US Small Business Tax Bill Unveiled

by Mike Godfrey, Tax-News.com, Washington

17 March 2010

House Ways and Means Committee Chairman Sander M. Levin has unveiled a discussion draft of the Small Business and Infrastructure Jobs Tax Act, which proposes additional tax relief for small businesses.

The main tax break in the proposed legislation is 100% exclusion of small business capital gains from taxable income. Under current law, Section 1202 of the Internal Revenue Code provides a 50% exclusion for gain from the sale of certain small business stock that is held for more than five years.

The amount of gain eligible for the Section 1202 exclusion is limited to the greater of 10 times the taxpayer’s basis in the stock, or USD10m gain from stock in that small business corporation. This provision is limited to individual investments and not the investments of a corporation. The non-excluded portion of section 1202 gain is taxed at the lesser of ordinary income rates or 28%, instead of the lower capital gains rates for individuals.

The American Reinvestment and Recovery Act temporarily increased the Section 1202 exclusion to 75% for qualifying stock acquired in 2009 and 2010. The proposed bill would temporarily increase the amount of the exclusion to 100% for qualifying stock acquired after March 15, 2010 and before January 1, 2012.

The bill would also generally make the penalty for failing to disclose reportable transactions, including listed transactions, proportionate to the underlying tax savings. Currently, the penalty for failure to disclose a reportable transaction (other than a listed transaction) on a return is USD10,000 in the case of individuals and USD50,000 in any other case. For listed transactions, the penalty is USD100,000 in the case of individuals and USD200,000 in any other case.

The bill would additionally require the IRS Commissioner to report annually to the Ways and Means Committee and the Senate Finance Committee on penalties assessed, and enforcement actions taken, with respect to tax shelters.

A further tax break aimed at small business would increase the limit on the tax deduction for trade or business start-up expenditures from USD5,000 to USD20,000, and increase threshold amount for reducing such limit to USD75,000, from USD50,000, for taxable years beginning in 2010 or 2011.

Commenting on these tax proposals, Levin said: “Small businesses are an important engine of our economy and this bill combines a number of proposals to help them grow and free up resources to hire new workers. "

Among the offset provisions in the bill are included: limitation on foreign tax treaty benefits for certain deductible payments, particularly those which have been routed through low tax jurisdictions; the clarification of a gain in a corporate 'spin-off' transaction; repeal of the '80/20' rules, which allow companies to avoid the gross basis withholding rules on dividends and interest if at least 80% of a corporation’s gross income during a three-year period is foreign source income and is attributable to the active conduct of a foreign trade or business; and increased reporting on expenses related to rental property.

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