Hoping to get the Small Business Jobs Act passed before the August recess, Senate Democrats have modified the legislation in an effort to avoid another filibuster battle.

“Helping small businesses helps get Americans back to work and our economy back on track,” said Senate Finance Committee Chairman Max Baucus, D-Mont. “We discussed improvements to our small business jobs package with our colleagues, and we listened to their ideas. Small businesses are counting on us to pass this bill and it is our hope that this amendment will deliver the 60 votes we need to do just that.”

Democrats are under pressure to demonstrate more gains in the economy as the November election approaches. President Obama urged Congress to pass the bill on Monday. “I hope the Senate acts this week on a package of tax cuts and expanded lending for small businesses, where most of America’s jobs are created,” he said.

However, Senate Democrats first needed to clear the mammoth financial reform bill and the unemployment extension this week before they could turn their attention back to the small business bill, which was introduced in late June (see Senate Unveils Small Business Jobs Act). The House passed its own package of tax breaks for small businesses last month (see House Passes Small Business Tax Relief Bill).

One change in the bill is an increase in grants under the State Small Business Credit Initiative. The new substitute amendment increases by $600 million the amount provided to states for grants to support small business lending programs in the original Senate substitute amendment.

The new substitute amendment also extends the elimination of Small Business Administration loan fees. The substitute includes a provision that would extend the American Recovery and Reinvestment Act small business lending program that eliminates the fees normally charged for loans through the SBA 7(a) and 504 loan programs and increases the government guarantees on 7(a) loans from 75 percent to 90 percent. Since its creation, the program has supported over $26 billion in small business lending, which has helped to create or retain over 650,000 jobs.

Some of the changes in the latest version of the Senate bill would make the bill more expensive, but also could help attract Republican support. One is a provision that would remove cellular phones from the IRS’s definition of “listed property.” The substitute includes a provision that would “delist” cell phones so their cost could be deducted or depreciated like other business property, without onerous recordkeeping requirements. This provision is estimated to cost $411 million over 10 years.

Another change would remove the federal small business lending fund provision from the bill after the fund came under attack from some Republicans.  This change, however, would increase the cost of the bill by $1.1 billion over 10 years.

Another change in the bill would remove a bad check penalty clarification that was in the original proposal. The substitute amendment removes a provision that would have clarified the application of the IRS’s bad check penalty. This provision was enacted in HR 5263, the Homebuyer Assistance and Improvement Act of 2010. However, the change reduces offsets in the bill by $49 million over 10 years.

Another deletion would strike out the application of a levy to payments to federal vendors relating to property. The original bill would have clarified that the Treasury’s continuous levy authority on government payments to federal contractors who owe back taxes to the IRS applies to amounts paid for property, as well as to payments for goods and services. The change will reduce offsets to the bill by $144 million over 10 years, however.

Another change would permit partial annuitization of a nonqualified annuity contract.  The substitute amendment would allow holders of nonqualified annuities (that is, annuity contracts held outside of a tax-qualified retirement plan or IRA) to elect to receive a portion of the contract in the form of a stream of annuity contracts, leaving the remainder of the contract to accumulate income on a tax-deferred basis. 

Another change involves source rules on guarantees. Under current law, the treatment of guarantee fees under the source rules is unclear. If guarantee fees are sourced like services, they are sourced according to the location in which the services were performed. If the guarantee fees are sourced like interest, they are sourced by reference to the country of residence of the payor. A recent court case determined that guarantee fees should be sourced like services. Sourcing guarantee fees in a manner similar to services would permit U.S. subsidiaries of foreign corporations to engage in earning-stripping transactions by making deductible payments to foreign affiliates (thereby reducing their U.S. income tax liability) without the imposition of U.S. withholding tax on the payment.

The substitute amendment would provide that amounts received directly or indirectly for guarantees of indebtedness of the payor issued after the date of enactment 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.  This provision is estimated to raise $2.025 billion over 10 years.

The substitute amendment also includes some technical corrections, including one that clarifies that a partner or S corporation shareholder must also meet the gross receipts test in order to carryback its share of general business credits to five years or use its share of general business credits to offset AMT liability in 2010.

Another technical change would provide a correct cross-reference to the general business credit provision on controlled groups from elsewhere in the Tax Code and conform the application of other general business credit provisions.

Another change extends the ability to revoke an election made under Section 179 without the consent of the IRS commissioner and the treatment of computer software as Section 179 property through 2011. 

Another technical change would correct the effective date on bonus depreciation to allow seamless application of the provision for non-calendar-year taxpayers.

Other modifications would decouple bonus depreciation from the allocation of contract costs under the percentage of completion accounting method rules for assets with a depreciable life of seven years or less in order to allow contractors that do not complete contracts within the same year in which they are entered into to benefit from bonus depreciation.

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