The House approved the Small Business Jobs Tax Relief Act of 2010 on Tuesday by a bipartisan majority of 247-170.

Sander Levin

The legislation would provide tax cuts for small businesses to help them grow and create new jobs.  H.R. 5486 is companion legislation to H.R. 5297, the Small Business Jobs and Credit Act, which will enhance lending opportunities for small businesses. Both pieces of legislation are offset by closing some existing tax loopholes.

“This bill represents a continuation of our work to spur job creation and improve the quality of life in our communities,” said Ways and Means Committee Chairman Sander M. Levin, D-Mich., in a statement.  “Small businesses need capital to create jobs and lead our economic recovery, and these bills contain important tax cuts and lending opportunities that will help give small business owners the resources and flexibility they need to help their businesses grow.”  

The bill would increase the capital gains exclusion on investments in small business stock to 100 percent (from 75 percent in the American Recovery and Reinvestment Act) for qualifying stock acquired after March 15, 2010 and before Jan. 1, 2012

The bill would also alleviate certain onerous tax penalties on small businesses. Under current law, Section 6707A of the Tax Code imposes a penalty on the failure to disclose a “reportable transaction” on any tax return or information statement. There are six categories of reportable transactions, one of which is a “listed transaction,” a type of transaction identified by the IRS through guidance as a tax avoidance transaction. The penalty for failure to disclose a reportable transaction (other than a listed transaction) on a return is $10,000 in the case of individuals and $50,000 in any other case. For listed transactions, the penalty is $100,000 in the case of individuals and $200,000 in any other case. The bill generally would make the penalty for failing to disclose reportable transactions (including listed transactions) proportionate to the underlying tax savings.

The bill would also allow small businesses to deduct up to $20,000 in small business start-up expenses not related to capital or equipment. In addition, the bill would allow non-recourse Small Business Administration loans to qualify for certain exceptions to the at-risk loan rules, allowing business expenditures made under those loans to be deductible against related business income. 

To pay for the cost of the legislation, the bill would require a minimum 10-year term for grantor retained annuity trusts, or GRATs, which allow taxpayers to structure a transfer of assets to another individual in such a way that substantial gift taxes may be avoided. This provision is estimated to raise $5.297 billion over 10 years.

In addition, the bill would make crude tall oil, a waste byproduct of the paper-manufacturing process, ineligible for the cellulosic biofuel producer credit. This proposal is estimated to raise $1.849 billion over 10 years.