After weeks of negotiation, Congress has passed the American Taxpayer Relief Act of 2012 (ATRA) to avert the tax side of the “Fiscal Cliff” and bring some certainty to the Tax Code. Almost all taxpayers are affected by the numerous extensions and modifications. Many popular but temporary tax extenders relating to businesses are included in ATRA. Among them are Code Sec. 179 small business expensing, bonus depreciation, the research tax credit, and the Work Opportunity Tax Credit. This letter provides some highlights of ATRA as it applies to business taxpayers.
CODE SEC. 179 SMALL BUSINESS EXPENSING
ATRA extends through 2013 enhanced Code Sec. 179 small business expensing. The Code Sec. 179 dollar limit for tax years 2012 and 2013 is $500,000 with a $2 million investment limit. Certain other Section 179 expensing rules are also extended by the new law. For example, businesses will continue to be able to expense off-the-shelf computer software placed in service before 2014.
ATRA extends 50 percent bonus depreciation through 2013. Some transportation and longer period production property is eligible for 50 percent bonus depreciation through 2014. Bonus depreciation has been used as an economic stimulus in many tax bills in recent years. One hundred percent bonus depreciation generally expired at the end of 2011 (with certain transportation and longer period production property eligible for 100 percent bonus depreciation through 2012).
Bonus depreciation also relates to the dollar limitations on the depreciation deduction for the year in which a taxpayer places a passenger automobile in service within a business, and for each succeeding year. If bonus depreciation had not been extended, 2012 would have been the final year in which substantial first-year write-offs for the purchase of a business automobile would be available.
To be eligible for bonus depreciation, qualified property must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) and have a recovery period of 20 years or less. These requirements encompass a wide-variety of assets. The property must be new and placed in service before January 1, 2014 (January 1, 2015 for certain longer production period property and certain transportation property). Subject to the investment limitations, Code Sec. 179 expensing remains a viable alternative, especially for small businesses. Property qualifying under Code Sec. 179 expensing may be used or new, in contrast to bonus depreciation’s “first-use” requirement.
RESEARCH TAX CREDIT
ATRA extends through 2013 the incremental research tax credit which expired after 2011. Commonly called the research or research and development credit, the incremental research credit may be claimed for increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research.
WORK OPPORTUNITY TAX CREDIT
Prior law allowed businesses to claim a credit generally equal to 40% of the first $6,000 of wages paid to new hires that belonged to one of nine targeted groups. The credit expired at the end of 2011, except for the Work Opportunity Tax Credit for hiring qualified veterans, which was set to expire at the end of 2012. ATRA extends the Work Opportunity Tax Credit for members of all the targeted groups who begin work after 2011 and before 2014.
EMPLOYER-PROVIDED CHILD-CARE FACILITIES AND SERVICES
The income tax credit for qualified expenses incurred by an employer in providing child care for employees has been made permanent for tax years beginning after December 31, 2012. The amount of the credit for a given tax year is the sum of 25 percent of the qualified child care expenditures and 10 percent of the qualified child care resource and referral expenditures incurred by the taxpayer for the tax year. The maximum amount of the credit allowable in any given tax year is $150,000.
QUALIFIED LEASEHOLD/RETAIL IMPROVEMENTS AND RESTAURANT PROPERTY
ATRA extends through 2013 the 15-year recovery period for qualified leasehold improvements, qualified retail improvements and qualified restaurant property.
Accumulated Earnings Tax. The 15-percent accumulated earnings tax rate is increased to 20 percent, for tax years beginning after December 31, 2012. The rate is now permanent.
Personal Holding Company Tax Rate. The 15-percent rate on personal holding companies is increased to 20 percent, for tax years beginning after December 31, 2012. The rate is now permanent.
Repeal of Collapsible Corporation Rules. The collapsible corporation rules of Code Sec. 341 are permanently repealed in tax years beginning after December 31, 2012. Thus, for post-2012 tax years, shareholders of what would have been defined as a collapsible corporation will not be required to report as ordinary income, any gain realized on sales or exchanges of their stock or on certain distributions that would normally result in capital gain treatment.
Planning Opportunity. The majority of U.S. businesses are pass-through entities, such as partnerships and S corporations. This means that profits are passed through to their individual owners and therefore are taxed at individual income tax rates. A “C” corporation, with its current corporate level tax rate of 35 percent (which may drop if recent corporate tax reform proposals are adopted), may become more attractive with rates rising to 39.6 percent for some individuals.
MORE BUSINESS TAX EXTENDERS
A number of other business tax extenders expired after 2011 and they are extended through 2013 under the American Taxpayer Relief Act. They include, among others:
- New markets tax credit
- Employer wage credit for activated military reservists
- Subpart F exceptions for active financing income
- Look through rule for related controlled foreign corporation payments
- 100 percent exclusion for gain on sale of qualified small business stock
- Reduced recognition period for S corporation built-in gains tax
- Enhanced deduction for charitable contributions of food inventory
- Tax incentives for empowerment zones
- Treatment of dividends of regulated investment companies (RICs)
- Treatment of RICs as qualified investment entities
- S corporations making charitable donations of property
The American Taxpayer Relief Act has a significant impact on all taxpayers. If you have any questions about the new law or how it affects you, please call our office for an appointment. We will be happy to assist you.