H.R. 5297: The Small Business Jobs and Credit Act of 2010
On September 27, 2010, President Obama signed into law the Small Business Jobs and Credit Act of 2010 (H.R. 5297).
NAR supported this law that:
- creates a Small Business Lending Fund from which the U.S. Treasury would be authorized to lend up to $30 billion to interested community banks to further expand lending to small businesses;
- enhances Small Business Administration (SBA) programs and provides $12 billion in tax breaks for small businesses.
- expands 1099 reporting related to a trade or business.
New Funds Available under the Law
It is estimated that community banks could use the $30 billion lending fund to leverage up to $300 billion in new loans to small businesses. In addition, the legislation authorizes $1.5 billion in grants to existing successful state small business lending programs that help private lenders extend more credit to small businesses. According to the nonpartisan Congressional Budget Office (CBO), all of the money in the Small Business Lending Fund will likely be paid back with interest and will make the federal government $1.1 billion in profit over the next decade.
These loans would be required to be repaid, with interest at the 5% federal government rate, over a 10-year period. To provide an incentive for participating community banks to increase small business lending, their initial 5 percent interest rate would be adjusted relative to the amount of their small business lending activity. For example, a bank that increases small business lending by 10 percent or more would pay an interest rate of only 1 percent. If a participating bank does not increase its small business lending after two years, then the interest rate is raised from 5 percent to 7 percent. In order to encourage timely repayment, after 4.5 years, the interest rate for all borrowers jumps to 9 percent.
More information on the specific provisions is listed below.
Improvements to SBA Loan Programs
Additionally, this law makes a number of notable improvements to existing SBA loan programs. The law:
- Expands the number of businesses eligible for SBA loans by increasing the alternative size standard to those small businesses with less than $15 million in net worth and $5 million in average net income.
- Raises loan limits for 1 year for low-document SBA Express loans from $350,000 to $1 million.
- Raises loan limits from $2 million to $5 million for SBA 7(a) loans.
- Raises loan limits from $1.5 million to $5 million for SBA 504 loans (up to $5.5 million for manufacturers).
- Allows the use of SBA 504 loans to refinance certain owner-occupied commercial real estate mortgages (not involving expansions) into long-term, fixed rate loans (e.g., qualified debt was incurred not less than two years before the date of the application, is a commercial loan, is not subject to a federal guaranty, is collateralized by eligible fixed assets, and for which the borrower has been current on all payments for not less than one year before the date of the application). This provision expires on September 27, 2012.
- Provides a temporary increase in the SBA’s 7(a) loan guarantee from 75 percent to 90 percent.
- Eliminates fees for all SBA 7(a) and 504 loans through December 31, 2010.
New Tax Breaks
The new law also provides some tax breaks for small business owners that will benefit REALTORS ®. They include:
- Provides an extension allowing first-year depreciation for 50 percent of the basis of certain qualified property.
Provides an extension of Section 179 expensing and increase of the maximum allowance from $250,000 up to $500,000 for tangible personal property. For the first time, investors may expense up to $250,000 of qualified leasehold property improvements done in 2010. Either a landlord or a tenant—who is reflected in the lease--may receive the tax benefit, but both may not claim benefit for the same improvement.
- Example of These Provisions in Action: If a tenant wishes to make leasehold improvements, then the tenant makes the improvement and then receives the tax credit. However, there are some limitations to the amount that may be claimed under the expensing provision. While the overall expensing provision is $500,000 in total expenditures, the leasehold improvement provision is limited to $250,000 in expenditures. For example, a company with $300,000 in leasehold improvements and $275,000 of investment in otherwise depreciable equipment could deduct only $250,000 of the leasehold improvements. The deduction for the equipment would also be limited to $250,000. Amounts that exceed the expensing limits may be depreciated over the appropriate depreciable life for the asset.
Allows self-employed individuals to deduct health insurance costs for themselves and their families from their self-employment tax base as well as the income tax base for the 2010 tax year.
- Background on This Provision: For many years, self-employed individuals have been permitted to deduct from their self-employment (Schedule C) income the cost of any health insurance premiums they pay for themselves and their families. The health insurance premium, however, was NOT permitted as a deduction when computing payroll taxes, so the self-employment payroll tax base included the full amount of the premium. This provision will permit health insurance premiums to be deducted from the self-employment tax base, as well as from the income tax base. This change will be available for only the 2010 tax year. NAR will seek to have it extended or made permanent in the next Congress.
Removes employer-provided cellular phones from “listed property” so their cost can be deducted or depreciated like other business property, without burdensome recordkeeping requirements. This is a permanent provision, effective for the full 2010 tax year and in all future years.
- Background on This Provision: The issue of concern is the deductions that are allowable when property, such as a computer or company car (so-called "listed property"), is used for both personal and business use. Before the Small Business Lending Fund bill was signed into law, a strict interpretation of these "listed property" rules would limit the deductions for the expense of a cell phone to the portion of the cell phone charges that are related to business activities. Charges for personal use of cell phones were not deductible. Since the IRS could not enforce such a strict interpretation, the agency asked Congress to amend the rules so that expenses related to any use of a cell phone by an employee or by a self-employed person would be fully deductible as a business expense.
New 1099 Reporting Requirements
This law also imposes two new and burdensome reporting requirements on property owners and owners of small businesses, including self-employed individuals and independent contractors. These are provisions which REALTORS opposed, prompting a Call for action in May 2010. Despite the high response rate to the Call for Action, Congress adopted the provision to help “pay for” provisions in the small business bill, including bonus depreciation and expensing for leasehold improvements mentioned above. These new requirements are permanent, however NAR is working, along with other groups to repeal or modify this requirement.
Starting in 2011, the law requires any person receiving rental income from real property must file a 1099 form for all payments of $600 or more made to service providers. More information is available in Information Reporting IRS Form 1099.