Article: Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

The recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (Tax Relief Act) is a sweeping tax package that includes, among many other items, an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year “patch” of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses. Here's a look at the key elements of the package:

• The current income tax rates will be retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.
• Employees and self-employed workers will receive a reduction of two percentage points in Social Security payroll tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed. 
• A two-year AMT “patch” for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.
• Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law extends the $1,000 child tax credit and maintains its expanded refundability for two years, extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years. 
• Businesses can write off 100% of their equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation. 
• Many of the “traditional” tax extenders are extended for two years, retroactively to 2010 and through the end of 2011. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the research credit. 
• After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010's or 2011's rules. 
• Not addressed in this legislation: Expected repeal of a controversial expansion of Form 1099 reporting requirements. 
• Also not included: Extension of the Build America Bonds program, which permits state and localities to issue federally-subsidized municipal bonds.

In addition to extending the Bush tax cuts, providing relief from the AMT, and cutting the payroll tax by two percentage points, the Tax Relief Act extends a host of other important tax breaks for businesses and individuals.

Individual Tax Relief

The following tax breaks for individuals that expired at the end of 2009 have been retroactively reinstated by the Tax Relief Act and extended through 2011:

• The election to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes. 
• The above-the-line deduction for qualified higher education expenses. 
• The $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, certain supplies, equipment, and supplementary materials used by the educator in the classroom. 
• The increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes. 
• The provision that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year. Individuals also will be allowed to make charitable transfers during January of 2011 and treat them as if made during 2010. 
• The look-thru rule for certain regulated investment company (RIC) stock in determining the gross estate of nonresidents. 
• The increase in the monthly exclusion for employer-provided transit and vanpool benefits to equal that of the exclusion for employer-provided parking benefits.

In addition, the new law extends for an additional year (i.e., through 2011) the rule allowing premiums for mortgage insurance to be deductible as qualified residence interest.

Business Tax Relief

On the business side, the following business tax breaks that expired at the end of 2009 have been retroactively reinstated and extended through 2011 by the Tax Relief Act:

• The research and development credit. 
• 15-year writeoffs for qualified leasehold improvements, and restaurant buildings (and certain improvements to such restaurant buildings). 
• 7-year writeoffs for certain motorsports racetrack property. 
• The employer wage credit for activated military reservists. 
• The active financing exception from the Code's Subpart F rules for a controlled foreign corporation predominantly engaged in the conduct of a banking, financing, or similar business. 
• Look-through treatment of payments between related controlled foreign corporations. 
• The Indian employment credit. 
• The new markets tax credit. 
• Accelerated depreciation for business property on an Indian reservation. 
• The railroad track maintenance credit. 
• The special expensing rules for certain film and television productions. 
• The mine rescue team training credit. 
• The election to expense advanced mine safety equipment. 
• Expensing of environmental remediation costs. 
• The deduction allowable for domestic production activities in Puerto Rico. 
• The American Samoa economic development credit. 
• The rules exempting from gross basis tax and from withholding tax the interest-related dividends and short-term capital gain dividends received from a RIC by certain foreign persons (extended to apply to tax years of a RIC beginning before 2012). 
• The inclusion of a RIC within the definition of a “qualified investment entity” under the provisions of the Foreign Investment in Real Property Tax Act as codified in Code Sec. 897.
• The enhanced deduction for contributions of food and book inventories, and computer equipment for educational purposes. 
• A liberal rule for S corporations making charitable donations. 
• The special rules for interest, rents, royalties and annuities received by a tax-exempt entity from a controlled entity. 
• Empowerment zone tax incentives. 
• Renewal community tax incentives. 
• Tax incentives for investments in the District of Columbia. 
• The work opportunity credit (extended for four months (through the end of 2011)). 
• Qualified zone academy bonds.

One major benefit of the Tax Relief Act that has been provided to businesses is the expansion and extension of additional first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008, 2009, or 2010 (2011 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends and temporarily increases this additional first-year depreciation provision for investment in new business equipment. For investments placed in service after September 8, 2010 and through December 31, 2011 (through December 31, 2012 for certain longer-lived and transportation property), the new law provides for 100% additional first-year depreciation. In other words, the entire cost of qualifying property placed in service during that time frame can be written off, without limit. Note that even though the legislation did not take shape in Congress until mid-December of 2010, the effective date of this provision was made retroactive, to include qualifying property placed in service after September 8, 2010.

The fifty percent additional first-year depreciation will apply again in 2012.

The Tax Relief Act extends through 2012 the election to accelerate the AMT credit instead of claiming additional first-year depreciation.

The new law leaves in place the existing rules as to what kinds of property qualify for additional first-year depreciation. Generally, the property must be (1) depreciable property with a recovery period of 20 years or less; (2) water utility property; (3) computer software; or (4) qualified leasehold improvements. Also the original use of the property must commence with the taxpayer – used machinery does not qualify.

Another major benefit of the new legislation is enhanced small business expensing (Section 179 expensing). Generally, the cost of property placed in service in a trade or business cannot be deducted in the year it is placed in service if the property will be useful beyond the year. Instead, the cost is “capitalized” and depreciation deductions are allowed for most property (other than land), but are spread out over a period of years. However, to help small businesses quickly recover the cost of capital outlays for qualifying personal property, small business taxpayers can elect to write off these expenditures in the year of acquisition instead of recovering the costs over time through depreciation. The expense election is made available, on a tax year by tax year basis, under Section 179 of the Internal Revenue Code, and is often referred to as the “Section 179 election” or the “Code Section 179 election.” The new law makes three important changes to the Code Section 179 expense election.

First, the Tax Relief Act provides that for tax years beginning in 2012, a small business taxpayer will be allowed to write off up to $125,000 (indexed for inflation) of capital expenditures subject to a phaseout (i.e., gradual reduction) once capital expenditures exceed $500,000 (indexed for inflation). The new maximum expensing amount and phaseout level for tax years beginning in 2012 is actually lower than the levels in effect for tax years beginning in 2010 or 2011 (maximum expensing amount of $500,000, and a phaseout level of $2,000,000). For tax years beginning after 2012, the maximum expensing amount will drop to $25,000 and the phaseout level will drop to $200,000.

Second, the rule which treats off-the-shelf computer software as qualifying property is extended through 2012.

Third, the Tax Relief Act extends, through 2012, the provision permitting a taxpayer to amend or irrevocably revoke a Code Sec. 179 expense election for a tax year without IRS's consent.

Finally, the Tax Relief Act extends for an additional year (i.e., through 2011) the temporary exclusion of 100% of gain on the sale of certain small business stock.

Energy Provisions

This legislation also includes certain energy and disaster relief provisions that may be of interest to you as well. The following energy provisions were extended by the Act (through 2011):

• The credit for manufacturers of energy-efficient new homes. 
• Incentives for biodiesel and renewable diesel. 
• The credit for refined coal facilities. 
• Excise tax credits and outlay payments for alternative fuel and alternative fuel mixtures. 
• The special rule to implement FERCs and State electric restructuring policy. 
• Suspension of the limitation on percentage depletion for oil and gas from marginal wells. 
• Grants for specified energy property in lieu of tax credits. 
• Provisions related to alcohol used as fuel. 
• The energy efficient appliance credit. 
• The credit for energy-efficient improvements to existing homes. 
• The 30% investment tax credit for alternative vehicle refueling property.

Disaster Relief Provisions

The following disaster relief provisions are extended through 2011:

• New York Liberty Zone tax-exempt bond financing. 
• Increased rehabilitation credit for structures in the Gulf Opportunity Zone. 
• Low-income housing credit rules for buildings in Gulf Opportunity Zones. 
• Tax-exempt bond financing for the Gulf Opportunity Zones. 
• Bonus depreciation deduction applicable to specified Gulf Opportunity Zone extension property.

These new tax provisions have been issued very late in the current year and action may be needed to fully take advantage of benefits available to you.  We recommend that you consult your Decosimo tax advisor now.  If you are not a current Decosimo client, please contact us about that possibility.

The contents and opinions contained in this article are for informational purposes only. The information is not intended to be a substitute for professional accounting counsel. Always seek the advice of your accountant or other financial planner with any questions you may have regarding your financial goals.