Abstract: The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, passed by the Senate Dec. 15 and the House Dec. 16, may be best known for extending lower income and capital gains tax rates for individuals. But the act also extends and enhances many breaks for businesses. In particular, it provides incentives for businesses to invest in assets, research and people. This article examines these and other provisions most relevant to businesses.
Tax Relief act provides businesses with enhanced investment incentives and more
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, passed by the Senate Dec. 15 and the House Dec. 16, may be best known for extending lower income and capital gains tax rates for individuals. But the act also extends and enhances many breaks for businesses. In particular, it provides incentives for businesses to invest in assets, research and people.
One way in which the 2010 Tax Relief act encourages businesses to invest is by significantly enhancing bonus depreciation. The act temporarily increases this additional first-year depreciation allowance to 100% and then provides a 50% allowance for 2012.
The Small Business Jobs Act (SBJA), signed into law in September, had previously extended 50% bonus depreciation to 2010. Here’s an overview of the bonus depreciation allowance:
|Qualified assets placed in service||Bonus depreciation|
|Jan. 1, 2010, through Sept. 8, 2010||50%|
|Sept. 9, 2010, through Dec. 31, 2011||100%|
|Jan. 1, 2012, through Dec. 31, 2012||50%|
|After Dec. 31, 2012||none|
Note: Later deadlines apply to certain long-lived and transportation property.
Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leasehold improvement property.
The Tax Relief act also extends the provision allowing corporations to accelerate certain credits in lieu of claiming bonus depreciation for qualified assets placed in service through Dec. 31, 2012 (Dec. 31, 2013, for certain long-lived and transportation property).
Sec. 179 expensing
Section 179 is another tax law provision that encourages investment. It allows smaller businesses to immediately write off the full price of qualifying asset purchases rather than depreciating them over several years. The deduction is reduced by $1 for every $1 of expenses in excess of a phaseout threshold, which is why the break primarily benefits smaller businesses. The expensing election can be claimed only to offset net income, not to reduce net income below zero.
Before the 2010 Tax Relief act, the Section 179 expensing limit was scheduled to drop to $25,000 in 2012, with a phaseout threshold of $200,000. The act increases the 2012 limits to $125,000 and $500,000, respectively, and both amounts will be indexed for inflation.
It’s important to note, however, that these higher limits will be a significant drop from the 2010 and 2011 limits. Under the SBJA, the limits for assets placed in service in those years are $500,000 and $2 million, respectively.
Also, the Tax Relief act didn’t extend the SBJA provision that expanded the types of assets that qualify for expensing to include certain leasehold-improvement, restaurant and retail-improvement property. Under the SBJA, up to $250,000 of such property placed in service in 2010 or 2011 is eligible for Sec. 179 expensing.
Sec. 179 may be less important while 100% bonus depreciation is available. Depending on the type of asset, 100% bonus depreciation may provide the same tax savings — with no limit on asset purchases. But you’ll also want to consider state tax consequences.
Leasehold improvement, restaurant and retail-improvement property
For 2009, accelerated depreciation was available for qualified leasehold-improvement, restaurant and retail-improvement property. The 2010 Tax Relief act extends it to 2010 and 2011.
Specifically, the provision allows a shortened recovery period of 15 years — rather than 39 years — for such property.
For many years, the research credit (also commonly referred to as the “research and development” or “research and experimentation” credit) has provided an incentive for businesses to invest in research. But the credit expired at the end of 2009.
The 2010 Tax Relief act extends the credit to 2010 and 2011. The credit is generally equal to a portion of qualified research expenses. It’s complicated to calculate, but the tax savings can be substantial.
Work Opportunity credit
The Work Opportunity credit, designed to encourage hiring from certain disadvantaged groups, was scheduled to expire after Aug. 31, 2011. The 2010 Tax Relief act extends the credit to qualifying hires made through Dec. 31, 2011.
Examples of disadvantaged groups for purposes of the credit include food stamp recipients, disabled or unemployed veterans, “disconnected” youth and ex-felons. The credit generally equals 40% of the first $6,000 of wages paid to qualifying employees ($12,000 for wages paid to qualified veterans).
Enhanced deductions for certain inventory donations expired at the end of 2009:
- Food inventory,
- Book inventory to public schools, and
- Computer inventory for educational purposes.
The 2010 Tax Relief act extends the enhanced deductions for these donations through 2011. The rules are complex and vary somewhat for each type of inventory donation, so talk to your tax advisor to determine whether you’re eligible for an enhanced deduction.
Some fringe benefits aren’t included in an employee’s wages for income and payroll tax purposes, yet the employer is still allowed to deduct them. Until recently, the maximum transit benefit that could receive such treatment was higher for parking than for van-pooling and mass transit. Tax legislation in 2009, however, provided for the limits to be equal through 2010.
The 2010 Tax Relief act extends this parity through 2011. For 2010, the limit is $230 per month. As of this writing, the 2011 inflation adjustment hasn’t been released.
For 2011 only, the 2010 Tax Relief act reduces the employee portion of the Social Security tax on earned income from 6.2% to 4.2%. The self-employed pay both the employee and employer portions of Social Security tax, and the act also reduces their rate by two percentage points for 2011, from 12.4% to 10.4%.
The employer portion of Social Security tax remains the same. But employers will have to work closely with their payroll companies to ensure the proper adjustments are made to their employees’ paychecks in the new year.
Also note that the Tax Relief act doesn’t extend the payroll tax forgiveness provided under the Hiring Incentives to Restore Employment (HIRE) Act of 2010. But remember that, if you hired workers in 2010 that qualified for payroll tax forgiveness, you may be eligible for a retention credit of up to $1,000 per retained worker on your 2011 tax return.
Many opportunities to save
The 2010 Tax Relief act also extends through 2011 many other breaks for businesses that had expired after 2009. These breaks are too limited in applicability to cover here, but they can provide significant benefits to the taxpayers that qualify for them.
And the Tax Relief act isn’t limited to tax breaks for businesses; it provides numerous additional tax-saving opportunities, including many that may help reduce your individual tax liability. If estate taxes are a concern, you’ll want to review your estate plan in light of the act’s temporary estate tax relief. Finally, if you’re interested in reducing energy consumption, you may want to take advantage of the act’s extensions of various energy-related breaks.
Please contact us with any questions you have about the 2010 Tax Relief act’s business incentives or other provisions. We can help you determine which ones will provide you opportunities to save taxes and achieve your goals.