Tax Provisions Set to Expire
November 14, 2013
Dear Valued Client,
As a follow up to our letter discussing additional taxes and increased tax rates, following is a discussion of certain tax provisions that are set to expire at the end of 2013 as you may want to discuss them with us and consider if there are actions that should be undertaken before the end of the calendar year
Bonus First-Year Depreciation
The 50% first-year bonus depreciation applies to qualified property acquired and placed in service before January 1, 2014 (before Jan. 1, 2015 for certain longer-lived and transportation property). California does not provide for any bonus first year depreciation. Through the end for 2013, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property are treated as 15-year property. Thus, such property is eligible for the bonus 50% first-year depreciation deduction if placed in service before January 1, 2014.
First-Year Depreciation Cap for 2013 Autos and Trucks Boosted by $8,000
The applicable first-year depreciation limit is increased by $8,000 (not indexed for inflation) for any passenger automobile that is “qualified property” under the bonus depreciation rules and which isn't subject to a taxpayer election to decline bonus depreciation.
The placed-in-service deadline for “qualified property” is December 31, 2013 (December 31, 2014 for aircraft and long-production-period property).
Boosted Expensing Amounts for 2013
Effective for tax years beginning in 2013, the maximum expensing amount under Code Sec. 179 is $500,000. The investment-based phase-out amount for tax years beginning in 2013 is $2,000,000. However, for tax years beginning after 2013, the maximum expensing amount is scheduled to drop to $25,000 and the investment-based phase-out amount is scheduled to drop to $200,000. California does not conform to these provisions. The maximum expensing amount remains at $25,000 per year.
The Act also provides that:
1. Off-the-shelf computer software is expensing-eligible property if placed in service in a tax year beginning before 2014.
2. For tax years beginning before 2014, an expensing election or specification of property to be expensed may be revoked without IRS's consent. But, if such an election is revoked, it can't be reelected.
3. For any tax year beginning in 2010, 2011, 2012, or 2013, up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) is eligible for expensing under Code Sec. 179.
Choice to Forego Bonus Depreciation and Claim Credits Instead
Prior to law changes in 2012, Code Sec. 168(k)(4) generally permits a corporation to increase the AMT credit limitation (but not the research credit limitation) by the bonus depreciation amount with respect to certain property placed in service after December 31, 2010 and before January 1, 2013 (January 1, 2014 in the case of certain longer-lived and transportation property). Current law provides similar options to corporations for property placed in service after December 31, 2012 and before 2014 (before 2015 for the aircraft and long-production-period property), in tax years ending after that date.
The research credit applies for amounts paid or accrued before January 1, 2014.
For tax years beginning after December 31, 2011, the research credit rules have been liberalized for persons that acquire the major portion of either a trade or business or a separate unit of a trade or business of another person. Here, for purposes of calculating the allowable research credit, the amount of qualified research expenses paid or incurred by the acquiring person during the measurement period is increased by certain expenses of the predecessor, and the gross receipts of the acquiring person for such period is increased by certain gross receipts of the predecessor. The measurement period is, with respect to the tax year of the acquiring person for which the research credit is determined, any period of the acquiring person preceding such tax year which is taken into account for purposes of determining the credit for such year.
The credit for each member of a controlled group is determined on a proportionate basis to its share of the aggregate of the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums, taken into account by such controlled group for purposes of the research credit. A similar rule applies to members of a group of commonly controlled trades or businesses.
Work Opportunity Tax Credit
The work opportunity tax credit (WOTC) allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages and, in certain cases first two years’ wages. The credit applies to eligible veterans and nonveterans who begin work for the employer before January 1, 2014.
Reduction in S Corp Recognition Period for Built-In Gains Tax
Where a corporation that was formed as a C corporation elected to become an S corporation (or where an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election if the gain is recognized during a recognition period.
For determining the net recognized built-in gain for tax years beginning in 2012 or 2013, the recognition period is the 5-year period beginning with the first day of the first tax year for which the corporation was an S corporation.
Empowerment Zone Tax Breaks Reinstated and Extended
The designation of an economically depressed census tract as an “Empowerment Zone” renders businesses and individual residents within such a Zone eligible for special tax incentives. This provision was extended for two years through December 31, 2013.
Enhanced Deduction for Food Inventory Reinstated and Extended
A C corporation may claim an enhanced charitable contribution deduction equal to the lesser of (a) basis plus half of the property's appreciation, or (b) twice the property's basis, for contributions of food inventory that was apparently wholesome food, i.e., meant for human consumption and meeting certain quality and labeling standards. The enhanced contribution is also available for a taxpayer other than a C corporation, but the aggregate amount of contributions of apparently wholesome food that may be taken into account for the tax year can't exceed 10% of the taxpayer's aggregate net income for that tax year from all trades or businesses from which those contributions were made for that tax year.
The “apparently wholesome food contribution” rules were extended for two years to include contributions made before Jan. 1, 2014.
New Markets Tax Credit Reinstated and Extended
A new markets tax credit applies for qualified equity investments to acquire stock in a community development entity (CDE). The credit is: (1) 5% for the year in which the equity interest is purchased from the CDE and for the first two anniversary dates after the purchase (for a total credit of 15%), plus (2) 6% on each anniversary date thereafter for the following four years (for a total of 24%). There is a $3.5 billion cap on the maximum annual amount of qualifying equity investments for 2013. A carryover is allowed where the credit limitation for a calendar year exceeds the aggregate amount allocated for the year, but no amount could be carried over to any calendar year after 2018.
Lower Shareholder Basis Adjustments for Charitable Contributions by S Corporations
Before the Pension Protection Act of 2006 (PPA), if an S corporation contributed money or other property to a charity, each shareholder took into account his pro rata share of the fair market value of the contributed property in determining his own income tax liability. The shareholder reduced his basis in his S stock by the amount of the charitable contribution that flowed through to him. The PPA amended this rule to provide that the amount of a shareholder's basis reduction in S stock by reason of a charitable contribution made by the corporation is equal to his pro rata share of the adjusted basis of the contributed property. This provision applies to contributions made in tax years beginning before January 1, 2014.
Other Year-end Items:
• If you are self-employed and have no employees, you may consider contributing to a SEP IRA. If you are considering other types of retirement plans such as a Solo 401K or other pension/profit sharing plan, these plans must be adopted before December 31, 2013. Even if you have employees, adoption of a SEP-IRA, Solo 401K or other pension/profit sharing plan may be helpful, but there are many factors to consider in designing and implementing a plan that makes economic sense for your enterprise.
• If you own an interest in a partnership or S corporation and losses are anticipated for the year, you should review your basis in the entity to make certain that you can deduct the loss on your tax return that would otherwise not be limited by the passive activity loss rules.
• Review vendor records and determine Form 1099 filing requirements.
We encourage you to contact us to discuss any questions you have regarding the applicability of any of these provisions to your particular circumstances. We will be considering all of these provisions as prepare your fourth quarter estimated tax projections, and again when we prepare your 2013 tax returns. We will also bring matters to your attention to consider for planning for the 2014 and subsequent tax years.
If you have any questions, please feel free to call our office 415-398-5900.