Unlike year-end 2012, planning for year-end 2013 is not burdened by the uncertainties over the extension of the Bush tax cuts or the political theater that took place surrounding last New Year's Day. Nevertheless, enough change and uncertainty remains that impacts year-end 2013 tax strategies to warrant special attention by taxpayers and their tax advisors.
Changes that impact on year-end 2013 planning include consideration of higher tax rates that may be imposed on distributions to owners; compliance with final repair regulations affecting virtually all businesses and final net investment income regulations that especially affect pass-throughs; strategies for lowering exposure and increasing benefits under the Affordable Care Act; and alignment of retirement plans and employee benefits with recent Internal Revenue Service guidance on same-sex marriage, among other matters.
Despite what's required at year-end 2013 in reaction to what's new, businesses nevertheless have not escaped a traditional year-end concern over "expiring provisions." The American Taxpayer Relief Act of 2012, signed on Jan. 2, 2013, extended many provisions for one or two years, many of them retroactively back to Jan. 1, 2012. They are all set to expire again after Dec. 31, 2013. This article reviews those expiring business-related provisions under ATRA '12 with an emphasis on year-end tax planning. More on other year-end concerns in a future column.
CAPITAL ACQUISITIONS
With budgets tight but the economy slowly on the upswing, Congress may be cutting back on its annual or bi-annual extension and enhancement of both bonus depreciation and Code Section 179 expensing. Businesses, however, reportedly continue to hold back on purchases. Curtailing bonus depreciation and enhanced Code Section 179 expensing in 2014 may encourage businesses to spend more for the remainder of 2013, presenting still another reason, aside from budget costs, for Congress to avoid another round of enhanced expensing and bonus depreciation.
BONUS DEPRECIATION
Bonus depreciation is scheduled to end after 2013. Additional 50 percent bonus depreciation was extended by ATRA '12 for one year only, to apply to qualifying property placed in service before Jan. 1, 2014 (or acquired before Jan. 1, 2014, but placed in service before Jan. 1, 2015, in the case of property with a longer production period and certain noncommercial aircraft). Unlike regular depreciation, under which half- or quarter-year conventions may be required, a taxpayer is entitled to the full 50 percent bonus depreciation irrespective of when during the year the asset is purchased. Year-end placed-in-service strategies therefore can provide an almost immediate "cash discount" from qualifying purchases, even when factoring in the cost of business loans to finance a portion of the purchases.
The rules for bonus depreciation for 2013 remain the same as in previous years: It is only available for new property (i.e., property the original use of which begins with the taxpayer) depreciable under MACRS that (a) has a recovery period of 20 years or less, (b) is MACRS water utility property, (c) is computer software depreciable over three years, or (d) is qualified leasehold improvement property. Also, as in past years, a taxpayer may make an election out of bonus depreciation with respect to any class of property placed in service during the tax year. Although this election may be factored into a year-end strategy, a final decision on making it is not required until a return is filed next year.
Bonus depreciation's placed-in-service deadline for property with a longer production period was extended by ATRA '12 for an additional year, but its acquisition date remains at before Jan. 1, 2014, as under the general rule. Longer-production property acquired pursuant to a written binding contract entered into before Jan. 1, 2014, is deemed acquired before Jan. 1, 2014. On the other hand, only pre-Jan. 1, 2014, progress expenditures are taken into account in computing basis for the bonus depreciation allowance.
- Luxury car depreciation caps. Along with the sunset of general bonus depreciation, the additional $8,000 first-year depreciation cap for passenger automobiles under Code Section 280F that accounts for bonus depreciation will no longer be available for vehicles acquired and placed in service after Dec. 31, 2013. For some businesses, this may provide a compelling reason to purchase (and place into service) a vehicle before year end 2013.
CODE SECTION 179 EXPENSING
An enhanced Section 179 expense deduction is available until 2014 for taxpayers (other than estates, trusts or certain non-corporate lessors) that elect to treat the cost of qualifying property (Section 179 property) as an expense, rather than a capital expenditure. The Section 179 dollar limitation for tax years beginning in 2012 and 2013, as increased by ATRA '12, is $500,000. For tax years beginning after 2013, that dollar limit is officially scheduled to plummet to $25,000 unless otherwise extended by Congress. For tax years beginning in 2012 and 2013, the overall investment limitation is $2 million; that level is also scheduled to drop precipitously to $200,000 in 2014. The Section 179 deduction therefore is completely phased out in a tax year beginning in 2013 if the taxpayer places more than $2.5 million of Section 179 property in service ($2.5 million - $2 million = $500,000).
A taxpayer will receive the greatest benefit from Code Section 179 by expensing property that does not qualify for bonus depreciation (e.g., used property) and property with a long MACRS depreciation period. For example, given the choice between expensing an item of MACRS five-year property and an item of MACRS 15-year property, the 15-year property should be expensed since it takes 10 additional tax years to recover its cost through annual depreciation deductions.
- Taxable income limitation. The Section 179 deduction is limited to the taxpayer's taxable income derived from the active conduct of any trade or business during the tax year, computed without taking into account any Section 179 deduction, deduction for self-employment taxes, net operating loss carryback or carryover, or deductions suspended under any provision. Any amount disallowed by this limitation may be carried forward and deducted in subsequent tax years, subject to the maximum dollar and investment limitations, or, if lower, the taxable income limitation in effect for the carryover year. Caution: Since the maximum dollar limit for 2014 will drop to $25,000 (unless revived by Congress), business should not assume that a carryover will be used up immediately in 2014. Monitoring 2013 taxable income in 2013 therefore is important within an overall Section 179 strategy.
- Qualifying property. Section 179 property is generally defined as new or used depreciable tangible Section 1245 property that is purchased for use in the active conduct of a trade or business. Off-the-shelf computer software is also included for 2013, as is qualified real property (up to $250,000). Both these later types of property will no longer qualify for Section 179 expensing at all after 2013, even at the lower $25,000 ceiling, making strategies that take advantage of them in 2013 particularly critical.
- Qualified real property. After a four-year run (2010-2013), the Section 179 expensing allowance for qualified real property is scheduled to end for property placed in service after 2013. Qualified real property for expensing purposes includes qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. Any amount of expensing for qualified real property disallowed by reason of the taxable income limitation, however, may not be carried forward to a tax year that begins after 2013, and such amount must be recovered through regular depreciation deductions only.
- Bonus depreciation versus Section 179 expensing. Unlike Section 179 expensing (which effectively provides 100 percent bonus depreciation for the smaller business), there is no dollar cap on the amount of bonus depreciation that a business may claim. However, Section 179 property can include used property, while bonus depreciation is confined to first use by the taxpayer. Also bear in mind that bonus depreciation is keyed to a calendar year and generally ends after Dec. 31, 2013.
Rules for 2013 Section 179 expensing, on the other hand, apply for tax years beginning in 2013; non-calendar-year taxpayers, therefore, may find Section 179 at enhanced 2013 levels extending into 2014, up to the date their fiscal year ends.
WORK OPPORTUNITY CREDIT
The Work Opportunity Credit, which has been extended at various times in various iterations, ends on Dec. 31, 2013. To qualify for the credit, an employer must hire members of certain targeted groups and have those individuals start work before Jan. 1, 2014. Targeted groups, as listed in Code Sec. 51, include qualified individuals in families receiving certain government benefits, including Title IV-A Social Security benefits (aid for dependent children) or food stamps; qualified individuals who receive supplemental Social Security income or long-term family assistance; veterans who are members of families receiving food stamps, who have service-connected disabilities, or who are unemployed; designated community residents; vocational rehabilitation referrals certified to have physical or mental disabilities; and others.
The credit is generally equal to 40 percent of the qualified worker's first-year wages up to $6,000 ($3,000 for summer youths and $12,000, $14,000 or $24,000 for certain qualified veterans). For long-term family aid recipients, the credit is equal to 40 percent of the first $10,000 in qualified first-year wages and 50 percent of the first $10,000 of qualified second-year wages.
Employers are eligible for the Work Opportunity Credit, however, only to the extent that qualifying employees are certified as members of a target group by a designated local agency. On or before the day the employee begins work, the employer must receive a written certificate from the DLA indicating that the employee is a member of a specific targeted group. Employers can use Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to obtain the certification. The IRS allows forms to be submitted electronically to DLAs with receipt systems that meet IRS standards.
Alternatively, as part of a written certification request, the employer may complete a prescreening notice on or before the day the employee is offered a job, and submit the notice to the designated local agency within 28 days after the employee commences work.
RESEARCH TAX CREDIT
ATRA '12 extended the Code Section 41 research tax credit, but only through 2013. The research credit may be claimed for increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research.
The credit applies to the excess of qualified research expenditures for the tax year over the average annual qualified research expenditures measured over the four preceding years.
Although the research tax credit enjoys significant bipartisan support in Congress and from the Obama administration, its estimated $14.3 billion price tag over 10 years for making it permanent makes it a hard sell. More likely, a one- or two-year extension will again be enacted, and perhaps retroactively after year's end.
SMALL BUSINESS STOCK
ATRA '12 extended the 100 percent exclusion allowed for gain on the sale or exchange of qualified small-business stock under Code Section 1202. The stock must be acquired before Jan. 1, 2014, and then held for more than five years by non-corporate taxpayers. Preferential Alternative Minimum Tax treatment also applies. The exclusion under Tax Code Section 1202 after 2013 reverts to a 50 percent exclusion.
Eligible gain from the disposition of qualified stock of any single issuer is subject to a cumulative limit for any given tax year equal to the greater of: $10 million ($5 million for married taxpayers filing separately), reduced by the total amount of eligible gain taken in prior tax years; or 10 times the taxpayer's adjusted basis in all qualified stock of a corporation disposed of during the tax year.
S CORP BUILT-IN GAINS
A corporate-level tax, at the highest marginal rate applicable to corporations, is imposed on an S corporation's net recognized built-in gain (i.e., gain that arose prior to the conversion of the C corporation to an S corporation and is recognized by the S corporation during the recognition period).
That recognition period, specified under Code Section 1374, is generally a 10-year period beginning with the first day of the first taxable year for which the corporation becomes an S corporation. ATRA '12 extended a reduced recognition period of five years through 2013. The sale of built-in gain assets should take place in 2013, therefore, if the five-year holding period has already been met before it reverts to a 10-year holding period.
OTHER SUNSETTING PROVISIONS
A number of other business tax extenders were also extended through 2013 by ATRA '12, including:
- The New Markets Tax Credit;
- The employer wage credit for activated military reservists;
- Subpart F exceptions for active financing income;
- The look-through rule for related controlled foreign corporation payments;
- The enhanced deduction for charitable contributions of food inventory;
- Tax incentives for empowerment zones;
- The Indian Employment Credit;
- Low-income tax credits for non-federally subsidized new buildings;
- Low-income housing tax credit treatment of military housing allowances;
- The treatment of dividends of regulated investment companies, or RICs;
- The treatment of RICs as qualified investment entities; and,
- Adjusted-basis reduction of stock after S corp charitable donation of property.
NOT EXTENDED
In case you missed it, certain business provisions were not extended by ATRA '12, including:
- The enhanced deduction for corporate charitable contributions of book inventory;
- The enhanced deduction for corporate charitable contributions of computers;
- Tax incentives for the District of Columbia; and,
- Expensing of brownfields remediation costs.
CONCLUSION
Based upon expiring ATRA '12 provisions alone, many businesses can benefit from an assessment of whether they ought to take advantage of the possible "last chances" now being offered by a handful of important provisions set to expire at the end of this year.
Unlike prior years, Congress more likely than not is apt to allow many to them to sunset. Taking advantage of these provisions in time, however, requires a certain amount of planning and time properly set aside to execute on them.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.
