This is Part 2 of 2.
I have seen many articles and heard countless comments about the looming “Tax Cliff”, Taxmageddon or “Fiscal Cliff”. The best article I have seen is from the Journal of Accountancy published by the American Institute of Certified Public Accountants (AICPA).
Individuals changes were summarized in Part 1, Businesses are summarized here in Part 2.
In June 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) which dramatically reduced income, estate, and gift tax rates and changed Qualified and Retirement Plan rules. Changes were set to be phased in over 9 years but the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) accelerated many of the provisions. The EGTRRA was written in a manner that allowed the changes to “sunset” or revert back on January 1, 2011.
In order to avoid this happening, Congress enacted a short-term solution in mid-December 2010 called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (Tax Relief Act) which extended the ordinary income tax rates and the capital gains tax rates, reinstated the estate tax at a reduced rate, and extended a large number of expired or expiring provisions. Many of the Tax Relief Act extensions expired at the end of 2011 and the rest will expire at the end of this year.
In August, the Senate Finance Committee approved a bill, the Family and Business Tax Cut Certainty Act of 2012, that would extend some, but not all, of the expired provisions through 2013. This may signal that, when Congress does act, it will not extend every expired provision because of the cost in lost federal revenue. Tax provisions for individuals that the bill focused on included restoring the alternative minimum tax (AMT) patch, the deduction for state and local sales tax, and parity for employer-provided mass transit and parking benefits. Provisions for businesses included extending the research and development credit, the work opportunity credit, and the increased Sec. 179 amounts. In all, the bill would extend or restore 11 provisions for individuals, 28 for businesses, and 13 energy incentives. However, the bill did not address the impending changes to income, estate and capital gains tax rates.
PROVISIONS SET TO EXPIRE AT THE END OF 2012
Bonus depreciation and Sec. 179 expensing. The Tax Relief Act sets the expensing limitation under Sec. 179 at $125,000 and the phaseout threshold amount at $500,000 for 2012. For tax years beginning after 2012, these amounts reduce to $25,000 and $200,000, respectively.
The availability of an additional 50% first-year bonus depreciation expires at the end of 2012. The election to accelerate AMT credits in lieu of bonus depreciation will also expire.
General business-related credits. The employer-provided child care credit (Sec. 45F) expires at the end of 2012. The returning heroes and wounded warriors work opportunity tax credits (versions of the expired work opportunity credit for veterans) also expire at the end of 2012.
Foreign provisions. The IRS’s authority under Sec. 1445(e)(1) to apply a 15% withholding tax to gains on the disposition of U.S. real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons expires at the end of 2012.
Other miscellaneous expiring provisions:
- The cellulosic biofuel producer credit
- The wind facilities electricity production facility credit (placed-in-service date)
- Indian coal production credit
- Election for wind facilities to claim energy credit in lieu of electricity production credit
- Special treatment of tax-exempt bonds for education facilities
- Special depreciation for cellulosic biofuel plant property
- Repeal of the collapsible corporation rules
- Special rates for accumulated earnings tax and personal holding company tax
- Modified tax treatment for electing Alaska Native Settlement Trusts
In addition to the large number of provisions scheduled to expire, many provisions expired at the end of 2011 and have not been reenacted.
Many business tax incentives expired at the end of 2011. Perhaps the most significant of these are the expiration of the allowance for 100% first-year bonus depreciation (it is reduced to 50% for 2012) and the expiration of the increased deduction amounts under Sec. 179. The Sec. 179 limitation was reduced to $125,000 for 2012, and the phase out threshold amount was lowered to $500,000. The inflation-adjusted amounts for 2012 are $139,000 and $560,000, respectively.
The Sec. 41 research and development credit also expired at the end of 2011, as did the work opportunity tax credit (but portions were extended through 2012 for certain veterans by the Three Percent Withholding Repeal and Job Creation Act).
Various other tax credits aimed at businesses also expired:
- The credit for plug-in electric vehicles
- The plug-in electric vehicle conversion credit
- The alternative fuel (non-hydrogen) vehicle refueling property credit
- The alcohol fuels income tax credit
- The biodiesel and renewable diesel fuel credits
- The refined coal production facility credit (placed-in-service date)
- The Indian employment tax credit
- The new markets tax credit
- The railroad track maintenance credit
- The new energy-efficient homes credit
- The energy-efficient appliances credit
- The mine rescue team training credit
- The military reservist employer wage credit
- The alcohol fuel mixture, biodiesel, alternative fuel, and alternative fuel mixture excise tax credits
- The American Samoa economic development credit
Expired deductions and special depreciation rules (in addition to the expiration of 100% bonus depreciation) include:
- 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
- Seven-year recovery period for motorsports entertainment complexes
- Accelerated depreciation for certain Indian reservation property
- Special rules for charitable contributions of real property for conservation purposes
- Charitable deduction for food inventory contributions
- Increased charitable deduction for contributions of book inventory to public schools
- Increased charitable deduction for corporate contributions of computer equipment to schools
- The election to expense advanced mine safety equipment
- Special film and television production expensing rules
- Brownfields environmental remediation expensing
- The deduction for domestic production activities in Puerto Rico
- Suspension of 100%-of-net-income limitation on percentage depletion for oil and gas from marginal wells
Finally, a number of other special business incentives and other tax items expired, including:
- Grants in lieu of tax credits for specified energy property
- Qualified zone academy bonds
- Low-income housing credit special treatment of military housing allowances
- The special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy for qualified electric utilities
- Modified tax treatment of certain payments to controlling tax-exempt organizations
- Special treatment of dividends from regulated investment companies
- Regulated investment company treatment under FIRPTA
- Subpart F active financing income exceptions
- Foreign personal holding company lookthrough rules for payments between related controlled foreign corporations
- Basis adjustments for S corporation charitable contributions of property
- Reduced S corporation recognition period for built-in gains tax
- Various Empowerment Zone tax incentives
- District of Columbia investment incentives
- Definition of gross estate for regulated investment company stock owned by nonresident noncitizens
- Disclosure of prisoner return information to certain prison officials