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Tax Implications of the American Tax Relief Act (aka the Fiscal Cliff Act) for business

Congress certainly took its time and waited far too long to enact much anticipated tax legislation as the country neared the so called fiscal cliff. The Senate and House of Representatives passed the American Tax Relief Act late New Year’s Day. This tax legislation will have far reaching implications. While it was once thought that any fiscal cliff legislation would be a basic package, Congress managed to come out with a surprisingly comprehensive set of tax provisions, although most of this legislation for businesses is only applicable through 2013. This article will focus on the key elements of the package as it pertains to business income taxes.

Depreciation provisions modified and extended

Code Section 179 Small Business Expensing – The Act extends through 2013 enhanced Section 179 small business expensing. The dollar limits for tax years 2012 and 2013 is $500,000 with a $2 million investment limit. The rule allowing off the shelf computer software is also extended. Prior to this legislation, the limit for 2012 was $125,000 with a $500,000 investment limit and the limit for 2013 was scheduled to be $25,000 with a $200,000 investment limit. Even though the Act was implemented too late for anyone to proactively purchase equipment to take advantage of the increased limit, a business that did exceed the $125,000 limit in 2012 can now how better options on how to depreciate that investment.

Bonus depreciation – The Act extends through 2013 the 50 percent bonus depreciation. This is especially critical in circumstances where the Section 179 limitations are not favorable or individual limitations exist. Some transportation and longer period production property is eligible for 50 percent bonus depreciation through 2014.

Qualified Leasehold/Retail Improvements, Restaurant Property – The Act extends through 2013 the 15 year recovery period for qualified leasehold improvements, qualified retail improvements and qualified restaurant property.

Business tax extenders – The act also extended many business tax credits and other provisions. Notably, it extended through 2013 and modified the Sec. 41 credit for increasing research and development activities, which expired at the end of 2011. The credit is modified to allow partial inclusion in qualified research expenses and gross receipts those of an acquired trade or business or major portion of one.

Other business provisions extended through 2013, and in some cases modified, are:

  • Temporary minimum low-income tax credit rate for non-federally subsidized new buildings;
  • Housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds;
  • Indian employment tax credit;
  • New markets tax credit;
  • Railroad track maintenance credit;
  • Mine rescue team training credit;
  • Employer wage credit for employees who are active duty members of the uniformed services;
  • Work opportunity tax credit;
  • Qualified zone academy bonds;
  • Accelerated depreciation for business property on an Indian reservation;
  • Enhanced charitable deduction for contributions of food inventory;
  • Election to expense mine safety equipment;
  • Special expensing rules for certain film and television productions;
  • Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico;
  • Modification of tax treatment of certain payments to controlling exempt organizations;
  • Treatment of certain dividends of regulated investment companies;
  • Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Act;
  • Extension of subpart F exception for active financing income;
  • Lookthrough treatment of payments between related controlled foreign corporations under foreign personal holding company rules;
  • Temporary exclusion of 100% of gain on certain small business stock;
  • Basis adjustment to stock of S corporations making charitable contributions of property;
  • Reduction in S corporation recognition period for built-in gains tax;
  • Empowerment Zone tax incentives;
  • Tax-exempt financing for New York Liberty Zone;
  • Temporary increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands; and
  • American Samoa economic development credit.

Energy incentives

The act also extends through 2013, and in some cases modifies, a number of energy credits and provisions that expired at the end of 2011:

  • Credit for alternative fuel vehicle refueling property;
  • Cellulosic biofuel producer credit;
  • Incentives for biodiesel and renewable diesel;
  • Production credit for Indian coal facilities placed in service before 2009 (extended to an eight-year period);
  • Credits with respect to facilities producing energy from certain renewable resources i.e. wind facilities;
  • Credit for energy-efficient new homes;
  • Credit for energy-efficient appliances;
  • Special allowance for cellulosic biofuel plant property;
  • Special rule for sales or dispositions to implement Federal Energy
  • Regulatory Commission or state electric restructuring policy for qualified electric utilities; and
  • Alternative fuels (ethanol) excise tax credits.

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