Proposals submitted on behalf of Congressional members to extend the expiration of a given tax provision have been called “tax extenders.” Many business tax extenders are set to expire this year. Although Congress extended many business provisions in 2012 there are several that were not permanently extended beyond this tax year. Provisions that were not initially extended permanently by the ATRA of 2012 are now set to expire. Here is a brief list of what provisions originally announced in the ATRA that are slated to expire at the end of 2013.
Additional first-year “bonus” depreciation
This provision allows businesses to take an additional depreciation deduction for the cost of qualified property placed in service in the applicable year in addition to the property’s original depreciation allowance. ATRA has extended this 50% bonus depreciation through the end of 2013 but there is no additional information regarding extension beyond this year.
Increased expensing limits for Code Section 179 property
Code Sec. 179 small business expensing provisions sets the dollar limit for the tax years 2012 and 2013 at $500000 with a $2 million investment limit. What does that mean for tax payers? A business is entitled to take a deduction for any expenses up to $500000 until the cost of the property exceeds $2 million. At that point the $500000 deduction no longer applies.
Several bills have been introduced to extend and/or enhance Code 179 expensing.
15-year straight-line cost recovery for qualified leasehold restaurant and retail improvements
ATRA extended through the end of 2013 the 15-year recovery period for qualified leasehold improvements qualified retail improvement and qualified restaurant property. Legislation has been introduced (Sen 746) and if it is passed by Congress it will permanently extend the 15-year recovery period for this property group.
Work Opportunity Tax Credit (WOTC)
This credit rewards employers who hire employees from targeted typically under-served or hard-to-employ groups. Employers hiring a person within this category will then be eligible for a credit generally equal to 40% of the first-year salary up to $6000. For some qualified veterans the credit may be higher. The WOTC applies with respect to wages paid to qualified individuals who begin work for the employer before January 1 2014. Soon after the ATRA was passed Senate Finance Committee Chair Max Baucus proposed the permanent extension of WOTC along with an expansion of the credit to encourage employers to hire recently discharged veterans.
Research tax credit
The Code Sec. 41 is a research credit that may be claimed for increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations to be used for basic research.
The research tax credit is significantly popular on both sides of the bipartisan fence. Congress is currently calling for making the credit permanent. The obstacle to its extension is the cost which the Joint Committee on Taxation has extimated to be $14.3 billion over 10 years.
Reduced recognition period for S corp built-in gains tax
Because an S corporation shareholder is not subject to tax on corporate distributions if the C corporation converts to an S corp ultimately liquidating the corporation the built-in gains tax provisions under Code Sec. 1374 prevent the C corp from avoiding corporate-level tax payments on its distributions made during the five year “recognition period.” ATRA has extended the five-year recognition period until the end of 2013.
Look-through rule for Controlled Foreign Corporations (CFC’s)
Several exceptions to the general rule that U.S. tax on the active trade or business income of a U.S.-based company’s foreign subsidiaries Controlled Foreign Corporations (CFCs) is deferred until the income is distributed to the U.S. parent company in dividends. What ended up happening is income from active business earnings that were earned by a CFC and then sent to another CFC became subject to U.S. tax.
In 2006 the “Look-Through-Rule” was enacted by Congress to exclude from the definition of “foreign personal holding company income” dividends interest rents and royalties received or accrued by a CFC from a related CFC. You can see a detailed explanation of the “Look-Through-Rule” at International Tax Blog The Code Sec. 954(c)(6).
More expiring incentives
A number of other business tax incentives are schedule to expire after 2013. They include among other provisions:
Employer wage credit for activated military reservists
Special rules for qualified small business stock
Treatment of certain RIC dividends
Modification of tax treatment of certain payments to controlling exempt organizations
Accelerated depreciation for business property on Indian reservations
Railroad track maintenance credit
Low-income housing tax credit rate
Code Section 199 deduction for Puerto Rico
Indian employment tax credit
Seven-Year recover for motorsports entertainment complexes
Credit for new energy efficient homes
Incentives for biodiesel renewable diesel and alternative fuels
Election to expense advance mine safety equipment
Energy efficient appliance credit for manufacturers
American Samoa economic development credit
Gain rule for sales or dispositions implementing FERC or state electric restructuring policy
Mine rescue team training credit
Special expensing rules for cost of film and television production
Many factors come into play when debating the expansion revision or extension of tax provisions but the biggest weight rests on this equation: the cost of the extenders versus the benefits toward the business. The government has to consider if it’s worth the expense and if it will possibly benefit big and small business. It should be more evident as 2013 comes to a close which tax extenders will be permanently extended or at least temporarily extended for the next few years. For now businesses should plan on not having these benefits available to them as the wait out Congressional decisions over their importance and viability.
Contact Lindemeyer CPA on how these extenders could affect your business.