Yesterday, the US House of Representatives passed the “American Taxpayer Relief Act of 2012”, which is set to be signed by the President shortly. The bill’s volume of tax extensions is pretty extreme. It extends nine individual tax breaks, 31 business tax breaks, 12 energy tax breaks, as well as partially extending the current tax brackets. Much has already been written about the bill’s impact on individual tax rates. So here are the items most pertinent to Massachusetts businesses and small business owners:
Business Tax Extenders
Section 301 - Extension and modification of research credit – The research credit has been extended for two years, retroactively to January 1, 2012 and through December 31, 2013.
Section 308 – Extension of wage credit for employers who are active duty members of the uniformed services – This tax credit is provided to small business that provide wage payments to active duty members of the armed services. This credit has been extended through December 31, 2013.
Section 309 – Extension of work opportunity tax credit – The work opportunity tax credit is available to business that pay wages to a targeted group. The credit is available for wages paid in the first and second year of employment. There are various targeted groups, but the largest pool are qualified veterans of the armed services. This has been extended through December 31, 2013.
Section 311 - Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements - This creates a 15 year depreciation life for certain property. It has been extended for two years, retroactively from January 1, 2012 through December 31, 2013.
Section 315 – Section 179 increased expensing limitation – Businesses can deduct the cost of equipment placed in service under what is known as Section 179 deduction. This deduction was set at $139,000 in 2012 and $25,000 in 2013. This has been retroactively increased to $500,000 for 2012 and set at $500,000 for 2013. It is scheduled to revert to $25,000 in 2014.
Section 324 – Extension of temporary exclusion of 100 percent of gain on certain small business stock – Under certain rules, 100% of the capital gain on the sale of small business stock can be excluded from income. Various rules apply, but the stock needs to be held for more than five years. This has been extended for stock acquired in 2013.
Section 326 - Extension of reduction in S-Corporation recognition period for built in gains tax – For businesses that convert to an S corporation, the conversion is not a taxable event. However, following this conversion, the entity must hold the assets for ten years to avoid a tax on any built in gains at the time of conversion. This period has been reduced to five years for sales that occur in either 2012 or 2013.
Section 331 - Extension and modification of bonus depreciation – Bonus depreciation of 50% has been extended through the end of 2013.
Other Pertinent Sections
Section 101 - Permanent extension and modification of the 2001 Bush tax cuts – Amongst other things, this sets the estate tax rate at 40% for individual estates greater than $5 million. The gift tax exemption is also set at $5 million.
Section 102 - Permanent extension and modification of the 2003 Bush tax cuts - It extends the 15% capital gains rates, with an increase to 20% for upper income earners.
Section 103 – Extends of the 2009 Tax Relief – This extends for a period of 5 years the American Opportunity Tax Credit. This is a $2,500 tax credit on qualifying college tuition payments.
Section 104 – Permanent Alternative Minimum Tax (AMT) Relief – This permanently increases the AMT exemption to $78,750 from $45,000, then indexes the exemption to inflation. This is retroactive to the 2012 tax year. The increase in the exemption prevents many from falling under the AMT.