The American Taxpayer Relief Act of 2012 also modifies or extends many business tax breaks. Here are the highlights.
Depreciation and Cost Recovery Provisions
Bonus Depreciation Extended – The new law extends 50 percent first-year bonus depreciation for an additional year to cover qualifying new assets that are placed in service in calendar year 2013. However, the placed-in-service deadline is extended to December 31, 2014 for certain assets that have longer production periods including transportation equipment and aircraft. Under the extended deadline privilege, only the portion of a qualifying asset’s basis that is allocable to costs incurred before January 1, 2014 is eligible for 50 percent bonus depreciation. Used assets are not eligible for bonus depreciation.
- For a new passenger auto or light truck that is subject to the luxury auto depreciation limitations, the 50 percent bonus depreciation provision increases the maximum first-year depreciation deduction by $8,000.
- For new autos, the maximum first-year depreciation deduction for 2012 is $11,160 ($8,000 plus $3,160). We don’t yet know the allowance for 2013, but it will be close to the 2012 figure.
- For new light trucks and vans, the maximum first-year deduction for 2012 is $11,360 ($8,000 plus $3,360). We don’t yet know the allowance for 2013, but it will be close to the 2012 figure.
Corporate Election to Claim Credits in Lieu of Bonus Depreciation – Previous legislation allowed corporations that are otherwise eligible to claim bonus depreciation to elect to forego bonus depreciation and instead “free up” otherwise unusable minimum tax credit carryovers. Credit carryovers freed up by this election are refundable (meaning they can be collected even if they exceed the electing corporation’s tax liability).
The Act allows the election with respect to bonus depreciation on qualified assets that are placed in service by December 31, 2013 or by December 31, 2014 for certain assets that have longer production periods including transportation equipment and aircraft. Therefore, additional freed-up credits can be claimed in lieu of bonus depreciation deductions that would have otherwise have been allowed by the law. Special rules apply to taxpayers that have previously taken advantage of this election.
Making the election does not result in lost deductions. It just postpones them for affected assets.
Generous Section 179 Rules Extended and Qualifying Real Estate Expenditures Are Eligible Again – For qualifying assets placed in service in tax years beginning in 2012 and 2013, the Act restores the maximum Section 179 deduction to $500,000 (same as for tax years beginning in 2011). Without this change, the maximum deduction would have been only $139,000 for 2012 and only $25,000 for 2013.
The new law also restores the Section 179 deduction phase-out threshold to $2 million for tax years beginning in 2012 and 2013 (same as for tax years beginning in 2011). Without this change, the phase-out threshold would have been only $560,000 for 2012 and only $200,000 for 2013.
Somewhat surprisingly, the temporary rule that allowed up to $250,000 of Section 179 deductions for qualifying real property placed in service in tax years beginning in 2010 and 2011 was retroactively restored for tax years beginning in 2012 and extended through tax years beginning in 2013.
Note: For tax years beginning in 2014, the maximum Section 179 deduction is scheduled to be only $25,000, the phase-out threshold is scheduled to fall to $200,000, and the Section 179 deduction privilege for real estate is scheduled to be eliminated.
Depreciation for Leasehold Improvements, Restaurant Property, and Retail Space Improvements – The Act retroactively restores the 15-year straight-line depreciation privilege for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail space improvements for property placed in service in 2012 and extends the deal to cover property placed in service in 2013.
Key Point: Without the favorable 15-year depreciation rule, leasehold improvements, restaurant building improvements, restaurant buildings, and retail space improvements generally would have to be depreciated straight-line over 39 years.
Expensing for Film and TV Productions – The Act retroactively restores the election to claim current deductions (within limits) for qualified film and television production costs to cover productions commencing in 2012 and extends the deal to cover productions commencing in 2013.
Tax Credit Provisions
Research Credit – The new law modifies and retroactively restores the research credit for 2012 and extends it through 2013 to cover qualifying expenses paid or incurred in those years.
Work Opportunity Credit – The Act retroactively extends the general deadline for employing eligible individuals for purposes of claiming the Work Opportunity Tax Credit to cover qualifying hiring that occurred in 2012 and further extends the deadline to cover qualifying hiring that occurs in 2013.
Military Service Differential Pay Credit for Small Employers – The law retroactively restores the credit for eligible small employers that provide differential pay to employees while they serve in the military to cover payments made in 2012 and extends the deal to cover payments made in 2013. The credit equals 20 percent of differential pay of up to $20,000 paid to each qualifying employee during the year.
New Markets Credit – The Act retroactively restores the credit for qualified equity investments in certain community development entities for 2012 and extends it through 2013.
Credit for Building Energy-Efficient Homes – The new law retroactively restores the $2,000 per-home contractor tax credit for building new energy-efficient homes in the U.S. (including manufactured homes) for 2012 and extends it through 2013. The credit can also be claimed for substantially reconstructing and rehabilitating an existing home and making it more energy-efficient. Homes that don’t fully meet the energy-efficiency standards may qualify for a reduced $1,000 credit. To qualify for this credit, a home must be sold by December 31, 2013 for use as a residence.
Credit for Manufacturing Energy-Efficient Appliances – The Act retroactively restores the credit for producing energy efficient dishwashers, clothes washers, and refrigerators in the U.S. to cover qualifying appliances that are produced in 2012 and extends the credit to cover qualifying appliances that are produced in 2013.
Credit for 2-Wheeled and 3-Wheeled Plug-In Electric Vehicles – The law modifies the credit for 2-wheeled and 3-wheeled vehicles and extends it to cover qualifying vehicles acquired in 2012 and 2013. The credit equals 10 percent of the cost of a qualifying vehicle, subject to a maximum credit of $2,500.
Credit for Alternative Fuel Vehicle Refueling Equipment – The Act retroactively restores the business and personal credit for up to 30 percent of the cost of installing non-hydrogen alternative fuel vehicle refueling property to cover property placed in service in 2012 and extends the deal to cover property placed in service in 2013. (The Act does not extend the credit for hydrogen refueling property because it is already allowed through 2014.) The personal version of the credit can be claimed for the cost of installing qualifying property at a principal residence. The annual per-location cap on the business version of the credit is $30,000, but it’s only $1,000 for the personal version.
Credits for Renewable Energy Production Facilities – The Act modifies and extends credits for facilities that produce energy from certain renewable resources, including wind, to cover facilities placed in service through 2013.
Biodiesel and Renewable Diesel Fuel Credits – The new law retroactively restores the income tax and excise tax credits for biodiesel and renewable diesel fuels for 2012 and extends it to cover qualifying fuels produced, sold, or used through 2013.
Alternative Fuel Credits – The Act retroactively restores the alternative fuel and alternative fuel mixture excise tax credits for 2012 and extends them to cover qualifying fuels sold or used through 2013.
Employer Child Care Facility Credit – Under the new law, the employer credit for eligible costs to provide child care for employees is made permanent. Certain costs to acquire, construct, rehabilitate, or expand child care facilities can qualify.
Employee Benefit Provisions
Favorable Rules for Employer-Paid Adoption Expenses Made Permanent – The Bush tax cut legislation increased the cap on tax-free employer adoption assistance payments and raised the income phase-out ranges to allow more employees to benefit. However, tax-free treatment for adoption assistance payments was scheduled to expire at the end of 2012. The new law makes the Bush tax cut provisions permanent for 2013 and beyond.
Employer Educational Assistance Plans Made Permanent – Section 127 of the Internal Revenue Code allows employers to set up plans that provide up to $5,250 in annual federal-income-tax-free educational assistance to each eligible employee. Both undergraduate and graduate school costs can be covered by the plan, and the education need not be job-related. The employer can deduct the cost as an employee benefit expense. This taxpayer-friendly deal was scheduled to expire at the end of 2012, but the Act makes it permanent for 2013 and beyond.
Qualified Retirement Plan Balances Can Be Transferred into Plan Designated Roth Accounts – Some qualified retirement plans [typically 401(k) plans] allow participants to make salary-reduction contributions to designated Roth accounts. These accounts are similar to Roth IRAs, but they are operated by the retirement plan rather than the individual. Previous legislation also allowed a plan participant to roll over amounts that are eligible for distribution from the “regular” part of the plan into his or her designated Roth account. The Act extends the concept by allowing participants to transfer amounts into designated Roth accounts without the requirement that such amounts be eligible for distribution. This favorable change is available for transfers after December 31, 2012.
Key Point: For the plan participant, the federal income tax impact of transferring an amount into a designated Roth account is the same as receiving the amount as a plan distribution and then rolling it over into a Roth IRA, thereby effecting a Roth conversion with respect to the transferred amount. In other words, the taxable portion of the transferred amount must be included in the participant’s gross income — just like with a garden-variety Roth conversion transaction.
Business Charitable Contribution Provisions
Enhanced Deduction for Food Donations – The new law retroactively restores for 2012 and extends through 2013 the enhanced charitable contribution deduction for non-C-corporation businesses that donate food (it must be apparently wholesome when donated). This provision is intended for non-C-corporation businesses that have food inventories, such as restaurants. For non-C-corporation taxpayers, deductions for donated food are normally limited to the taxpayer’s basis in the food or FMV, whichever is lower. In contrast, the enhanced deduction equals the lesser of:
1. Basis plus one-half the value in excess of basis or
2. Two times the basis (the same enhanced deduction rule has been available to C corporations for years). The taxpayer’s total charitable contribution deduction for food donations under this provision generally cannot exceed 10 percent of net income for the tax year from sole proprietorships, S corporations, partnerships (or other non-C corporation entities) from which the food donations are made.
Favorable Rules for C Corporation Farm and Ranch Qualified Conservation Contributions – Liberalized deduction rules for qualified conservation contributions expired at the end of 2011. The Act retroactively restores them for tax years beginning in 2012 and extends them through tax years beginning in 2013. Qualified conservation contributions are charitable donations of real property interests, including remainder interests and easements that restrict the use of real property. For qualified C corporation farming and ranching operations, the maximum write-off for qualified conservation contributions is increased from the normal 10 percent of adjusted taxable income to 100 percent of adjusted taxable income. Qualified conservation contributions in excess of what can be written off in the year of the donation can be carried forward for 15 years.
Favorable Rule for S Corporation Donations of Appreciated Assets – The Act retroactively restores for tax years beginning in 2012 and extends through tax years beginning in 2013 the favorable shareholder basis rule for stock in S corporations that make charitable donations of appreciated assets. For such donations, each shareholder’s tax basis in the S corporation’s stock is only reduced by the shareholder’s pro-rata percentage of the company’s tax basis in the donated assets. Without the extended provision, a shareholder’s basis reduction would equal the passed-through write-off for the donation (a larger amount than the shareholder’s pro-rata percentage of the company’s tax basis in the donated asset). The extended provision is taxpayer-friendly because it leaves shareholders with higher tax basis in their S corporation shares, which is almost always beneficial to shareholders.
Small Business Corporation Provisions
Qualified Small Business Corporation Stock – The Act retroactively restores the temporary 100 percent gain exclusion (within limits) for sales of qualified small business corporation (QSBC) stock issued in 2012 and extends the deal to cover eligible shares issued in 2013. QSBC shares must be held for more than five years to be eligible for the gain exclusion privilege.
S Corporation Built-In Gains – When a C corporation converts to S corporation status, the corporate-level built-in gains tax generally applies when built-in gain assets (including receivables and inventories) are turned into cash or sold within the recognition period. The recognition period is normally the 10-year period that begins on the conversion date.
Previous legislation established an exception for built-in gains recognized in S corporation tax years beginning in 2011 if the fifth year of the recognition period had gone by before the beginning of the tax year beginning in 2011. Gains that fall under this exception were not hit with the built-in gains tax.
The American Taxpayer Relief Act retroactively restores the five-year exception for tax years beginning in 2012 and extends it for tax years beginning in 2013. In other words, for gains recognized in those years, the built-in gains tax won’t apply if the fifth year of the recognition period has gone by before the start of the year. The Act also clarifies the treatment of installment sale gains for purposes of qualifying for the five-year exception.
Consult with your tax adviser if you have questions about these business provisions and your situation.
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– content reprinted with permission from BKR International.
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