American Taxpayer Relief Act of 2012—Provisions Applicable to Small Businesses

The following is a summary of some provisions applicable to small businesses included in the 157-page American Taxpayer Relief Act.

Section 179 Expensing Increased for 2012 and 2013
Under prior law, the Section 179 expensing cap for 2012 was $139,000 and would have dropped to $25,000 in 2013. The 2012 Taxpayer Relief Act extends 2011 caps to both 2012 and 2013. Thus, for both years, the cap will be $500,000, with a $2,000,000 investment ceiling. The 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. 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.

Bonus First-Year Depreciation Extended for One Year
Under prior law, a bonus first-year depreciation was 50% of the adjusted basis of qualified property acquired and placed in service after Dec. 31, 2011, and before Jan. 1, 2013 (before Jan. 1, 2014 for certain longer-lived and transportation property). Bonus depreciation applies for both regular tax and AMT purposes, but is not allowed for purposes of computing earnings and profits. A taxpayer may elect out of additional first-year depreciation for any class of property for any tax year. The 2012 Taxpayer Relief Act extends 50% first-year bonus depreciation so that it applies to qualified property acquired and placed in service before Jan. 1, 2014 (before Jan. 1, 2015 for certain longer-lived and transportation property).

First-Year Depreciation Cap for 2013 Autos and Trucks Boosted by $8,000
As a result of the one-year extension of the 50% bonus depreciation, the yet-to-be determined luxury auto dollar limits for 2013 are increased $8,000 when the bonus depreciation is used.

15-Year Writeoff for Qualified Leasehold and Retail Improvements and Restaurant Property Reinstated and Extended
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.

Qualified Small Business Stock Exclusion
Normally 50% of the gain from QSBS is excluded from taxation (but is an AMT preference). Under prior law the 50% was increased to 100% for the exclusion of gain on certain small business stock acquired after Sept. 27, 2010 and before Jan. 1, 2012. The 2012 Taxpayer Relief Act retroactively extends this provision for two years, through 2013. CAUTION – For California purposes, the requirement that 80% of the business be conducted in California to benefit from the California exclusion and reinvestment was recently found to be discriminatory and all exclusions or reinvestments since 2009 have been invalidated. The State of California Franchise Tax Board will be sending out tax due notices to affected taxpayers.

Work Opportunity Tax Credit Extended
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 up to $6,000 per employee ($3,000 for qualified summer youth employees). Where the employee is a long-term family assistance (LTFA) recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages; it’s 25% for employees, who have completed at least 120 hours, but less than 400 hours of service for the employer. For LTFA recipients, it includes an additional 50% of qualified second-year wages. The maximum WOTC for hiring a qualifying veteran generally is $6,000. However, it can be as high as $12,000, $14,000, or $24,000, depending on factors, such as, whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred relative to the WOTC-eligible hiring date. 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. Thus, the Act grants a two-year lease on life for the WOTC for eligible nonveterans, and a one-year lease on life for the WOTC for qualifying veterans.

Differential Wage Payment Credit for Employers Reinstated and Extended
Eligible small-business employers (less than an average of 50 employees during the year), with a written plan, that pay differential wage payments to qualified employees (been an employee during the 91-day period immediately preceding the period for which any differential wage payment is made) for periods that they are called to active duty with the U.S. uniformed services (for more than 30 days) that represent all or part of the wages that they would have otherwise received from the employer can claim a credit equal to 20% of up to $20,000 of differential pay made to an employee during the tax year. The 2012 Taxpayer Relief Act retroactively extends the credit for two years. It applies for differential wages paid through Dec. 31, 2013.

Research Credit Reinstated and Liberalized
The research credit equals the sum of: (1) 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount, (unless the taxpayer elected an alternative simplified research credit); (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. Under pre-Act law, the research credit didn’t apply for amounts paid or accrued after Dec. 31, 2011. The 2012 Taxpayer Relief Act retroactively extends the research credit for two years, so that it applies for amounts paid or accrued before Jan. 1, 2014. For tax years beginning after Dec. 31, 2011, the Act also liberalizes the research credit rules 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. It also revises the rules for allocating the research credit among members of a controlled group or members of a group of commonly controlled trades or businesses.

These are just highlights—there were many others. Please call your Tax Consultant with any concerns you may have related to how these new tax laws may affect your tax situation.

Disclosures:

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.