d/Fin ¶S-3655; FTC 2d/Fin ¶S-3656; USTR ¶60,414; TaxDesk ¶814,001; A taxpayer whose rental activity is a trade or business is subject to this reporting requirement, but, under pre-2010 Small Business Act law, a taxpayer whose rental real estate activity is not considered a trade or business was not subject to the above described reporting requirement. (Com Rept, see ¶5612)
New Law. The 2010 Small Business Act provides that solely for purposes of Code Sec. 6041(a) , and except as provided in Code Sec. 6041(h)(2) (discussed below), a person receiving rental income from real estate will be considered to be engaged in a trade or business of renting property. (Code Sec. 6041(h)(1) as amended by 2010 Small Business Act §2101(a))
Thus, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider. (Com Rept, see ¶5612)
RIA illustration 1: A owns a 12-floor commercial building in the downtown area of City X. A rents out units as office or retail space in the building. A hires a plumber in Year 1 to make repairs to the building and pays the plumber $2,000 for Year 1. A is considered to be in a trade or business and must file an information return showing the $2,000 payment to the plumber.
Exceptions for certain recipients.
The rental property expense payment reporting treatment described above will not apply to:
... any individual who receives rental income of not more than the minimal amount, as determined under IRS regs; (Code Sec. 6041(h)(2)(B) )
RIA observation: Presumably, IRS will timely issue regs that will indicate the minimal amount of rental income that a recipient would need to earn to be subject to the reporting requirement.
... any individual, including one who is an active member of the uniformed services or an employee of the intelligence community (as defined in Code Sec. 121(d)(9)(C)(iv) , see FTC 2d/Fin ¶I-4528.4A; USTR ¶1214; TaxDesk ¶225,708.3A; ) if substantially all rental income is derived from renting the individual's principal residence (within the meaning of Code Sec. 121 , see FTC 2d/Fin ¶I-4522; USTR ¶1214; TaxDesk ¶225,702; ) on a temporary basis; (Code Sec. 6041(h)(2)(A) )
RIA observation: The term “substantially all” rental income is not defined for purposes of Code Sec. 6041(h)(2)(A) , nor is “temporary basis.” Thus, a situation may exist where a person renting his principal residence can reasonably expect to sell his residence within six months, but because the residential real estate market in the area declined, the person may have to wait several years to sell the property or take the property off the market for a period of time. It's unclear whether the taxpayer's intent will control for purposes of the “temporary basis” test, or whether IRS will set a length of time under regs or other guidance.
RIA illustration 2: B is laid off from his job in New Jersey and is hired for a new job in California. B is unable to sell his principal residence in New Jersey before moving, but not wanting to leave it vacant, he rents the house to C in Year 1. B expects his move to be permanent and intends to sell his New Jersey house as soon as he can. It becomes necessary during Year 1 for B to have a leak in the roof repaired for $1,000. Presumably, B will not have to file an information return for his $1,000 payment in Year 1 to a roofing contractor, if he is considered to be renting the principal residence on a temporary basis.
RIA observation: If the house in New Jersey is no longer considered B's principal residence because he buys or rents a residence in California, and the facts and circumstances indicate that B's principal residence is now in California (see Reg §1.121-1(b)(2) ), presumably B would not meet the exception to information reporting in Code Sec. 6041(h)(2)(A) .
RIA observation: If B rented out his house in New Jersey, was employed in California, bought a home in California, moved his family to California, registered to vote in California, obtained a California drivers' license, registered his car(s) in California, filed California resident or part-year resident income tax returns, moved his bank accounts to California, joined a church and social organizations in California, presumably the house in New Jersey would no longer be considered B's principal residence.
RIA observation: The result may be different if B rented his house to C in order to go to California for a four-months' temporary assignment on his job. If B stayed in a hotel, a bed and breakfast, or other temporary lodging in California and intended to return to New Jersey, presumably the house he rented to C would be considered his principal residence. The definition of principal residence is based on all the facts and circumstances under the Code Sec. 121 regs.
RIA observation: An individual who owns several residences will need to look to Code Sec. 121 and the regs under that Code section to determine which residence is the principal residence if one or more residences are rented out, in order to determine whether the individual meets the Code Sec. 6041(h)(2)(A) exception to the treatment of the receipt of rental income from real estate as a trade or business.
RIA illustration 3: R owns a house in Pennsylvania and a house in Florida. R divides his time between these two residences during the year. When R is at one residence, he arranges to rent the other, the Pennsylvania house to S and the Florida house to T. If R is to be considered not to be engaged in a trade or business with respect to one of the residences, he must determine which is his principal residence. This could be difficult if each property is rented for six months of the year. If R determines that the Pennsylvania house is his principal residence, then R is considered engaged in a trade or business with respect to the Florida house.
... any other individual for whom the requirements of Code Sec. 6041 would cause hardship, as determined under IRS regs. (Code Sec. 6041(h)(2)(C) )
RIA observation: Presumably, IRS will timely issue regs that will indicate what constitutes hardship with respect to information reporting requirements for persons receiving income from rental real estate.
Redesignations.
Pre-2010 Small Business Act Code Sec. 6041(h) and Pre-2010 Small Business Act Code Sec. 6041(i) are redesignated as Code Sec. 6041(i) andCode Sec. 6041(j) , respectively. (2010 Small Business Act §2101(a))
Effective: Payments made after Dec. 31, 2010. (2010 Small Business Act §2101(b))

Per return rates for information return penalty doubled and maximum and minimum penalty amounts increased
Code Sec. 6721(a)(1), as amended by 2010 Small Business Act §2102(a)
Code Sec. 6721(b)(1), as amended by 2010 Small Business Act §2102
Code Sec. 6721(b)(2), as amended by 2010 Small Business Act §2102(c)
Code Sec. 6721(d)(1), as amended by 2010 Small Business Act §2102(d)
Code Sec. 6721(e)(2), as amended by 2010 Small Business Act §2102(e)
Code Sec. 6721(f), as amended by 2010 Small Business Act §2102(f)
Generally effective: Information returns required to be filed after Dec. 31, 2010
Committee Reports, see ¶5613
Code Sec. 6721 imposes penalties for failing to provide timely, complete, and correct information returns, see FTC 2d/Fin ¶V-1803; USTR ¶67,214; TaxDesk ¶861,025; . Under pre-2010 Small Business Act law, if a person didn't file a correct information return on or before Aug. 1 of the calendar year in which the required filing date occurred, the amount of the penalty was $50 per return (third-tier penalty), with a maximum penalty of $250,000 per calendar year. If a person filed a correct information return after the prescribed filing date but on or before the date that was 30 days after the prescribed filing date, the amount of the penalty was $15 per return (first-tier penalty), with a maximum penalty of $75,000 per calendar year. If a person filed a correct information return after the date that was 30 days after the prescribed filing date but on or before Aug. 1 of the calendar year in which the required filing date occurred, the amount of the penalty was $30 per return (second-tier penalty), with a maximum penalty of $150,000 per calendar year. FTC 2d/Fin ¶V-1805; USTR ¶67,214; TaxDesk ¶861,026;
Under pre-2010 Small Business Act law, if a failure was due to intentional disregard of a filing requirement, the penalty calculations above did not apply. Instead the penalty for each failure was the greater of $100 (the $100 minimum) or an amount that varied based on the type of return, with no $250,000 maximum. The penalty applied regardless of the period of the failure and the small business reduction described below did not apply. FTC 2d/Fin ¶V-1811; USTR ¶67,214; TaxDesk ¶861,027;
Under pre-2010 Small Business Act law, the maximum penalties for small businesses (firms having average annual gross receipts for the most recent three tax years that don't exceed $5 million) were much lower than the above maximum limits. They were $25,000 if the failures were corrected on or before 30 days after the prescribed filing date; $50,000 if the failures were corrected on or before Aug. 1; and $100,000 if the failures weren't corrected on or before Aug. 1. FTC 2d/Fin ¶V-1805; USTR ¶67,214; TaxDesk ¶861,026;
The Code specifies the information returns and other statements that are subject to these penalties, see FTC 2d/Fin ¶V-1804; USTR ¶67,214; TaxDesk ¶861,029; .
New Law. The 2010 Small Business Act increases the third-tier penalty (for failures not corrected within the time limits described above) from $50 to $100 (Code Sec. 6721(a)(1) as amended by 2010 Small Business Act §2102(a)(1)) and increases the calendar year maximum limit on it from $250,000 to $1,500,000. (Code Sec. 6721(a)(1) as amended by 2010 Small Business Act §2102(a)(2))
The 2010 Small Business Act increases the first-tier penalty (for failures corrected within the 30-day period described above) from $15 to $30 (Code Sec. 6721(b)(1)(A) as amended by 2010 Small Business Act §2102(b)(1)) and increases the calendar year maximum limit on it from $75,000 to $250,000. (Code Sec. 6721(b)(1)(B) as amended by 2010 Small Business Act §2102(b)(2))
The 2010 Small Business Act increases the second-tier penalty (for failures corrected by the Aug. 1 deadline described above) from $30 to $60 (Code Sec. 6721(b)(2)(A) as amended by 2010 Small Business Act §2102(c)(1)) and increases the calendar year maximum limit on it from $150,000 to $500,000. (Code Sec. 6721(b)(2)(B) as amended by 2010 Small Business Act §2102(c)(2))
For small businesses (firms having average annual gross receipts for the most recent three tax years that don't exceed $5 million, see FTC 2d/Fin ¶V-1806; ) the calendar year maximum is increased from $100,000 to $500,000 for the third-tier penalty, (Code Sec. 6721(d)(1)(A) as amended by 2010 Small Business Act §2102(d)(1)(A)) from $25,000 to $75,000 for the first-tier penalty, (Code Sec. 6721(d)(1)(B) as amended by 2010 Small Business Act §2102(d)(1)(B)) and from $50,000 to $200,000 for the second-tier penalty. (Code Sec. 6721(d)(1)(C) as amended by 2010 Small Business Act §2102(d)(1)(C))
RIA observation: Thus, for the first-tier penalty (for failures corrected within the 30-day period described above), small businesses will have a maximum limit ($75,000) that will be the same as the maximum first-tier penalty limit for other businesses under pre-2010 Small Business Act law. In other cases, small businesses will have a maximum limit that will be higher than the generally applicable maximum under pre-2010 Small Business Act law, although it will still be much lower than the 2010 Small Business Act maximum for other businesses. Thus, for the third-tier penalty (for failures not corrected within the periods described above), small businesses will have a maximum penalty limit ($500,000) that will be twice the maximum third-tier penalty limit for other businesses ($250,000) that applied under pre-2010 Small Business Act law, but that will still be only one third of the 2010 Small Business Act maximum ($1,500,000) for other businesses.
The above changes are illustrated by the following table:
Pre-Small Business Act general penalty Pre-Small Business Act small business penalty New general penalty New small business penalty
First tier penalty $15 (maximum $75,000) $15 (maximum $25,000) $30 (maximum $250,000) $30 (maximum $75,000)
Second tier penalty $30 (maximum $150,000) $30 (maximum $50,000) $60 (maximum $500,000) $60 (maximum $200,000)
Third tier penalty $50 (maximum $250,000) $50 (maximum $100,000) $100 (maximum $1,500,000) $100 (maximum $500,000)
RIA observation: For returns required to be filed after 2010, the above changes double the basic per return penalty amount, but they increase the maximum limits even more dramatically. The maximum limit on the third-tier penalty is six times as large as under pre-Small Business Act law.
RIA illustration 1: A Corporation (X) with average annual gross receipts for the most recent three tax years that exceed $5 million fails to timely file 10,000 Forms 1099-MISC for Calendar Year 1. X eventually files these on Sept. 28, Year 2, after the period for reduction of the penalty has elapsed. Under pre-2010 Small Business Act law, X was subject to a $250,000 penalty for the 10,000 forms that weren't filed by Aug. 1 ($50 × 10,000 = $500,000 subject to a $250,000 limit). Under 2010 Small Business Act law, X is subject to a $1,000,000 penalty for the 10,000 forms that weren't filed by Aug. 1 ($100 × 10,000 = $1,000,000, or less than the $1,500,000 limit).
RIA illustration 2: A Corporation (Y) with average annual gross receipts for the most recent three tax years that exceed $5 million fails to timely file 11,500 Forms 1099-MISC for Calendar Year 1. 6,000 of these returns are filed with correct information within 30 days, and 5,500 after 30 days but on or before Aug. 1. For the same year, Y fails to timely file 500 Forms 1099-INT. Y eventually files these on Sept. 28, Year 2, after the period for reduction of the penalty has elapsed. Under pre-2010 Small Business Act law, Y was subject to a $25,000 penalty for the 500 forms that weren't filed by Aug. 1 ($50 × 500 = $25,000), $150,000 for the 5,500 forms filed after 30 days ($30 × 5500 = $165,000, limited to $150,000), and $75,000 for the 6,000 forms filed within 30 days ($15 × 6,000 = $90,000, limited to $75,000), for a total penalty of $250,000. Under 2010 Small Business Act law, Y is subject to a $50,000 penalty for the 500 forms that weren't filed by Aug. 1 ($100 × 500 = $50,000), $330,000 for the 5,500 forms filed after 30 days ($60 × 5,500 = $330,000, not subject to reduction by the $500,000 maximum limit), and $180,000 for the 6,000 forms filed within 30 days ($30 × 6,000 = $180,000, not subject to reduction by the $250,000 maximum penalty), for a total penalty of $560,000. Thus, the penalty more than doubled due to the combination of doubled per return amounts and maximum amounts that more than doubled.
The 2010 Small Business Act increases the minimum penalty for each failure due to intentional disregard from $100 to $250. (Code Sec. 6721(e)(2) as amended by 2010 Small Business Act §2102(e))
The new law also provides that the penalty amounts will be adjusted for inflation every five years with the first adjustment to take place after 2012, effective for each year thereafter. (Com Rept, see ¶5613) Specifically, for each fifth calendar year beginning after 2012, each of the dollar amounts under Code Sec. 6721(a) (relating to the third tier penalty), Code Sec. 6721(b) (relating to the first and second tier penalties), Code Sec. 6721(d) (relating to the special limits for small businesses), and Code Sec. 6721(e) (relating to intentional disregard) will be increased by the dollar amount multiplied by a cost-of-living adjustment. But, this won't apply to the $5,000,000 gross receipts test amount in Code Sec. 6721(d)(2)(A) ). The inflation adjustment will be determined under Code Sec. 1(f)(3) determined by substituting “calendar year 2011” for “calendar year 1992” in Code Sec. 1(f)(3)(B) . (Code Sec. 6721(f)(1) as amended by 2010 Small Business Act §2102(f))
RIA observation: Tax bracket amounts are indexed for inflation under Code Sec. 1(f) . The cost-of-living adjustment for a calendar year under Code Sec. 1(f)(3) is generally the percentage (if any) by which the consumer price index (CPI) for the preceding calendar year exceeds the CPI for calendar year '92 (the permanent base year). FTC 2d/Fin ¶A-1103; USTR ¶14.08; TaxDesk ¶568,203; . Thus, 2011 will be the base year for the inflation adjustments of the penalty amounts described above.
Amounts adjusted for inflation under the above rules are rounded differently depending on whether they are large or small amounts. If any amount adjusted for inflation under the above rules is $75,000 or more, it will be rounded to the next lowest multiple of $500 (if it is not itself a multiple of $500). (Code Sec. 6721(f)(2) )
If any amount adjusted for inflation under the above rules is less than $75,000, it will be rounded to the next lowest multiple of $10 (if it is not itself a multiple of $10). (Code Sec. 6721(f)(2) )
RIA observation: Thus, the per return penalties will be rounded to the next lowest multiple of $10, while the aggregate amounts will be rounded to the next lowest multiple of $500.
RIA observation: The 2010 Small Business Act also increases Code Sec. 6722 penalties for failure to furnish correct payee statements, see ¶603 .
Effective: Information returns required to be filed after Dec. 31, 2010. (2010 Small Business Act §2102(h))
Per statement rates for payee statement penalty and maximum and minimum penalty amounts increased
Code Sec. 6722, as amended by 2010 Small Business Act §2102(g)
Generally effective: Information returns required to be filed after Dec. 31, 2010
Committee Reports, see ¶5613
Code Sec. 6722 imposes penalties for (a) any failure to furnish a payee statement to the person prescribed, on or before the date prescribed, and (b) any failure to include all of the information required to be shown on the payee statement or any inclusion of incorrect information on the payee statement. FTC 2d/Fin ¶V-1814; USTR ¶67,224; TaxDesk ¶861,066; . Under pre-2010 Small Business Act law, except in cases of intentional disregard, persons who committed such failures were subject to a $50 penalty for each payee statement with respect to which a failure occurred, but the total amount imposed on any person for all such failures during any calendar year could not exceed $100,000. FTC 2d/Fin ¶V-1816; USTR ¶67,224; TaxDesk ¶861,068;
Under pre-2010 Small Business Act law, where the failure act was due to intentional disregard of the requirement to furnish a correct statement, the penalty for each such failure was $100 or, if greater:
(1) 10% of the aggregate amount of the items required to be reported correctly, in the case of a payee statement other than a statement required under any of the following:
• Code Sec. 6041A(e) , in respect of returns required under Code Sec. 6041A(b) (statements concerning payments to direct sellers),
• Code Sec. 6045(b) (statements concerning transactions, including real estate transactions, reportable by brokers),
• Code Sec. 6050H(d) (statements of payments of $600 or more in a calendar year of mortgage interest that is received in the course of a trade or business),
• Code Sec. 6050J(e) (statement concerning foreclosures or abandonments of property held as security for business loans),
• Code Sec. 6050K(b) statements concerning certain exchanges of partnership interests),
• Code Sec. 6050L(c) (statements concerning certain dispositions of donated property),
or:
(2) 5% of the aggregate amount of the items required to be reported correctly in the case of a payee statement required under Code Sec. 6045(b) (statements concerning transactions, including real estate transactions, reportable by brokers), Code Sec. 6050K(b) (statements concerning certain exchanges of partnership interests), or Code Sec. 6050L(c) (statements concerning certain dispositions of donated property).
In the case of the intentional disregard penalties described above, there was no $100,000 limitation on the amount of penalties that may be imposed on a taxpayer for a given calendar year. In addition, these intentional disregard penalties were not taken into account in applying the $100,000 limitation to other penalties. FTC 2d/Fin ¶V-1818; USTR ¶67,214; TaxDesk ¶861,070;
New Law. The 2010 Small Business Act revises the penalty for failure to furnish a payee statement to provide tiers and caps similar to those applicable to the penalty for failure to file the information return, discussed at ¶602 .(Com Rept, see ¶5613) Thus, the 2010 Small Business Act increases the basic penalty from $50 to $100 and increases the calendar year maximum limit on it from $100,000 to $1,500,000. (Code Sec. 6722(a)(1) as amended by 2010 Small Business Act §2102(g)) The Committee Reports refer to this penalty as the third-tier penalty. (Com Rept, see ¶5613)
The definition of a failure is the same as under pre-2010 Small Business Act law. (Code Sec. 6722(a)(2) )
However, the 2010 Small Business Act reduces the penalty for failures corrected on or before the day 30 days after the required filing date. In such cases the basic penalty is reduced from $100 to $30 (first-tier penalty). (Code Sec. 6722(b)(1)(A) ) The calendar year maximum limit per person for all such corrected failures is $250,000. (Code Sec. 6722(b)(1)(B) )
The 2010 Small Business Act also provides for a less significant reduction if a failure subject to the penalty is corrected after the 30-day deadline above, but on or before Aug. 1 of the calendar year in which the required filing date occurred. In such a case the basic penalty is reduced from $100 to $60 (second-tier penalty). (Code Sec. 6722(b)(2)(A) ) The calendar year maximum limit per person for all such corrected failures is $500,000. (Code Sec. 6722(b)(2)(B) )
Under the 2010 Small Business Act, the maximum penalties for small businesses are much lower than the above maximum limits. They are $500,000, rather than $1,500,000 if the failures aren't corrected on or before Aug. 1 of the calendar year in which the required filing date occurred (Code Sec. 6722(d)(1)(A) ) , $75,000 rather than 250,000 if the failures are corrected on or before 30 days after the prescribed filing date (Code Sec. 6722(d)(1)(B) ) , and $200,000 rather than $500,000 if the failures are corrected on or before Aug. 1. (Code Sec. 6722(d)(1)(C) ) Small businesses are defined as in Code Sec. 6721(d)(2) (firms having average annual gross receipts for the most recent three tax years that don't exceed $5 million, see FTC 2d/Fin ¶V-1806; USTR ¶67,214; TaxDesk ¶861,056; ).(Code Sec. 6722(d)(2) ) Thus, the 2010 Small Business Act changes the penalty structure in cases not involving intentional disregard from a simple structure ($50 per statement penalty up to a $100,000 maximum) into the complex structure illustrated by the following table:
New general penalty New small business penalty
Penalty for failure corrected within 30 days $30 (maximum $250,000) $30 (maximum $75,000)
Penalty for failure corrected by Aug. 1 $60 (maximum $500,000) $60 (maximum $200,000)
Penalty for failure not corrected by Aug. 1 $100 (maximum $1,500,000) $100 (maximum $500,000)
RIA observation: The exception for small business is particularly important because it relates to the maximum amount of the penalties. Although the above changes double the basic penalty amount where the statement doesn't meet the Aug. 1 deadline, they actually reduce it if the statement meets the 30-day deadline. But, the changes increase the maximum limits dramatically, except in the case of small businesses. Even the lowest maximum limit for persons other than small businesses (where the 30-day deadline is met) is $250,000 compared to the $100,000 limit under pre-Small Business Act law. Small businesses in this situation get a $75,000 maximum. The importance of the new law changes in the maximum limit are illustrated below.
RIA illustration 1: A Corporation (X) with average annual gross receipts for the most recent three tax years that exceed $5 million fails to timely furnish 10,000 statements for Calendar Year 1. X eventually files these on Sept. 28, Year 2, after the period for reduction of the penalty has elapsed. Under pre-2010 Small Business Act law, X was subject to a $100,000 penalty for the 10,000 statements ($50 × 10,000 = $500,000, subject to a $100,000 limit). Under 2010 Small Business Act law, X is subject to a $1,000,000 penalty for the 10,000 statements because they weren't filed by Aug. 1 ($100 × 10,000 = $1,000,000, which is less than the $1,500,000 maximum limit).
RIA illustration 2: A Corporation (Y) with average annual gross receipts for the most recent three tax years that exceed $5 million fails to timely file 12,000 statements for Calendar Year 1. 6,000 of these are filed with correct information within 30 days of the required date, and 5,500 after 30 days but on or before Aug. 1, Year 2. 500 statements are eventually filed on Sept. 28, Year 2, after the period for reduction of the penalty has elapsed. Under pre-2010 Small Business Act law, Y was subject to a $100,000 penalty for the 12,000 statements ($50 × 12,000 = $600,000 subject to a $100,000 limit). Under 2010 Small Business Act law, Y is subject to a $50,000 penalty for the 500 statements that weren't filed by Aug. 1 ($100 × 500 = $50,000), $330,000 for the 5,500 statements filed after 30 days ($60 × 5,500 = $330,000, not subject to reduction by the $500,000 maximum limit), and $180,000 for the 6,000 statements filed within 30 days ($30 × 6,000 = $180,000, not subject to reduction by the $250,000 maximum penalty), for a total penalty of $560,000. Thus, the penalty greatly increased due to the greatly increased maximum amounts. If there were no maximum limits under pre-2010 Small Business Act law, the penalty would actually have decreased (from $600,000 to $560,000).
Except as provided below, a de minimis number (as defined below) of payee statements that do not include all of the information required to be shown on the statement or that include incorrect information will be treated as having been furnished with all of the correct required information, if the failure is corrected on or before Aug. 1 of the calendar year in which the required filing date occurs. (Code Sec. 6722(c)(1) ) The de minimis number is the greater of 10 or one half of 1 percent of the total number of payee statements that the person is required to file during that calendar year. (Code Sec. 6722(c)(2) )
RIA illustration 3: Thus, if a corporation is required to file 10,000 payee statements for Year 1, the calculation of the de minimis exception is based on the 10,000 and therefore the de minimis number is 50.
The 2010 Small Business Act increases the minimum penalty for each failure due to intentional disregard from $100 to $250. (Code Sec. 6722(e)(2) ) The Act also provides that the penalty for each such failure is not affected by the reductions for correction within 30 days or by Aug. 1, the lower limits for small business and the exception for de minimis failures. (Code Sec. 6722(e)(1) ) In the case of these intentional disregard penalties, there is no $1,500,000 limitation on the amount of penalties that may be imposed on a taxpayer for a given calendar year. In addition, these intentional disregard penalties are not taken into account in applying the $1,500,000 limitation to other penalties. (Code Sec. 6722(e)(3) )
The calculation of the intentional disregard penalties is the same as under pre-2010 Small Business Act law, except for the increased minimum penalty. (Code Sec. 6722(e)(2) )
The 2010 Small Business Act also provides that the penalty amounts will be adjusted for inflation every five years with the first adjustment to take place after 2012, effective for each year thereafter. (Com Rept, see ¶5613) . Specifically, for each fifth calendar year beginning after 2012, each of the dollar amounts under Code Sec. 6722(a) (relating to the basic penalty), Code Sec. 6722(b) (relating to the reductions for correction within 30 days or by Aug. 1), Code Sec. 6722(d) (relating to the lower limits for small businesses), and Code Sec. 6722(e) (relating to intentional disregard) will be increased by the dollar amount multiplied by a cost-of-living adjustment. But, this won't apply to the $5,000,000 gross receipts test amount in Code Sec. 6722(d)(2) ). The inflation adjustment will be determined under Code Sec. 1(f)(3) determined by substituting “calendar year 2011” for “calendar year 1992” in Code Sec. 1(f)(3)(B) . (Code Sec. 6722(f)(1) )
RIA observation: Tax bracket amounts are indexed for inflation under Code Sec. 1(f) . The cost-of-living adjustment for a calendar year under Code Sec. 1(f)(3) is generally the percentage (if any) by which the consumer price index (CPI) for the preceding calendar year exceeds the CPI for calendar year '92 (the permanent base year). FTC 2d/Fin ¶A-1103; USTR ¶14.08; TaxDesk ¶568,203; . Thus, 2011 will be the base year for the inflation adjustments of the penalty amounts described above.
Amounts adjusted for inflation under the above rules are rounded differently depending on whether they are large or small amounts. If any amount adjusted for inflation under the above rules is $75,000 or more, it will be rounded to the next lowest multiple of $500 (if it is not itself a multiple of $500). (Code Sec. 6722(f)(2)(A) )
If any amount adjusted for inflation under the above rules is less than $75,000, it will be rounded to the next lowest multiple of $10 (if it is not itself a multiple of $10). (Code Sec. 6722(f)(2)(B) )
RIA observation: Thus, the per statement penalties will be rounded to the next lowest multiple of $10, while the aggregate amounts will be rounded to the next lowest multiple of $500.
RIA observation: The 2010 Small Business Act also increases Code Sec. 6721 penalties for failure to file information returns, see ¶602 .
Effective: Information returns required to be filed after Dec. 31, 2010. (2010 Small Business Act §2102(h))
RIA observation: The effective date above seems to be tailored to the related changes in the Code Sec. 6721 penalties for failure to file information returns, see ¶602 . The above changes to the Code Sec. 6722 penalty seem to be effective for statements due after Dec. 31, 2010.
Penalties for failing to report reportable and listed transactions retroactively reduced for post-2006 assessments
Code Sec. 6707A(b), as amended by 2010 Small Business Act §2041(a)
Generally effective: Penalties assessed after Dec. 31, 2006
Committee Reports, see ¶5609
Code Sec. 6707A imposes a penalty on any person who fails to include on any return or statement any information regarding a “reportable transaction” which is required under Code Sec. 6011 to be included with the return or statement. The penalty applies regardless of whether the transaction results in a tax understatement. The penalty also applies in addition to any other penalty that may be imposed under the Code. Regulations under Code Sec. 6011 require taxpayers to disclose with their returns certain information regarding each reportable transaction in which they participated. FTC 2d/Fin ¶V-2531; USTR ¶67,07A4; TaxDesk ¶866,501; .
Under pre-2010 Small Business Act law, the penalty for failure to report reportable transactions was $10,000 in the case of a natural person and $50,000 for others. These amounts were increased, however, if they involved a listed transaction to $100,000 for a natural person, and $200,000 for all others. FTC 2d/Fin ¶V-2532; USTR ¶67,07A4; TaxDesk ¶866,502;
Reportable transactions are certain types of transactions IRS has identified as having a potential for tax avoidance or evasion. A listed transaction for Code Sec. 6707A purposes means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by IRS as a tax avoidance transaction for Code Sec. 6011 purposes. Such identification may be made by notice, reg or other forms of published guidance. FTC 2d/Fin ¶V-2533; USTR ¶67,07A4; TaxDesk ¶866,503; , TaxDesk ¶866,504; .
After noting a Congressional commitment to enact legislation to address the perceived inequities caused by the imposition of the high listed transaction penalties described above on small businesses, IRS announced, on July 6, 2009, a suspension of Code Sec. 6707A collection enforcement through Sept. 30, 2009, in cases where the annual tax benefit from the transaction was less than $100,000 for individuals or $200,000 for other taxpayers per year. On Sept. 24, 2009, this suspension was extended through Dec. 31, 2009 to give Congress time to address the issue. On Dec. 23, 2009, IRS announced its intention to further extend the suspension until Mar. 1, 2010 and said it would hold off until Mar. 1, 2010 on filing new notices of lien where the amount due was solely related to Code Sec. 6707A penalties. IRS said it would work with taxpayers experiencing financial hardship due to existing liens covered by the moratorium. On Mar. 2, 2010, a further extension until June 1, 2010, was announced along with a continued intention to hold off on filing new notices of lien on amounts due that were solely related to Code Sec. 6707A penalties. FTC 2d/Fin ¶V-2531; USTR ¶67,07A4; TaxDesk ¶866,501;
New Law. The 2010 Small Business Act completely replaces the Code Sec. 6707A penalty structure. The new law says that, except as otherwise provided below, the amount of the penalty with respect to any reportable transaction shall be 75% of the decrease in tax shown on the return as a result of the transaction (or which would have resulted from the transaction if the transaction were respected for federal tax purposes). (Code Sec. 6707A(b)(1) as amended by 2010 Small Business Act §2041(a))
The 2010 Small Business Act changes the general rule for determining the amount of the applicable penalty to achieve proportionality between the penalty and the tax savings that were the object of the transaction. (Com Rept, see ¶5609)
Regardless of the amount determined under the general rule, the penalty for each such failure may not exceed certain maximum amounts. (Com Rept, see ¶5609) The new law provides that the amount of the penalty with respect to any reportable transaction for any tax year can't exceed:
(A) in the case of a listed transaction, $200,000 ($100,000 in the case of a natural person),
(B) in the case of any other reportable transaction, $50,000 ($10,000 in the case of a natural person). (Code Sec. 6707A(b)(2) )
RIA observation: Thus, the above rules provide for a dramatic lowering of the penalties. Note that the previously applicable penalty amounts required to be imposed with respect to listed transactions ($100,000 for natural persons and $200,000 for others) are now the maximum penalties for such persons with respect to listed transactions. The maximums apply to limit the penalty if the decrease in tax that triggered the penalty was more than $133,333.33 (.75 × $133,333.33 = $100,000) for natural persons and more than $266,666.67 (.75 × $266,666.67 = $200,000) for others.
Similarly, the previously applicable penalty amounts required to be imposed with respect to reportable transactions ($10,000 for natural persons and $50,000 for others) are now the maximum penalties for such persons with respect to reportable transactions. These maximums apply to limit the penalty if the decrease in tax that triggered the penalty was more than $13,333.33 (.75 × $13,333.33 = $10,000) for natural persons and more than $66,666.67 (.75 × $66,666.67 = $50,000) for others.
The 2010 Small Business Act also establishes a minimum penalty with respect to failure to disclose a reportable or listed transaction. (Com Rept, see ¶5609) Thus, the new law provides that the amount of the penalty with respect to any transaction can't be less than $5,000 for a natural person and $10,000 for any other person. (Code Sec. 6707A(b)(3) )
Illustration 1: Two individuals participate in a listed transaction through a partnership formed for that purpose. Both partners, as well as the partnership, are required to disclose the transaction. All fail to do so. The failure by the partnership to disclose its participation in a listed or otherwise reportable transaction is subject to the minimum penalty of $10,000, because income tax liability is not incurred at the partnership level nor reported on a partnership return. The partners in the partnership who also failed to comply with the reporting requirements of Code Sec. 6011 are each subject to a penalty based on the reduction in tax reported on their respective returns, but not in excess of $100,000 for each. (Com Rept, see ¶5609)
Illustration 2: A corporation participates in a single listed transaction over the course of three tax years. The decrease in tax shown on the corporate returns is $1 million in the first year, $100,000 in the second year, and $10,000 in the third year. If the corporation fails to disclose the listed transaction in all three years, the corporation is subject to three separate penalties: a penalty of $200,000 in the first year (as a result of the cap on penalties), a $75,000 penalty in the second year (computed under the general rule) and a $10,000 penalty in the third year (as a result of the minimum penalty) for total penalties of $285,000. (Com Rept, see ¶5609)
RIA observation: The 2010 Small Business Act also requires an annual report to Congress relating to the above penalty, see ¶703 .
Effective: Penalties assessed after Dec. 31, 2006. (2010 Small Business Act §2041(b))
RIA observation: Thus, not only does the 2010 Small Business Act provide for a dramatic lowering of the potentially applicable penalties, but it also makes the change retroactive to a date that long precedes the moratorium declared on July 6, 2009.
RIA recommendation: Taxpayers who have already paid a Code Sec. 6707A penalty should consider filing a refund claim due to the retroactive nature of the above change.

IRS required to submit annual reports to Congress on penalties and other enforcement actions
Code Sec. 6662A, 2010 Small Business Act §2103
Code Sec. 6700, 2010 Small Business Act §2103
Code Sec. 6707, 2010 Small Business Act §2103
Code Sec. 6707A, 2010 Small Business Act §2103
Code Sec. 6708, 2010 Small Business Act §2103
Code Sec. 6501(c)(10), 2010 Small Business Act §2103
Generally effective: Sept. 27, 2010
Committee Reports, see ¶5614
Under Code Sec. 6662A , a 20% accuracy-related penalty applies for “reportable transaction understatements” for any tax year (referred to below as the “reportable transaction understatement penalty”). The penalty rises is 30% for any portion of any reportable transaction understatement for which certain disclosure rules are not met. There is a reasonable cause exception to the penalty that isn't available if the 30% penalty rate applies. An item is subject to the penalty rules if the item is attributable to: (a) any listed transaction and (b) any reportable transaction (other than a listed transaction) if a significant purpose of the transaction is federal income tax avoidance or evasion. Reportable transactions are certain types of transactions IRS has identified as having a potential for tax avoidance or evasion. A listed transaction means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by IRS as a tax avoidance transaction for Code Sec. 6011 purposes. FTC 2d/Fin ¶V-2281; ; FTC 2d/Fin ¶V-2282; USTR ¶66,62A4; TaxDesk ¶868,101; .
Code Sec. 6700 imposes a civil penalty on any person who:
• organizes (or assists in the organization of) or participates (directly or indirectly) in the sale of any interest in (a) a partnership or other entity, (b) any investment plan or arrangement, or (c) any other plan or arrangement, and
• makes or furnishes, or causes another person to make or furnish, in connection with such organization or sale (a) a statement on the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement, which he knows (or has reason to know) is false or fraudulent as to any material matter, or (b) a gross valuation overstatement as to any material matter. FTC 2d/Fin ¶V-2401; USTR ¶67,004; .
IRS is authorized to waive all or part of any Code Sec. 6700 penalty resulting from a gross valuation overstatement, if there was a reasonable basis for the valuation and the valuation was made in good faith. FTC 2d/Fin ¶V-2409; USTR ¶67,004; .
Code Sec. 6707 provides that a material advisor (as defined in Code Sec. 6111 , i.e., any person who provides any material aid, assistance, or advice with respect to a reportable transaction, and who directly or indirectly derives gross income in excess of a threshold amount for the advice or assistance) who fails to file a timely information return required under Code Sec. 6111(a) , or who files a false or incomplete information return, for a reportable transaction (including a listed transaction) is subject to a penalty. The penalty is ordinarily $50,000 for each failure. However, if the failure relates to a listed transaction, the penalty is increased. The Code Sec. 6707A rules below apply to the rescission of this penalty. Thus, the penalty won't be rescinded for a listed transaction and there will be no right to a judicial appeal of a refusal to rescind a penalty. FTC 2d/Fin ¶V-2501; USTR ¶67,074; TaxDesk ¶866,505; .
Code Sec. 6707A imposes a penalty on any person who fails to include on any return or statement any information regarding a “reportable transaction” which is required under Code Sec. 6011 to be included with the return or statement. Regulations under Code Sec. 6011 require taxpayers to disclose with their returns certain information regarding each reportable transaction in which they participated. FTC 2d/Fin ¶V-2531; USTR ¶67,07A4; TaxDesk ¶866,501; . IRS may rescind all or any portion of the penalty for failing to disclose a reportable transaction imposed by Code Sec. 6707A for any violation if: (a) the violation is for a reportable transaction other than a listed transaction, and (b) rescinding the penalty would promote compliance with the Code and effective tax administration. A rescission determination isn't reviewable in any judicial proceeding. FTC 2d/Fin ¶V-2535; USTR ¶67,07A4; TaxDesk ¶866,505; . The Small Business Act retroactively reduced the amount of the above penalty, see ¶701 .
Each material advisor must maintain a list with respect to any reportable transaction and furnish the list to IRS on request. FTC 2d/Fin ¶S-4408.1; USTR ¶61,124; . Under Code Sec. 6708 , any person required to maintain a list of advisees with respect to reportable transactions who fails to make that list available to IRS on its written request within 20 business days after the request, is liable for a penalty of $10,000 per day for each day of the failure after the 20th day, see FTC 2d/Fin ¶V-2503; USTR ¶67,084; .
IRS is required to maintain records and report on the administration of the penalties for failure to disclose a reportable transaction in two ways. First, each decision to rescind a penalty imposed under Code Sec. 6707 orCode Sec. 6707A must be memorialized in a record in the Office of the Commissioner. Second, IRS must provide an annual report to Congress on the administration of rescission under both Code Sec. 6707 andCode Sec. 6707A . The information relating to Code Sec. 6707A must be in summary form, while the information on rescission of penalties imposed against material advisors must be more detailed. But, the report isn't required to address administration of the other enforcement tools described above. FTC 2d/Fin ¶V-2535; USTR ¶67,07A4; .
New Law. The 2010 Small Business Act provides that IRS must submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate an annual report on the penalties assessed by IRS during the preceding year under certain specified provisions.
The penalty provisions specified as the subjects of the above annual report are:
(1) Code Sec. 6662A (relating to the accuracy-related penalty on understatements with respect to reportable transactions).
(2) Code Sec. 6700(a) (relating to promoting abusive tax shelters).
(3) Code Sec. 6707 (relating to failure to furnish information regarding reportable transactions).
(4) Code Sec. 6707A (relating to failure to include reportable transaction information with a return).
(5) Code Sec. 6708 (relating to failure to maintain lists of advisees with respect to reportable transactions). (2010 Small Business Act §2103(a))
A summary of the penalties assessed for the preceding year is required. (Com Rept, see ¶5614)
The report required by the above rules must also include information on the following with respect to each year:
(A) Any action taken under 31 USC § 330(b) , with respect to any reportable transaction (as defined in Code Sec. 6707A(c) ).
(B) Any extension of the time for assessment of tax enforced, or assessment of any amount under such an extension, under Code Sec. 6501(c)(10) . (2010 Small Business Act §2103(b))
31 USC § 330(b) , cited at (A) above, authorizes the Treasury Department to impose sanctions on those appearing before the Department, including monetary penalties and suspension from practice before the Department. Thus, actions taken against practitioners appearing before the Treasury or IRS with respect to a reportable transaction must be reported to Congress. (Com Rept, see ¶5614)
Code Sec. 6501(c)(10) , cited at (B) above, provides that if a taxpayer fails to include on any return or statement for any tax year any information with respect to a listed transaction that is required under Code Sec. 6011 to be included with that return or statement, the time for assessment of any tax with respect to that transaction won't expire before one year after the earlier of: (a) the date when the required information is furnished to IRS, or (b) the date that a material advisor meets the list-maintenance requirements with respect to a request by IRS under Code Sec. 6112(b) relating to the transaction with respect to the taxpayer. FTC 2d/Fin ¶T-4163; USTR ¶65,014.147; TaxDesk ¶838,055; .
Thus, instances in which IRS attempted to rely on the exception to the limitations period for assessment based on failure to disclose a listed transaction must be reported to Congress. (Com Rept, see ¶5614)
The first report required under the above rules must be submitted not later than December 31, 2010. (2010 Small Business Act §2103(c))
Effective: Sept. 27, 2010.

Certain 2015 estimated taxes due for corporations with assets of $1 billion or more increase to 159.25%
Code Sec. 6655, 2010 Small Business Act §2131
Generally effective: Sept. 27, 2010
Committee Reports, see ¶5621
Generally, corporations are required to pay estimated income tax for each tax year in 4 equal installments due on the 15th day of the 4th, 6th, 9th, and 12th month of the tax year, see FTC 2d/Fin ¶S-5324.1; USTR ¶66,554; TaxDesk ¶609,201; .
RIA illustration 1: D Corp. uses a tax year beginning on Jan. 1. The due dates for its installments are: Apr. 15, June 15, Sept. 15, and Dec. 15.
Under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), before amended by 2010 HELP Act §12(b) (Sec. 12(b), PL 111-171, 5/24/2010 ), before amended by 2010 Burmese Import Restrictions Act §3 (Sec. 3, PL 111-210, 7/27/2010 ), before amended by 2010 Manufacturing Act §4002 (Sec. 4002, PL 111-227, 8/11/2010 ), and before amended by 2010 Firearms Excise Tax Act §4(a) (Sec. 4(a), PL 111-237, 8/16/2010 ), in the case of a corporation with assets of at least $1 billion (determined as of the end of the previous tax year), the amount of any required installment of corporate estimated tax otherwise due in July, Aug., or Sept. 2015 was 121.5% of that amount. 2010 HELP Act §12(b) (Sec. 12(b), PL 111-171, 5/24/2010 ) raised the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), in effect on May 24, 2010, by 0.75 percentage points, 2010 Burmese Import Restrictions Act §3 (Sec. 3, PL 111-210, 7/27/2010 ) raised the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), in effect on July 27, 2010, by 0.25 percentage points, 2010 Manufacturing Act §4002 (Sec. 4002, PL 111-227, 8/11/2010 ), raised the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), in effect on Aug. 11, 2010, by 0.5 percentage points, and 2010 Firearms Excise Tax Act §4(a) (Sec. 4(a), PL 111-237, 8/16/2010 ) raised the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), in effect on Aug. 16, 2010, by 0.25 percentage points. Thus, under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ), as amended by 2010 HELP Act §12(b) (Sec. 12(b), PL 111-171, 5/24/2010 ), as amended by 2010 Burmese Import Restrictions Act §3 (Sec. 3, PL 111-210, 7/27/2010 ), as amended by 2010 Manufacturing Act §4002 (Sec. 4002, PL 111-227, 8/11/2010 ), and as amended by 2010 Firearms Excise Tax Act §4(a) (Sec. 4(a), PL 111-237, 8/16/2010 ), in the case of a corporation with assets of at least $1 billion (determined as of the end of the previous tax year), the amount of any required installment of corporate estimated tax that would otherwise be due in July, Aug., or Sept. 2015 was 123.25% of that amount.
The amount of the next required installment after an increased installment must be appropriately reduced to reflect the amount of the increase. FTC 2d/Fin ¶S-5320; FTC 2d/Fin ¶S-5324.1; USTR ¶66,554; TaxDesk ¶609,201;
New Law. The 2010 Small Business Act provides that the percentage under 2010 HIRE Act §561(2) (Sec. 561(2), PL 111-147, 3/18/2010 ) in effect on Sept. 27, 2010 is increased by 36 percentage points. (2010 Small Business Act §2131) Thus, the 2010 Small Business Act increases the required payment of corporate estimated tax otherwise due in July, Aug., or Sept. 2015 by 36 percentage points. (Com Rept, see ¶5621)
RIA observation: Accordingly, the 2010 Small Business Act increases the corporate estimated tax payment due in July, Aug., or Sept. 2015 from 159.25% (123.25% + 36%) of the payment otherwise due.
RIA illustration 2: X Corp., a calendar-year taxpayer with assets of $2 billion, calculates its estimated tax payment otherwise due in Sept. 2015 to be $100,000,000. Instead, X must make a payment of $159,250,000 ($100,000,000 × 159.25%) by the due date in Sept. 2015. X calculates its estimated tax payment otherwise due in Dec. 2015 to be $100,000,000. X reduces the estimated tax payment otherwise due in Dec. 2015 by $59,250,000 ($159,250,000 − $100,000,000). Thus, X must make a payment of $40,750,000 ($100,000,000 − $59,250,000) by the due date in Dec. 2015.
RIA observation: Corporations with a fiscal year that begins July 1 will not be affected by the above rule, because they do not have any estimated tax payments due in July, Aug., or Sept.
RIA illustration 3: Z Corp. uses a tax year beginning on July 1. For Z's tax year beginning July 1, 2015, the due dates for its installments are: Oct. 15, 2015, Dec. 15, 2015, Mar. 15, 2016, and June 15, 2016.
RIA observation: The federal government's fiscal year begins Oct. 1. Thus, the 2010 Small Business Act effectively moves revenues from one fiscal year to another to meet budgetary requirements.
Effective: Sept. 27, 2010. (Com Rept, see ¶5621)
¶ 802. Crude tall oil and other fuels with acid numbers over 25 that are sold or used after Dec. 31, 2009 aren't eligible for the cellulosic biofuel producer credit
Code Sec. 40(b)(6)(E)(iii)(III), as amended by 2010 Small Business Act §2121(a)(3)
Generally effective: Fuels sold or used after Dec. 31, 2009
Committee Reports, see ¶5619
The cellulosic biofuel producer credit is a component of the alcohol fuel credit. This credit is a nonrefundable income tax credit for each gallon of qualified cellulosic fuel production of the producer for the tax year, and is in addition to any other credit available under the alcohol fuels credit, see FTC 2d/Fin ¶L-17501; USTR ¶404.01; TaxDesk ¶382,202; . The cellulosic biofuel producer credit applies to qualified cellulosic biofuel production after Dec. 31, 2008 and before Jan. 1, 2013, see FTC 2d/Fin ¶L-17516.1; USTR ¶404.07; TaxDesk ¶382,213; .
Cellulosic biofuel is any liquid fuel that:
... is produced from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis; and
... meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency (EPA) under §211 of the Clean Air Act (42 USC 7545).
Cellulosic biofuel doesn't include any alcohol with a proof of less than 150. For this purpose, the determination of the proof of any alcohol is made without regard to any added denaturants. See FTC 2d/Fin ¶L-17516.5; USTR ¶404.01; TaxDesk ¶382,213; . Also, under pre-2010 Small Business Act law, cellulosic biofuel (as defined above) does not include unprocessed fuels (sometimes referred to as black liquor) that are:
... more than 4% of the fuel (determined by weight) is any combination of water and sediment, or
... the ash content of the fuel is more than 1% (determined by weight). FTC 2d/Fin ¶L-17516.5A; USTR ¶404.11;
The kraft process for making paper produces a by-product called black liquor, which has been used for decades by paper manufacturers as a fuel in the papermaking process. Black liquor is composed of water, lignin and the spent chemicals used to break down the wood. The amount of the biomass in black liquor varies. The portion of the black liquor that is not consumed as a fuel source for the paper mills is recycled back into the papermaking process. Black liquor has ash content (mineral and other inorganic matter) significantly above that of other fuels. (Com Rept, see ¶5619)
Crude tall oil is generated by reacting acid with “black liquor soap.” Crude tall oil is used in various applications, such as adhesives, resins, and coatings. It also can be burned and used as a fuel. (Com Rept, see ¶5619)
New Law. Under the 2010 Small Business Act, cellulosic biofuel (as defined above) does not include any fuel if the fuel has an acid number greater than 25. (Code Sec. 40(b)(6)(E)(iii)(III) as amended by 2010 Small Business Act §2121(a)(3)) In other words, the 2010 Small Business Act modifies the cellulosic biofuel producer credit to exclude from the definition of cellulosic biofuel fuels with an acid number of greater than 25. (Com Rept, see ¶5619)
The acid number is the amount of base required to neutralize the acid in the sample. The acid number is reported as weight of the base (typically potassium hydroxide) per weight of sample, or milligram (“mg”) potassium hydroxide per gram. The normal acid number for crude tall oil is between 100 and 175. As a comparison, ASTM (American Society for Testing and Materials) D6751 for biodiesel specifies that the acid number be less than 0.5 mg potassium hydroxide. ASTM D4806 for ethanol does not have acid value but instead limits “acidity” to 0.007 mg of acetic acid per liter, which is significantly below an acid number of 25. (Com Rept, see ¶5619)
RIA observation: Since crude tall oil normally has an acid number between 100 and 175 (i.e., an acid number greater than 25), it is excluded from the definition of cellulosic biofuel and thus, isn't eligible for the cellulosic biofuel producer credit.
RIA observation: According to a Senate Summary (dated July 21, 2010) of the 2010 Small Business Act, 2010 Small Business Act §2121 limits eligibility for the tax credit to fuels that are not highly corrosive (i.e., fuels that could be used in a car engine or in a home heating application).
Effective: Fuels sold or used after Dec. 31, 2009. (2010 Small Business Act §2121(b))
RIA caution: If a producer uses a fiscal year as its tax year, the producer may have already filed an income tax return that contains a claim of the cellulosic biofuel producer credit based on crude tall oil sold or used in 2010. In that case, the producer will need to consider filing an amended return to change its claim of the cellulosic biofuel producer credit to reflect the exclusion of crude tall oil from the definition of cellulosic biofuel for any fuels sold or used after Dec. 31, 2009.

New rules provided for sourcing guarantee income
Code Sec. 861(a)(9), as amended by 2010 Small Business Act §2112(a)
Code Sec. 862(a)(9), as amended by 2010 Small Business Act §2122(b)
Code Sec. 864(c)(4)(B)(ii), as amended by 2010 Small Business Act §2122(c)
Generally effective: Guarantees issued after Sept. 27, 2010
Committee Reports, see ¶5620
Nonresident alien individuals and foreign corporations are generally subject to a 30% gross basis withholding tax on payments of U.S. source fixed or determinable annual or periodical (FDAP) income that is not effectively connected with a U.S. trade or business. ( FTC 2d/Fin ¶O-10101; ; FTC 2d/Fin ¶O-10103; ; FTC 2d/Fin ¶O-11903; USTR ¶8714.02; ; USTR ¶8814.02; ; USTR ¶14414; ; USTR ¶14424; TaxDesk ¶630,101; ; TaxDesk ¶632,001; ; TaxDesk ¶634,001; ) Foreign persons are also subject to U.S. income tax (in the same manner and at the same rates as U.S. persons) on income that is effectively connected with the conduct of a U.S. trade or business (ECI). Foreign source income is treated as ECI only if it falls into one of three specific statutory categories, and only if the foreign person has an office or other fixed place of business in the U.S. to which the income is attributable. Under pre-2010 Small Business Act law, one of these categories included interest or dividends derived in the active conduct of a banking, financing, or similar business within the U.S., or received by a corporation whose principal business is trading in stocks or securities for its own account. FTC 2d/Fin ¶O-10622; FTC 2d/Fin ¶O-10632; FTC 2d/Fin ¶O-10635; FTC 2d/Fin ¶O-10640.2; USTR ¶8614.11; USTR ¶8644.04; USTR ¶8644.05; TaxDesk ¶642,011;
The Code and regs provide sourcing rules for certain categories of income. For example, interest income is generally sourced to the residence of the obligor and personal services income is generally sourced to where the services are performed. Courts have sourced some items of income in categories that are not subject to a specific source rule by analogy, i.e., by applying the rule that applies to the most similar type of income. ( FTC 2d/Fin ¶O-10900; et seq. USTR ¶8614.01; TaxDesk ¶633,000; et seq.)
Under pre-2010 Small Business Act law, guarantee fees were not covered by a specific sourcing rule and courts had sourced them by analogy. Certain credit fees were sourced as income from services when they were charged for specific services, for example, the negotiation of letter of credit commissions. Acceptance and confirmation payments on export letters of credit to third party banks, on the other hand, have been treated as more closely analogous to interest because they involved a substitution of credit and the assumption of increased risk by the guarantor. In Container Corp. 134 TC No. 5 (Feb. 17, 2010), the Tax Court treated guarantee fees paid to a foreign parent as analogous to payments for services when the parent had no primary obligation to make payments on the underlying debt. The Court concluded that credit support — as opposed to credit substitution — was more in the nature of personal services and should be sourced as payments for services. Since the guarantee was based on the parent's assets and creditworthiness, the fees were held to be foreign source income and withholding was not required under Code Sec. 1442 .FTC 2d/Fin ¶O-10907.1;
New Law. The 2010 Small Business Act (Act) provides specific sourcing rules for guarantee fees that are intended to legislatively overrule Container Corp.(Com Rept, see ¶5620) Under the Act, gross income from sources within the U.S. includes amounts received, directly or indirectly, from:
(A) a noncorporate resident or domestic corporation for the provision of a guarantee of any indebtedness of that resident or corporation (Code Sec. 861(a)(9)(A) as amended by 2010 Small Business Act §2122(a)) , or
(B) any foreign person for the provision of a guarantee of any indebtedness of such person, if those amounts are connected with income that is effectively connected (or treated as effectively connected) with the conduct of a U.S. trade or business. (Code Sec. 861(a)(9)(B) )
Any amounts received, directly or indirectly, from a foreign person for the provision of a guarantee of indebtedness of that person, other than amounts derived from sources within the U.S. described in Code Sec. 861(a)(9) are treated as income from foreign sources. (Code Sec. 862(a)(9) as amended by 2010 Small Business Act §2122(b)) )
Illustration : A foreign bank pays a guarantee fee to a foreign corporation (FC) for FC's guarantee of debt owed to the bank by FC's U.S. subsidiary. The cost of the guarantee fee is passed on to the U.S. subsidiary as additional interest on the debt. The guarantee is treated as U.S. source income because it is treated as paid indirectly by the U.S. subsidiary. (Com Rept, see ¶5620)
RIA observation: This allows IRS to tax payments of guarantee fees from U.S. subsidiaries to foreign parents as it taxes other payments received by foreign companies in connection with financing U.S. risks by treating the fees like any other U.S. source FDAP income without regard to the nature of the underlying credit and economic arrangements. IRS had earlier ruled that (i) guarantee fees paid to a foreign parent for third party loans could not be treated as fees in exchange for services under U.S. tax principles, (ii) that guarantee fees were more closely analogous to interest payments and should be sourced under the interest sourcing rules, but (iii) that guarantee fees could not be characterized as interest under an income tax treaty (because the third party loans were not made for the use or forbearance of money) and payment were therefore ineligible for treaty benefits. FTC 2d/Fin ¶O-10907.1; .
RIA observation: This provision prevents foreign multinationals from stripping out income from U.S. subsidiaries by guaranteeing their debts through a tax haven entity. If the guarantee fees were treated as foreign source (as they would be under Container Corp.), the payments would be deductible against U.S. earnings but not be limited by the Code Sec. 163(j) earnings stripping provisions (which limit the deductibility of certain interest payments to related persons, including interest on a loan from an unrelated tax-exempt or foreign person that is guaranteed by a related tax-exempt or foreign person, see FTC 2d/Fin ¶K-5364; ). Furthermore, they would not be subject to U.S. withholding tax, even if the payee was in a non-treaty country. (A taxpayer could not achieve these tax benefits with a guarantee from a CFC to the extent the CFC had inbound guarantees treated as investments in U.S. property under Code Sec. 956 , see FTC 2d/Fin ¶O-2549; USTR ¶9564.02; .)
RIA observation: Most U.S. income tax treaties do not have specific rules on the treatment guarantee payments, but many include a catchall provision that governs the treatment of income not otherwise subject to a specific provision in the treaty. Some treaties provide an exemption from source country tax on other income. This type of provision would likely prohibit U.S. tax on guarantee fees paid by a U.S. subsidiary to a resident of the other treaty country, unless it was associated with a permanent establishment. Under the U.S.–Canada Treaty, the other income article includes a specific rule that guarantee fees derived by a resident of one country are taxable only in the country of residence unless they are attributable to a permanent establishment in the other country (see FTC 2d/Fin ¶O-19035; ). Payments of guarantee fees to a Canadian corporation for related party guarantees, therefore, are not subject to U.S. withholding tax under the U.S.–Canada Treaty so long as the Canadian corporation does not engage in the trade or business of providing guarantees through a U.S. permanent establishment.
The term "noncorporate residents" is intended to be consistent with Code Sec. 861(a)(1) (in connection with sourcing interest payments), except that foreign partnerships are not included. Payments from a foreign partnership with respect to guarantees of partnership debt are U.S. source if the payments are connected with ECI. (Com Rept, see ¶5620)
RIA observation: This treatment is consistent with the Code Sec. 861(a)(1)(C) source rule for interest paid by a foreign partnership predominantly engaged in the active conduct of a trade or business outside the U.S.. Interest income of a foreign partnership from domestic sources is not U.S. source income unless it is paid by a trade or business engaged in by the partnership in the U.S., or it is allocable to income effectively connected (or treated as effectively connected) with the conduct of a trade or business in the U.S.
The 2010 Small Business Act further provides that amounts received for the provision of guarantees of indebtedness will be treated as effectively connected with the conduct of a foreign corporation's U.S. trade or business if they are attributed to an office or other fixed place of business within the U.S., and either (i) the taxpayer's principal business is the active conduct of a banking, financing, or similar business within the U.S., or (ii) the income is received by a foreign corporation engaged in a U.S. business consisting of trading in stocks or securities for its own account. (Code Sec. 864(c)(4)(B)(ii) as amended by 2010 Small Business Act §2122(c))
RIA observation: This conforming provision allows the U.S. to tax guarantee fees generated in the business of financing U.S. risks through subsidiaries as it taxes other payments received by foreign companies for financing such as interest (see FTC 2d/Fin ¶O-10632; ; FTC 2d/Fin ¶O-10635; USTR ¶8644.04; ).
IRS may provide source rules for other types of payments not covered by Code Sec. 861(a)(9) .(Com Rept, see ¶5620)
Effective: Guarantees issued after Sept. 27, 2010. (2010 Small Business Act §2122(d))
Congress intends no inference regarding the source of income received for guarantees issued before Sept. 27, 2010. (Com Rept, see ¶5620)
© 2010 Thomson




§ 6707A Penalty for failure to include reportable transaction information with return.
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(a) WG&L Treatises Imposition of penalty.
Any person who fails to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty in the amount determined under subsection (b).
(b) WG&L Treatises Amount of penalty.
(1) New Law AnalysisWG&L Treatises In general.
Except as otherwise provided in this subsection , the amount of the penalty under subsection (a) with respect to any reportable transaction shall be 75 percent of the decrease in tax shown on the return as a result of such transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes).
(2) New Law AnalysisWG&L Treatises Maximum penalty.
The amount of the penalty under subsection (a) with respect to any reportable transaction shall not exceed—
(A) in the case of a listed transaction, $200,000 ($100,000 in the case of a natural person), or
(B) in the case of any other reportable transaction, $50,000 ($10,000 in the case of a natural person).
(3) New Law Analysis Minimum penalty.
The amount of the penalty under subsection (a) with respect to any transaction shall not be less than $10,000 ($5,000 in the case of a natural person).
(c) WG&L Treatises Definitions.
For purposes of this section —
(1) WG&L Treatises Reportable transaction.
The term “reportable transaction” means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.
(2) Listed transaction.
The term “listed transaction” means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.
(d) Authority to rescind penalty.
(1) In general.
The Commissioner of Internal Revenue may rescind all or any portion of any penalty imposed by this section with respect to any violation if—
(A) the violation is with respect to a reportable transaction other than a listed transaction, and
(B) rescinding the penalty would promote compliance with the requirements of this title and effective tax administration.
(2) No judicial appeal.
Notwithstanding any other provision of law, any determination under this subsection may not be reviewed in any judicial proceeding.
(3) Records.
If a penalty is rescinded under paragraph (1), the Commissioner shall place in the file in the Office of the Commissioner the opinion of the Commissioner with respect to the determination, including—
(A) a statement of the facts and circumstances relating to the violation,
(B) the reasons for the rescission, and
(C) the amount of the penalty rescinded.
(e) Penalty reported to SEC.
In the case of a person—
(1) which is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 or is required to be consolidated with another person for purposes of such reports, and
(2) which—
(A) is required to pay a penalty under this section with respect to a listed transaction,
(B) is required to pay a penalty under section 6662A with respect to any reportable transaction at a rate prescribed under section 6662A(c), or
(C) is required to pay a penalty under section 6662(h) with respect to any reportable transaction and would (but for section 6662A(e)(2)(B)) have been subject to penalty under section 6662A at a rate prescribed under section 6662A(c),
the requirement to pay such penalty shall be disclosed in such reports filed by such person for such periods as the Secretary shall specify. Failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which the penalty under subsection (b)(2) applies.
(f) Coordination with other penalties.
The penalty imposed by this section shall be in addition to any other penalty imposed by this title.