Small Business Taxes & Management^TM--Copyright 2013, A/N Group, Inc.

Both houses of Congress have now passed the American Taxpayer Relief Act of 2012. Most of the changes are in the way of extensions or modifications of existing law. For example, the deduction as interest of mortgage insurance premiums has been extended without any other change in the provision. As a result we've listed the provisions of the new law as bullet points without any detailed explanation unless there's a substantive change. Please check the dates carefully. Many provisions that expired at the end of 2011 have been extended into 2012; most of those have been extended through 2013. Note. The discussion below is in the order the provisions appear in the Senate bill. We'll complete the discussion in Part II with energy extenders and a list of certain other provisions.

Individual Tax Provisions

Payroll Tax Cut Not Extended. While not unexpected, the new law does not extend the 2% cut in social security taxes. This could be the most significant tax impact because it affects all working individuals. For taxpayers with earnings of $113,700, the additional tax amounts to $2,274.

Individual Tax Rates. The Bush tax cuts have been extended, with an additional rate, 39.6%. Thus, rates are now 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The brackets remain the same, as adjusted for inflation. The exception is the addition of a 39.6% rate applies to taxpayers with taxable income above $450,000 for a married couple filing jointly, $425,000 for a taxpayer filing as head of household, and $400,000 for a single individual. The usual graduated tax rates apply to the first $450,000 (married, joint) of income of high-income taxpayers.

Marriage Penalty Relief. The new law extends marriage penalty relief.

Phaseout of Personal Exemptions and Itemized Deductions. The rules would be the same as under existing Sections 68 (itemized deductions) and 151 (personal exemptions). The starting threshold for the phaseouts will be $300,000 (married, joint); $275,000 (head of household; and $250,000 (single). The provision is effective for years beginning after 2012. This threshold is higher than it would have been if the Bush cuts had simply expired.

Estate Tax. The rate would increase to 40%, but only apply to estates above $5 million. Applies to decedents dying, generation-skipping transfers, and gifts made, after December 31, 2012. The law makes the "portability" between spouses permanent.

Capital Gains and Dividends. For taxpayers who don't make it into the 39.6% bracket, there will be no change in the rates on long-term capital gains and dividends. For taxpayers in the 39.6% bracket, capital gains will be taxed at 20%. Effective for tax years beginning in 2013.

Accumulated Earnings, Personal Holding Company, Dispositions of U.S. Real Property Interests. The tax rate on these special taxes will rise to 20% from 15%, effective for taxable years beginning in 2013.

American Opportunity Credit. This education credit is extended for five years, through 2017.

Child Tax Credit. The current provisions of the child tax credit will be extended through 2017.

Earned Income Credit. The current provisions of the earned income tax credit are extended through 2017.

Alternative Minimum Tax Relief. The higher exemption amounts providing relief from the alternative minimum tax (AMT) for many taxpayers has been made permanent for 2012 and subsequent years. The exemption amounts for 2012 will be $78,750 and $50,600. These amounts will be indexed for inflation.

Discharge of Qualified Principal Residence Debt Income Exclusion. The exclusion of up to $2 million of debt discharge on a principal residence has been extended through 2013.

Parity for Exclusion from Income for Employer-Provided Mass Transit and Parking. This provision has been extended through 2013.

Mortgage Insurance Premiums. The provision allowing the deduction of mortgage insurance premiums as interest has been extended through the end of 2013. Amounts paid in 2012 are deductible.

Deduction for State and Local Sales Tax. The law allows the deduction for state and local sales tax for 2012 and 2013.

Conservation Contributions. The law extends the special rule for contributions of capital gain property (allowing contributions to be deductible up to 50% of a taxpayer's AGI) made for conservation purposes for 2012 through 2013.

Qualified Tuition Expenses. The law extends the above-the-line (i.e., toward AGI) deduction for qualified tuition and related expenses for 2012 through 2013.

Charitable Contributions from IRAs. The tax-free distribution from individual retirement plans for charitable contributions has been extended for 2012 through the end of 2013. This provision allows distributions from IRAs for charitable contributions without inclusion in taxable income for taxpayers aged 70-1/2 or more, up to a maximum of $100,000 per year. The provision also allows qualified charitable distributions made after December 31, 2012 and before February 1, 2013 will be deemed to have been made on December 31, 2012. In addition, any portion of a distribution from an IRA to the taxpayer after November 30, 2012 and before January 1, 2013 may be treated as a qualified charitable distribution if the portion is transferred in cash after the distribution to an organization described in Sec. 408(d)(8)(B)(i) before February 1, 2013 and the part of the distribution would meet the requirements of Sec. 408(d)(8) but for the fact the distribution was not transferred directly to the organization.

Tax Tip--This provision can produce significant tax benefits. Since the IRA distribution is not included in income it doesn't increase your AGI. That could allow you to take advantage of a number of tax benefits that are phased out based on AGI.

Business Tax Extenders

Extension and Modification of Research Credit. The new law extends the research credit, which expired at the end of 2011 through December 31, 2013. The law also contains a provision dealing with the acquisition of the major portion of either a trade or business or separate unit of a trade or business and makes certain other modifications to the existing law. The amendments apply to taxable years beginning after December 31, 2011.

Low-Income Tax Credit Rate for Buildings. The law extends the temporary minimum low-income tax credit rate for non-federally subsidized new buildings to housing credit dollar amount allocations made before January 1, 2014.

Indian Employment Tax Credit. The law extends the Indian Employment Tax Credit for 2012 and through 2013.

New Markets Tax Credit. The new law extends the New Markets Tax Credit through 2013 and extends the carryover of the credit through 2018 (from 2016). The amendments apply to calendar years beginning after December 31, 2011.

Wage Credit for Active Duty Servicemen. The employer wage credit for employees who are active duty members of the uniformed services now applies to payments made after December 31, 2011 and before December 31, 2013.

Work Opportunity Tax Credit. The work opportunity tax credit is extended to December 31, 2013 and applies to individuals who begin work for the employer after December 31, 2011.

Zone Academy Bonds. Qualified zone academy bonds are extended through 2013; the provision applies to obligations issued after December 31, 2011.

Qualified Leasehold Improvements, Restaurant Buildings, Retail Improvements. The law extends the 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements for expenditures made before January 1, 2014. The amendment applies to property placed in service after December 31, 2011.

Tax Tip--If you had dismissed the prospect of recovering your qualified leasehold, restaurant, or retail improvements over the shorter 15-year period, you should now review your capital expenditures for qualifying expenditures for 2012. And, while the provision may be extended once again (extension may be less likely if the economy improves), consider making expenditures that qualify before the end of 2013.

Business Property on an Indian Reservation. The accelerated depreciation rules for business property on an Indian reservation have been extended for capital expenditures through December 31, 2013. The provision applies to expenditures made after December 31, 2011.

Contribution of Food Inventory. The enhanced charitable deduction for contributions of food inventory have been extended for 2012 and now expire December 31, 2013.

Section 179 Expensing Limit. The higher expensing limits in effect in 2011 have been reinstated for 2012 and extended for expenditures made before December 31, 2013. Thus, a taxpayer can expense up to $500,000 of expenditures in 2012 and 2013, subject to a phaseout if total capital expenditures exceed $2,000,000. The maximum amount that can be expensed in years beginning after 2013 will, without amendment, drop to $25,000.

Computer Software. The election to expense qualifying computer under Section 179 has been extended and applies to expenditures made by December 31, 2013.

Qualified Real Property and Section 179. Taxpayers with expenditures in 2012 and 2013 for qualified real property, which includes qualified leasehold improvements, qualified restaurant property and qualified retail improvement property, can elect to claim Section 179 expensing treatment for such expenditures.

Film and Television Productions. The law extends special expensing rules for certain film and television productions for expenditures made in 2012 and 2013.

Foreign Personal Holding Company Rules. The law extends the look-thru treatment of payments between related controlled corporations under foreign personal holding company rules for taxable years beginning before January 1, 2014.

Gain on Small Business Stock. The new law extends the temporary exclusion of 100 percent of gain on certain small business stock acquired before January 1, 2014. The law also makes certain technical corrections to existing law.

Basis Adjustment for Charitable Contributions. The law extends the basis adjustment rule (i.e., basis reduction limited to adjusted property) to stock of S corporations making charitable contributions of property to taxable years beginning no later than December 31, 2013.

Built-In Gains of S Corporations. The law provides for a 5-year holding period for the sale of property with built-in gain for taxable years beginning in 2012 or 2013. In addition, the law adds a provision that the rule for installment sales applies to the year in which the sale was made.

Empowerment Zones. The law extends the designation of an empowerment zone by two years, through December 31, 2013 and extends the exclusion for the gain on stock by two years.

Liberty Zone Bonds. The law extends the availability of tax-exempt bonds for financing in the New York Liberty Zone to bonds issued before January 1, 2014.

Bonus Depreciation. The law allows 50% bonus depreciation for property placed in service before January 1, 2014. (The deadline is January 1, 2015 for certain property.) The law adds several amendments including creating round 3 extension property and elections. As a result of the extension of bonus depreciation, the higher first-year deduction for new autos and trucks will be allowed.

Additional Provisions

We'll finish up with the energy tax extenders and a list of other provisions that may be of interest in Part II.

--Last Update 01/02/13