Your business planning for 2011 is in full swing, plus it’s tax time. What impact will the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 have on this process? Likely, it will be a positive one.
The Tax Relief Act extends, renews or enhances a large number of business tax incentives. Highlighted below are some key business tax incentives in the new law.
To help ignite business spending, the new law provides for 100 percent bonus depreciation for qualified property acquired after September 8, 2010 and before January 1, 2012 and placed in service before January 1, 2012 (or before January 1, 2013 for certain longer-lived and transportation property). Qualified property is defined as a new property (original use commences with taxpayer) that either has a MACRS recovery period of less than 20 years, computer software, water utility property, or qualified leasehold improvement property. Additionally, 50 percent bonus depreciation is available for qualified property placed in service in 2012. In addition, certain corporations may be able to elect to accelerate any alternative minimum tax (AMT) credit in lieu of bonus depreciation.
Code Sec. 179 expensing
The new law extends enhanced Code Sec. 179 expensing for 2012 but not at the 2010 and 2011 dollar and investment limits. For 2010 and 2011, the Code Sec. 179 dollar limit is $500,000 and the investment limit is $2 million. The new law makes no changes to these limits for 2010 and 2011. However, the dollar limit will fall to $125,000 (indexed for inflation) and the investment limit will fall to $500,000 (indexed for inflation) for tax years beginning in 2012 (and sunsetting after December 31, 2012). The 2012 amounts, while reduced from 2010 and 2011, are still above the amounts that would have been in place for 2012 absent the new law ($25,000/$200,000 respectively).
Qualified real property
For 2010 and 2011, special rules apply to qualified real property. Taxpayers can elect up to $250,000 of the $500,000 dollar limit for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. The new law does not extend these special rules beyond 2011. The new law does renew a 15-year recovery period for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property for 2010 and 2011.
Payroll tax cut
The new law reduces an employee’s share of Social Security taxes (the OASDI portion) from 6.2 percent to 4.2 percent up to the taxable maximum amount of $106,800 for calendar year 2011. The new law does not reduce the employer’s share, which remains at 6.2 percent for 2011. Self-employed individuals, including independent contractors with which a business may contract, are also entitled to a two percentage point reduction in payroll taxes, from 12.4 percent to 10.4 percent.
The IRS has instructed employers to start using new withholding tables and reducing the amount of Social Security tax withheld no later than January 31, 2011. The IRS also instructed employers to make any offsetting adjustments in an employee’s pay for Social Security over-withheld no later than March 31, 2011.
Businesses owners, such as sole proprietors, who are taxed at the individual tax rates will benefit from an extension of reduced individual tax rates. The new law extends for two years (2011 and 2012) the current individual tax rates of 10, 15, 25, 28, 33, and 35 percent. Without the new legislation, all of the rates would have risen with the top two rates increasing from 33 and 35 percent to 36 and 39.6 percent respectively.
Under the new law, the federal estate tax will again apply to the estates of decedents passing after December 31, 2009. The new law sets a maximum estate tax rate of 35 percent with a $5 million exclusion ($10 million for married couples). Additionally, executors of estates of individuals who died in 2010 can elect out of the estate tax (and apply modified carryover basis rules) or can elect to have the estate tax apply.
Research tax credit
While not permanent, the new law renews the credit, which expired at the end of 2009, for 2010 and 2011.
Work Opportunity Tax Credit
Aimed at rewarding employers who hire economically-disadvantaged individuals—and individuals from groups with historically high rates of unemployment, the Work Opportunity Tax Credit (WOTC) has been extended through the end of 2011. However, the new law does not extend two groups who were added to the credit in 2009 (unemployed veterans and disconnected youth).
In order to encourage the development and production of alternative fuels, the new law extends, renews or enhances some of temporary incentives we have seen recently in the tax code, including:
•Grants for certain alternative energy property in lieu of tax credits
•Tax credits for biodiesel and renewable diesel fuel
•Tax credit for refined coal facilities
•Percentage depletion for oil and gas from marginal wells
•Special tax incentives for builders of energy-efficient homes
Business tax extenders
A slew of business tax incentives, known as extenders, were renewed by the new law. They include:
•Differential wage credit
•New Markets Tax Credit (with modifications)
•Tax treatment of certain dividends of RICs and certain investments of RICs
•Active financing exception/look-through treatment for CFCs
•Tax incentives for empowerment zones and the District of Columbia
•Indian employment credit
•Railroad track maintenance credit
•Mine rescue training credit
•Code Sec. 199 deduction for Puerto Rico
•Five-year write-off of farm machinery
•Accelerated depreciation for business property on an Indian reservation
Despite consideration, the new law did not:
•Repeal a controversial expansion of information reporting. The Patient Protection and Affordable Care Act of 2010 requires businesses to report payments for property and payments to corporations aggregating $600 or more in a calendar year made after December 31, 2011. Congress may revisit this requirement before the effective date.
•Lower the corporate tax rate.
Contact your tax advisor
These provisions may not apply to all businesses or individuals. It is best to seek advice from a tax professional to determine how these incentives factor into your business plan or specific situation.
Content contributed by the Charlotte office of Elliott Davis, PLLC, an accounting, tax and consulting services firm providing clients the solutions needed to achieve their objectives in 10 offices throughout the Southeast. For more information, contact Dan Warren at firstname.lastname@example.org or Richard Battle at email@example.com or visit www.elliottdavis.com.