Summary of the American Taxpayer Relief Act of 2012 – H.R. 8: Business, Real Estate, and Hurricane Sandy Provisions
This is the second in a series of EisnerAmper LLP Tax Alerts on the provisions of the Taxpayer Relief Act of 2012 (the “Act”). You can view the first alert, on individual income tax, estate and trust provisions here.
On Jan. 1, 2013, Congress passed the Act, which the President quickly signed into law on Jan. 2, 2013. Following are the more significant of the Act pertaining to business, real estate and Hurricane Sandy.
Bonus First-Year Depreciation Extended for One Year
- 50% first-year bonus depreciation extended to qualified property acquired and placed in service before Jan. 1, 2014 (before Jan. 1, 2015 for certain longer-lived and transportation property).
- 50% bonus depreciation previously allowed for qualified property acquired and placed in service after Dec. 31, 2011, and before Jan. 1, 2013.
- The additional first-year depreciation deduction is allowed for both regular tax and alternative minimum tax (AMT) purposes, but is not allowed for purposes of computing earnings and profits.
- A conforming change is made to Code Sec. 460(c)(6)(B) (relating to 50% bonus depreciation not being taken into account as a cost in applying the percentage of completion method for certain long-term contracts).
- The 2012 Taxpayer Relief Act also retroactively extends through 2013 the Sec. 168(e)(3)(E)(iv) rule treating qualified leasehold improvement property as 15-year property.
- Such property is therefore eligible for a bonus 50% first-year depreciation deduction if placed in service before Jan. 1, 2014.
Election to Claim Credits in Lieu of Bonus Depreciation
- For property placed in service after Dec. 31, 2012, the 2012 Taxpayer Relief Act permits a corporation to increase the AMT credit limitation (but not the research credit limitation) by the bonus depreciation amount.
- Applies to property newly eligible for 50% bonus first-year depreciation under the 2012 Taxpayer Relief Act's one-year extension provision.
- Pre-Act law's Code Sec. 168(k)(4) applied to property placed in service after Dec. 31, 2010 and before Jan. 1, 2013
|Bonus Depreciation (New Program)||2011||2012||2013*|
|Personal Property (i.e., Furniture and Equipment) IRC §1245||100%||50%||50%|
|Qualified Leasehold Improvement Property as Defined in IRC §168 (k)(3) (QLIP)||100%||50%||50%|
|Qualified Restaurant Property IRC §168 (e)(7) (QRP)||0%||50%||50%|
|Qualified Retail Improvement Property IRC §168 (e)(8) (QRIP)||0%||50%||50%|
|Building and Improvements IRC §1250||0%||0%||0%|
*Extended to 2013 by the 2012 Taxpayer Relief Act
- Under Code Sec. 179 taxpayers can elect to deduct as an expense tangible personal property placed in service during the tax year in the taxpayer's trade or business.
- The 2012 Taxpayer Relief Act increases the maximum expensing amount under Code Sec. 179 for tax years beginning in 2012 from $139,000 to $500,000.
- Old law: The maximum amount that may be expensed:
- For tax years beginning in 2011: $500,000.
- For tax years beginning in 2012: $139,000.
- For tax years beginning after 2012: $25,000.
- Effective for tax years beginning in 2013, the 2012 Taxpayer Relief Act increases the maximum expensing amount under Code Sec. 179 from $25,000 to $500,000.
- Old law: For tax years beginning in 2011, the maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of section 179 property placed in service during the tax year in excess of $2,000,000 (the investment ceiling). For tax years beginning in 2012, the investment ceiling is $560,000. For tax years beginning after 2012, the investment ceiling is $200,000.
- The 2012 Taxpayer Relief Act also increases the investment-based phaseout amount for tax years beginning in 2012 or 2013 to $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 phaseout amount is scheduled to drop to $200,000. (Code Sec. 179(b), as amended by Act Sec. 315(a)).
- The 2012 Taxpayer Relief Act also provides that:
- Off-the-shelf computer software is expensing-eligible property if placed in service in a tax year beginning before 2014 (a one-year extension).
- For tax years beginning before 2014 (also a one-year extension), an expensing election or specification of property to be expensed may be revoked without IRS consent. But, if such an election is revoked, it can't be reelected.
- For any tax year beginning in 2010, 2011, 2012, or 2013 (a two-year extension), 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(f)(1)).
15-Year Writeoff for Qualified Leasehold and Retail Improvements
- The 2012 Taxpayer Relief Act retroactively extends for two years the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year MACRS class.
- Such property qualifies for 15-year recovery if it is placed in service before Jan. 1, 2014.
Tax Lives/Depreciation Method
|Tax Lives/Depreciation Method||2011||2012||2013|
|Personal Property (i.e., Furniture and Equipment) IRC §1245||5 or 7 years DDB||5 or 7 years DDB||5 or 7 years DDB|
|Qualified Leasehold Improvement Property as Defined in IRC §168(k)(3) (QLIP)||15 Years S/L||15 Years S/L*||15 Years S/L*|
|Qualified Restaurant Property IRC §168(e)(7) (QRP)||15 Years S/L||15 Years S/L*||15 Years S/L*|
|Qualified Retail Improvement Property IRC §168(e)(8) (QRIP)||15 Years S/L||15 Years S/L*||15 Years S/L*|
|Building and Improvements IRC §1250||39 Years S/L||39 Years S/L||39 Years S/L|
*Retroactively reduced by the 2012 Taxpayer Relief Act
Research Credit Reinstated; Expanded
- The 2012 Taxpayer Relief Act retroactively extends the research credit for two years (through Dec. 31, 2013)
o The research credit previously expired Dec. 31, 2011.
- The research credit equals the sum of:
- (1) 20% of the excess of the qualified research expenses for the tax year over a base amount;
- (2) the university basic research credit (i.e., 20% of the basic research payments);
- (3) 20% of the taxpayer's expenditures on qualified energy research undertaken by an energy research consortium.
- Persons that acquire the major portion of either a trade or business or a separate unit of a trade or business of another person.
- In such case, 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.
- Controlled groups.
- 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.
New law also makes modifications for:
Work Opportunity Tax Credit (WOTC) Extended
- The 2012 Taxpayer Relief Act retroactively extends the WOTC so that it applies to eligible veterans and nonveterans who begin work for the employer before Jan. 1, 2014.
- The work opportunity tax credit allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee.
New Markets Tax Credit Extended
- The 2012 Taxpayer Relief Act retroactively extends the new markets tax credit two years, through 2013.
- A new markets tax credit applies for qualified equity investments to acquire stock in a “community development entity.”
Empowerment Zone Tax Breaks 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.
- The 2012 Taxpayer Relief Act extends for two years, through Dec. 31, 2013, the period for which the designation of an Empowerment Zone is in effect. The Act also extends for two years, through Dec. 31, 2018, the period for which a higher percentage exclusion applies for certain qualified small business stock of empowerment zone businesses.
TV Production Expensing Election Extended
- The 2012 Taxpayer Relief Act retroactively extends the expensing provision, for two years, for qualified film and TV productions beginning before Jan. 1, 2014.
- Taxpayers may elect to expense production costs of qualified film and television productions, with certain limitations.
Subpart F Exception for Active Financing Income Extended
- The 2012 Taxpayer Relief Act retroactively extends the exclusions for active financing income for two years.
- Applies to tax years of a foreign corporation beginning after Dec. 31, 1998 and before Jan. 1, 2014.
- Certain income from the active conduct of a banking, financing or similar business, or from the conduct of an insurance business (collectively referred to as “active financing income”), is “temporarily” excluded from the definition of Subpart F income.
Look-Through Rule for Payments Between Related CFCs Under Foreign Personal Holding Company Income Rules Extended
- The 2012 Taxpayer Relief Act retroactively extends look-through treatment for related CFCs for two years.
- Applies to tax years of a foreign corporation before Jan. 1, 2014.
- Dividends, interest, rents, and royalties received by one controlled foreign corporation from a related CFC are treated as foreign personal holding company income (FPHCI) to the extent attributable or properly allocable to non-subpart-F income, or income that was not effectively connected with the conduct of a U.S. trade or business of the payor.
Reduction in S Corp Recognition Period for Built-In Gains Tax Modified and Extended
- The 2012 Taxpayer Relief Act provides that for determining the net recognized built-in gain for tax years beginning in 2012 or 2013, the recognition period is the five-year period beginning with the first day of the first tax year for which the corporation was an S corporation.
- Additionally, effective for tax years beginning after Dec. 31, 2011, for S corporations that report gain from the sale of an asset under the Sec 453 installment method, the treatment of all payments received is governed by the provisions of Code Sec. 1374(d)(7) that apply to the tax year in which the sale was made.
Temporary Exclusion of 100% of Gain on Certain Small Business Stock Extended
- The 2012 Taxpayer Relief Act retroactively for two years the 1201 provisions.
- Taxpayers may exclude 100% of gain from the disposition of qualified small business stock acquired after Sep. 27, 2010 and before Jan. 1, 2014.
- The 2012 Taxpayer Relief Act also makes certain technical amendments relevant to qualified small business stock acquired during earlier periods.
Exemption for Regulated Investment Company Interest-Related Dividends and Short-Term Capital Gains Dividends Extended
- The 2012 Taxpayer Relief Act retroactively extends for two years the rules exempting from gross basis tax and withholding tax the interest-related dividends and short-term capital gain dividends received from a regulated investment company (RIC), for dividends with respect to tax years of a RIC beginning before Jan. 1, 2014.
- A RIC can designate and pay (1) interest-related dividends out of interest that would generally not be taxable when received directly by a nonresident alien individual or foreign corporations and (2) short-term capital gains dividends out of short-term capital gains. RIC dividends designated as interest-related dividends and short-term capital gains dividends were generally not taxable when received by a nonresident alien individual or foreign corporation and weren't subject to the withholding tax imposed on nonresident alien individuals and foreign corporations.
Treatment of RIC as Qualified Investment Entity Extended
- The 2012 Taxpayer Relief Act extends the inclusion of a RIC within the definition of a “qualified investment entity” for two years, through 2013.
- The change made by Act. Sec. 321(a) takes effect on Jan. 1, 2012, but the 2012 Tax payer Relief Act doesn't impose a withholding requirement under Code Sec. 1445 for any payment made before Jan. 2, 2013. A RIC that withheld and remitted tax under Code Sec. 1445 on distributions made after Dec. 31, 2011 and before Jan. 2, 2013, isn't liable to the distributee for such withheld and remitted amounts. (Act Sec. 321(b))
- Gain from the disposition of a U.S. real property interest (USRPI) by a foreign person is treated as income effectively connected with a U.S. trade or business and is subject to tax and to Code Sec. 1445 withholding under Foreign Investment in Real Property Tax Act (FIRPTA) provisions. A USRPI does not include an interest in a domestically controlled “qualified investment entity.”
Withholding on Dispositions of U.S. Real Property
- The IRS’s authority (under Sec. 1445(e)(1)) to apply a withholding tax to gains on the disposition of U.S. real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons has been made permanent.
- The withholding amount is increased to 20%.
Assorted Other Changes
- Other business provisions extended or modified include:
- Temporary minimum low-income tax credit rate for non-federally subsidized new buildings (Sec. 42).
- Housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds (Section 3005 of the Housing Assistance Tax Act of 2008).
- Indian employment tax credit (Sec. 45A).
- Railroad track maintenance credit (Sec. 45G).
- Mine rescue team training credit (Sec. 45N).
- Employer wage credit for employees who are active duty members of the uniformed services (Sec. 45P).
- Qualified zone academy bonds (Sec. 54E).
- Accelerated depreciation for business property on an Indian reservation (Sec. 168(j)).
- Enhanced charitable deduction for contributions of food inventory (Sec. 170(e)).
- Election to expense mine safety equipment (Sec. 179E).
- Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (Sec. 199(d)).
- Modification of tax treatment of certain payments to controlling exempt organizations (Sec. 512(b)).
- Basis adjustment to stock of S corporations making charitable contributions of property (Sec. 1367).
- Empowerment Zone tax incentives (Sec. 1391).
- Tax-exempt financing for New York Liberty Zone (Sec. 1400L).
- Temporary increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands (Sec. 7652(f)).
- American Samoa economic development credit (Section 119 of the Tax Relief and Health Care Act of 2006, P.L. 109-432, as modified).
Sandy-Related Extended Tax Filing Deadlines
- Parts of Connecticut, New Jersey, New York, and Rhode Island have been declared major disaster areas. In those areas, the following returns are extended until 2/1/13:
- 12/15 corporate and individual filings.
- Fourth quarter estimated tax payments (normally due 1/15/13).
- Excise and payroll returns (Forms 940/941) and related payments (normally due 10/31/12 and/or 1/21/13).
- Tax-exempt organizations that must file Form 990 returns with an original or extended deadline falling between 10/31/12 and 1/31/13.
- The IRS has committed to work with any taxpayer who resides outside the disaster area but whose books, records or tax professional are located within the designated areas.
- State tax filing and payments deadline extended to 11/7/12.
- Applies to all state tax filings and payments due the week ending 11/2/12.
- Connecticut Department of Revenue Services (“DRS”) will also approve demonstrated hardship waivers related to Sandy on a case-by-case basis using “2012 Storm Sandy Relief Request Form” available online.
- State tax filing and payments deadline extended to 11/26/12.
- Applies to all returns, reports, and related payments due 10/30/12 through 11/26/12.
- New Jersey Division of Taxation will grant hardship waivers for late filers on a case-by-case basis for business taxpayers affected by Sandy.
- Billing notices for late filing and/or late payment may be waived on request if Sandy-related damage can be demonstrated to have caused the delay. Taxpayers should respond to the notice with a written explanation accompanied by documentation that their businesses, tax records, or tax preparers were located in a storm-impacted area.
- State tax filing and payments deadline extended to 11/26/12.
- Applies to all returns with original deadlines between 10/26/12 and 11/26/12.
- Taxpayers should write “Hurricane Sandy” on the top center of the front page of any late-filed return.
- Abatements of penalties for remittances of taxes due not made by the extended 11/26/12 deadline will be handled on a case-by-case basis.
- New York, New Jersey, and Connecticut disaster areas are eligible for both individual and public FEMA assistance.
- Rhode Island disaster counties were deemed eligible for public assistance only.
- Further, the President declared disaster areas in parts of Delaware, the District of Columbia, New Hampshire, Pennsylvania, Maryland, Rhode Island, Virginia, and West Virginia. As such, those areas are eligible for category B public assistance.
- Qualified disaster recovery payments made by employers to employees for recovery expenses may be tax-free and excluded from taxable wages under IRC Sec. 139.
- An itemized deduction may be available for personal losses from fires, storms, car accidents, and similar “sudden, unexpected, or unusual” events.
- The deduction is only available for physical damage or loss to your property.
- The loss is measured as the lesser of (a) the drop in value and (b) your basis in the property.
- Limitations on the deduction:
- The loss figure must be reduced by three amounts:
- First, to the extent you are insured, you must reduce your loss by your reimbursement.
- Second, for each casualty, you must reduce your loss amount by $100.
- This reduction is per “event,” not per item damaged. Thus, if a storm knocks over a tree that damages your car and home, you have three property losses (tree, car, and house) and only one reduction.
- Third, after combining all your losses under the above guidelines, you must reduce them by 10% of adjusted gross income (AGI) in the appropriate tax year (see below). Only the loss amount above this “floor” may be deducted.
- Where property is held for both business (or profit) and personal purposes, these limits apply only to the personal part of the loss.
- The loss figure must be reduced by three amounts:
- Except for “disaster losses,” the deduction is taken in the year the loss is incurred. For a federally declared disaster area, the loss can be taken in the year before it was incurred. As a result, taxpayers may need to wait to determine in which year it would be most sensible to claim the loss.
- Individual taxpayers who don't itemize deductions can't deduct their casualty losses. The additional standard deduction that was allowed to non-itemizers for net losses from federally declared disasters occurring in 2008 or 2009 is not available for disasters occurring in 2010 or later years.
- IRS resources:
- Publication 584, 584B; Publication 547;
- Form 4684.
- Damages received for injury to business that represent compensation for lost profits (including business interruption insurance proceeds) are taxable as ordinary income.
- Insurance proceeds that compensate for the loss of the right to use property due to loss or destruction may qualify for non-recognition as involuntary conversion proceeds, but the proceeds of a use and occupancy insurance contract that expressly insures against actual lost profits do not qualify and are treated as taxable income. Reg § 1.1033(a)-2(c)(8).
- The essential elements of an involuntary conversion are a property loss caused by destruction (complete or partial), theft, seizure, or condemnation.
- If property is involuntarily converted directly into similar property and gain on the conversion isn't recognized under Code Sec. 1033(a)(1), the basis of the property received is the basis of the converted property (1) decreased by the amount of any money received that was not spent acquiring similar property, and (2) increased by the amount of gain recognized, or decreased by the amount of loss recognized.
- Where the taxpayer's property is involuntarily converted into money or other property that isn't similar or related in use to the converted property and, within the prescribed period, the taxpayer purchases other property that is similar or related in service or use to the converted property, and elects not to recognize any part of the gain, the basis of the replacement property is its cost, reduced by the amount of gain that is not recognized.
- If more than one piece of property is bought as a replacement, the basis (cost less non-recognized gain) is allocated to each piece in proportion to its respective cost.
- Sandy-affected persons are currently exempted from the requirements of the federal securities laws with regard to the Exchange Act filing requirements for the period from Oct. 29, 2012 to Nov. 20, 2012, provided that the filer disclose the reasons why, in good faith, he/she cannot file on a timely basis.
- CPA licensees whose registration renewal is due in November or December 2012, and who are unable to complete required coursework due to the storm, will have until February 1, 2013 to meet their requirements.
- CPE earned in January 2013 may be applied to either 2012 or 2013.
401(k) Hardship Distributions
- In response to Hurricane Katrina, the IRS liberalized the safe-harbor hardship withdrawal rules for certain hurricane-related withdrawals. Under the relief, plans could rely on participants' representations regarding the need for, and amount of, hardship withdrawals and the requirement for post-distribution contribution suspensions was eliminated. IRS/Congress may still make this determination for Sandy.
- Generally, distributions from a 401(k) plan while you're still employed and before you reach age 59 ½ are not permitted. However, if the plan provides for hardship distributions, and you can show that you have an immediate and heavy financial need, then you may be entitled to a distribution of funds necessary to meet your obligation. A distribution of “elective contributions” to a cash or deferred arrangement (CODA, also known as a 401(k) plan) is on account of hardship if the distribution:
- (1) is made on account of an immediate and heavy financial need of the employee, and
- (2) is necessary to satisfy that need.
- The determination of the existence of an immediate and heavy financial need and of the amount necessary to meet that need must be made in accordance with nondiscriminatory and objective standards set forth in the plan.