Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act Of 2010 signed into law

Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act Of 2010 signed into law

As you’ve probably already heard, President Obama signed the Bush-era tax cuts extension into law on Friday (officially known as the “Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act Of 2010”).

While the text of the new law is only 30 pages, it is nonetheless very broad in its scope and is sure to have a significant impact on virtually all taxpayers.

So without further ado, here is a recap of some of the more generally applicable effects on both individuals and businesses. For a full description of the provisions (as well as the text of the new law), please see the links at the end of this message.

Individuals

The new law extends, renews or enhances a large number of individual tax incentives, among the most far reaching being reduced individual income tax rates and an across-the board payroll tax cut for 2011. This letter highlights some of the key individual tax incentives in the new law.

Individual tax rates.
Reduced individual tax rates put in place in 2001 were scheduled to expire after 2010. The new law extends the reduced rates for two years. The current rate brackets (10, 15, 25, 28, 33 and 35 percent) remain unchanged for 2011 and 2012. The new law also extends full repeal of the itemized deduction limitation and full repeal of the personal exemption phase-out, both scheduled to expire after 2010, for two years.

The extension of the reduced individual tax rates is significant. If the old rates had returned, the top two rates would have jumped from 33 and 35 percent to 36 and 39.6 percent, respectively. The current 10 percent rate would have disappeared. Additionally, marriage penalty relief in the form of an expanded 15 percent rate bracket would also have expired.

AMT relief.
Along with extending these rate cuts, the new law targets relief to taxpayers facing the alternative minimum tax (“AMT”). Because the AMT is not indexed for inflation, and for other reasons, the tax steadily encroaches on middle income taxpayers. The new law stops this encroachment by giving individuals higher exemption amounts and providing other targeted relief. The reach of the AMT often surprises individuals. While the provisions in the new law are helpful, it is also important to plan strategically for the AMT. Unlike the income tax rates, the higher AMT exemption had already expired at the end of 2009 before the new law stepped in to save it. Its two-year extension, therefore, expires earlier, at the end of 2011.

Payroll tax cut.
Social Security is financed through a dedicated payroll tax. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $106,800 (in 2010 and 2011), while self-employed individuals pay 12.4 percent. Effective for calendar year 2011, the new law reduces the employee-share from 6.2 percent to 4.2 percent up to the taxable maximum. The employer-share remains unchanged. Self-employed individuals will pay 10.4 percent on self-employment income up to the taxable maximum. The reduction has no effect on an individual’s future Social Security benefits.

The payroll tax cut replaces the Making Work Pay credit, which temporarily reduced income tax withholding in 2009 and 2010. The Making Work Pay credit phased-out for higher-income individuals. The payroll tax cut is across-the-board (up to the taxable maximum of $106,800).

Shortly after the new law was passed, the IRS instructed employers to start reducing the amount of Social Security tax withheld as soon as possible in 2011 but no later than January 31, 2011. For any Social Security tax over-withheld in January, employers should make an offsetting adjustment in an individual’s pay no later than March 31, 2011.

The payroll tax cut opens up some tax planning opportunities for individuals. The savings could be contributed to an IRA or another retirement savings vehicle, thereby compounding available tax benefits. The savings also could be used to help fund a Coverdell education savings account.

Capital gains/dividends.

In 2003, Congress set new maximum tax rates for qualified capital gains and dividends but, like the individual rate cuts, these taxpayer-friendly rates were temporary. For 2010, the maximum tax rate is 15 percent (zero percent for individuals in the 10 and 15 percent tax brackets). The new law extends these rates for two years, through December 31, 2012. In a related development, the new law extends the temporary 100 percent exclusion of gain on certain small business stock.

Child tax credit.
Many individuals enjoy the benefit of the $1,000 per child tax credit. Without the new law, the child tax credit would have dropped to $500 for 2011. The new law extends the $1,000 credit and keeps the refundability threshold at $3,000 for 2011 and 2012. In related developments, the new law also extends some enhancements to the earned income tax credit and the adoption credit for two years.

Estate tax.
Under the new law, the federal estate tax will again apply to the estates of decedents dying after December 31, 2009 and before January 1, 2013. The new law sets a maximum estate tax rate of 35 percent with a $5 million exclusion ($10 million for married couples). Additionally, executors of estates of individuals who died in 2010 can elect out of the estate tax (and apply modified carryover basis rules) or can elect to have the estate tax apply. This election, and many of the other estate tax provisions in the new law, is very technical. Besides the estate tax, there are provisions in the new law extending and modifying the federal gift tax and the federal generation skipping transfer (“GST”) tax.

Education.
A variety of tax incentives are available to help save for and finance education costs. Like so many incentives, they are temporary. The new law extends some of the most popular education tax incentives. They include:

• American Opportunity Tax Credit
• Higher education tuition deduction
• Student loan interest deduction
• Exclusion for employer-provided educational assistance
• Enhancements to Coverdell education savings accounts
• Special rules for certain scholarships

The education incentives in the tax code are among the most complex. Often, taxpayers will mistakenly believe they cannot claim more than one or they may inadvertently claim ones they should not.

Energy.

Individuals who made some energy-efficient improvements in 2009 or 2010 may have benefitted from a special tax break. This tax incentive rewarded individuals who installed energy-efficient windows, doors, furnaces, and other items in their homes. The credit, while very valuable, was also very complex. The new law extends the credit but also adds to the complexity by reinstating rules for the credit in place before 2009. The complexity is certain to confuse taxpayers. Please consider the possible benefits if you are planning to install new windows, doors, heating or cooling systems, or other energy-efficient items so you do not miss out on this tax break.

More incentives.
The new law extends many valuable but temporary tax incentives for individuals. They include the state and local sales tax deduction, the teacher’s classroom expense deduction, and special rules for individuals who contribute IRA proceeds to charity. Keep in mind that not all of the expired temporary individual tax incentives were extended. Among the incentives not extended are the additional standard deduction for real property taxes, the $2,400 exclusion for unemployment benefits, the first-time homebuyer tax credit, COBRA premium assistance, and some others.

Businesses

The multi-billion dollar new law extends, renews or enhances a large number of business tax incentives. This letter highlights some of the key business tax incentives in the new law.

Business spending.
During past economic slowdowns, Congress has used bonus depreciation and enhanced Code Sec. 179 small business expensing to help jumpstart business spending. The new law provides for 100 bonus depreciation. The 100 percent bonus depreciation rate applies to qualified property acquired after September 8, 2010 and before January 1, 2012 and placed in service before January 1, 2012 (or before January 1, 2013 for certain longer-lived and transportation property). Additionally, 50 percent bonus depreciation is available for qualified property placed in service in 2012. Moreover, certain corporations may be able to elect to accelerate any alternative minimum tax (“AMT”) credit in lieu of bonus depreciation.

Along with bonus depreciation, the new law extends enhanced Code Sec. 179 expensing for 2012 but not at the 2010 and 2011 dollar and investment limits. For 2010 and 2011, the Code Sec. 179 dollar limit is $500,000 and the investment limit is $2 million. The new law makes no changes to these limits for 2010 and 2011. However, the dollar limit will fall to $125,000 (indexed for inflation) and the investment limit will fall to $500,000 (indexed for inflation) for tax years beginning in 2012 (and sunsetting after December 31, 2012). The 2012 amounts, while reduced from 2010 and 2011, are still above the amounts that would have been in place for 2012 absent the new law ($25,000/$200,000 respectively).

For 2010 and 2011, special rules apply to qualified real property. Taxpayers can elect up to $250,000 of the $500,000 dollar limit for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. The new law does not extend these special rules beyond 2011. The new law does renew a 15-year recovery period for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property for 2010 and 2011.

Payroll tax cut.
The new law reduces an employee’s share of Social Security taxes (the OASDI portion) from 6.2 percent to 4.2 percent up to the taxable maximum amount of $106,800 for calendar year 2011. The new law does not reduce the employer’s share, which remains at 6.2 percent for 2011. Self-employed individuals, including independent contractors with which a business may contract, are also entitled to a 2 percentage point reduction in payroll taxes, from 12.4 percent to 10.4 percent.

The IRS has instructed employers to start using new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011 but no later than January 31, 2011. The IRS also instructed employers to make any offsetting adjustments in an employee’s pay for Social Security over-withheld during January as soon as possible but no later than March 31, 2011.

The new law does not extend payroll tax forgiveness for qualified new hires. This incentive was part of the Hiring Incentives to Restore Employment (“HIRE”) Act of 2010 and will expire, as scheduled, after 2010. Under the HIRE Act, qualified employers do not have to pay their share of OASDI for a covered employee’s employment from the day after March 18, 2010 through December 31, 2010. The HIRE Act also provides for a worker retention credit, which qualified employers may be able to claim if the covered employee works a certain number of weeks and meets other requirements.

Tax brackets.
Businesses owners, such as sole proprietors, who are taxed at the individual tax rates will benefit from an extension of reduced individual tax rates. The new law extends for two years (2011 and 2012) the current individual tax rates of 10, 15, 25, 28, 33, and 35 percent). Absent the new law, all of the rates would have risen with the top two rates increasing from 33 and 35 percent to 36 and 39.6 percent respectively.

Estate tax.
Under the new law, the federal estate tax will again apply to the estates of decedents dying after December 31, 2009 and before January 1, 2013. The new law sets a maximum estate tax rate of 35 percent with a $5 million exclusion ($10 million for married couples). Additionally, executors of estates of individuals who died in 2010 can elect out of the estate tax (and apply modified carryover basis rules) or can elect to have the estate tax apply.

Research tax credit.
In recent years, Congress has come close to making the Code Sec. 41 research tax credit permanent but the cost of a permanent credit has been prohibitive. The new law renews the credit, which expired at the end of 2009, for 2010 and 2011.

Work Opportunity Tax Credit.
The Work Opportunity Tax Credit (“WOTC”) rewards employers that hire economically-disadvantaged individuals and individuals from groups with historically high rates of unemployment. The WOTC was scheduled to expire after August 31, 2011. The new law extends the WOTC through the end of 2011. However, the new law does not extend two groups that were added to the credit in 2009 (unemployed veterans and disconnected youth).

Energy.
Recent laws have used the Tax Code to encourage the development and production of alternative fuels, such as energy from wind and biomass. Many of these incentives are temporary. The new law extends, renews or enhances some of the incentives, including:

• Grants for certain alternative energy property in lieu of tax credits
• Tax credits for biodiesel and renewable diesel fuel
• Tax credit for refined coal facilities
• Percentage depletion for oil and gas from marginal wells
• Special tax incentives for builders of energy-efficient homes
• And more 

Business tax extenders.

A package of business tax incentives, known as extenders because they regularly expire and are regularly extended, is renewed by the new law. They include:

• Differential wage credit
• New Markets Tax Credit (with modifications)
• Brownfields remediation
• Tax treatment of certain dividends of RICs and certain investments of RICs
• Active financing exception/look-through treatment for CFCs
• Tax incentives for empowerment zones and the District of Columbia
• Indian employment credit
• Railroad track maintenance credit
• Mine rescue training credit
• Code Sec. 199 deduction for Puerto Rico
• Five-year write-off of farm machinery
• Accelerated depreciation for business property on an Indian reservation
• And more

What’s not included.

Despite significant support in Congress, the new law does not repeal a controversial expansion of information reporting. The Patient Protection and Affordable Care Act of 2010 requires businesses to report payments for property and payments to corporations aggregating $600 or more in a calendar year made after December 31, 2011. Congress may revisit this requirement before the effective date. The new law also does not lower the corporate tax rate, another proposal that could be addressed in the future.

Further reading

• CCH – http://tax.cchgroup.com/downloads/files/pdfs/legislation/bush-taxcuts.pdf
• Joint Committee on Taxation – http://www.jct.gov/publications.html?func=startdown&id=3716
• Full text (U.S. Govt. Printing Ofc.) – http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853enr/pdf/BILLS-111hr4853enr.pdf
• Library of Congress (detailed info) – http://thomas.loc.gov/cgi-bin/bdquery/z?d111:h.r.04853:

House passes Bush tax cut extension bill, now awaits President's signature

By a vote of 277-148, the House this evening passed H.R. 4853, leaving the President's signature as the final step to bring this landmark legislation into law.

Will he sign it Friday? We shall see!

Here are the vote results: http://clerk.house.gov/evs/2010/roll647.xml

Senate to pass its version of the Bush tax cuts extension

On Wednesday, December 15 the Senate is widely expected to pass its version of  the Bush tax cuts extension in the form of Senate Amendment 4753 ("The Reid-McConnell Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010").  S.A. 4753 is the Senate's version of H.R. 4853 ("Middle Class Tax Relief Act of 2010").

After its passage, the bill heads to the House, where it does face Democratic opposition but is nevertheless expected to pass.  After House passage, it moves to the President for signature.  I suspect that we might see it signed into law this week (or early next week).

In the interim, here's the Senate Finance Committee's summary of its bill:

Summary of the Reid Tax Relief, Unemployment Insurance Reauthorization

and Job Creation Act of 2010

(source:  http://finance.senate.gov/legislation/download/?id=5598822b-8892-4445-b43a-4da7f0b991a0)

I. Temporary Extension of Tax Relief

Two major bills enacting tax cuts for individuals expire at the end of 2010: the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA); and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The following package extends these provisions from EGTRRA and JGTRRA for an additional two years, through 2012, and will provide important tax relief to American taxpayers. The following package also extends a number of provisions enacted as part of EGTRRA that were modified in the American Recovery and Reinvestment Act.

Reductions in Individual Income Tax Rates

Temporarily extend the 10% bracket. Under current law, the 10% individual income tax bracket expires at the end of 2010. Upon expiration, the lowest tax rate will be 15%. This proposal extends the 10% individual income tax bracket for an additional two years, through 2012.

Temporarily extend the 25%, 28%, 33%, and 35% brackets. Under current law, the 25%, 28%, 33%, and 35% individual income tax brackets expire at the end of 2010. Upon expiration, the rates become 28%, 31%, 36%, and 39.6% respectively. This proposal extends the 25%, 28%, 33%, and 35% individual income tax brackets for an additional two years, through 2012.

Temporarily repeal the Personal Exemption Phase-out. Personal exemptions allow a certain amount per person to be exempt from tax. Due to the Personal Exemption Phase-out (“PEP”), the exemptions are phased out for taxpayers with AGI above a certain level. The EGTRRA repealed PEP for 2010. The proposal extends the repeal of PEP for an additional two years, through 2012.

Temporarily repeal the itemized deduction limitation. Generally, taxpayers itemize deductions if the total deductions are more than the standard deduction amount. Since 1991, the amount of itemized deductions that a taxpayer may claim has been reduced, to the extent the taxpayer’s AGI is above a certain amount. This limitation is generally known as the “Pease limitation.” The EGTRRA repealed the Pease limitation on itemized deductions for 2010. The proposal extends the repeal of the Pease limitation for an additional two years, though 2012.

Capital Gains and Dividends

Temporarily extend the capital gains and dividend rates. Under current law, the capital gains and dividend rates for taxpayers below the 25% bracket is equal to zero percent. For those in the 25% bracket and above, the capital gains and dividend rates are currently 15%. These rates expire at the end of 2010. Upon expiration, the rates for capital gains become 10% and 20%, respectively, and dividends are subject to the ordinary income rates. This proposal extends the current capital gains and dividends rates for all taxpayers for an additional two years, through 2012.

Child Tax Credit

Temporarily extend the modified child tax credit. Generally, taxpayers with income below certain threshold amounts may claim the child tax credit to reduce federal income tax for each qualifying child under the age of 17. The EGTRRA increased the credit from $500 to $1,000. The EGTRRA also expanded refundability. The amount that may be claimed as a refund was 15% of earnings above $10,000. The American Recovery and Reinvestment Act of 2009 provided that earnings above $3,000 would count towards refundability for 2009 and 2010. This proposal extends the current child tax credit for an additional two years, through 2012.

Marriage Penalty Relief

Temporarily extend marriage penalty relief. The proposal extends the marriage penalty relief for the standard deduction, the 15 percent bracket, and the EITC for an additional two years, through 2012.

Incentives for Families and Children

Temporarily extend the expanded dependent care credit. The dependent care credit allows a taxpayer a credit for an applicable percentage of child care expenses for children under 13 and disabled dependents. The EGTRRA increased the amount of eligible expenses from $2,400 for one child and $4,800 for two or more children to $3,000 and $6,000, respectively. The EGTRRA also increased the applicable percentage from 30 percent to 35 percent. The proposal extends the changes to the dependent care credit made by EGTRRA for an additional two years, through 2012.

Temporarily extend the increased adoption tax credit and the adoption assistance programs exclusion. Taxpayers that adopt children can receive a tax credit for qualified adoption expenses. A taxpayer may also exclude from income adoption expenses paid by an employer. The EGTRRA increased the credit from $5,000 ($6,000 for a special needs child) to $10,000, and provided a $10,000 income exclusion for employer-assistance programs. The Patient Protection and Affordable Care Act of 2010 extended these benefits to 2011 and made the credit refundable. The proposal extends for an additional year, through 2012, the increased adoption credit amount and the exclusion for employer-assistance programs as enacted in EGTRRA.

Temporarily extend the credit for employer expenses for child care assistance. The EGTRRA provided employers with a credit of up to $150,000 for acquiring, constructing, rehabilitating or expanding property which is used for a child care facility. The proposal extends this provision for an additional two years, through 2012.

Earned Income Tax Credit (EITC).

Temporarily extend third-child EITC. Under current law, working families with two or more children currently qualify for an earned income tax credit equal to 40% of the family’s first $12,570 of earned income. The American Recovery and Reinvestment Act increased the earned income tax credit to 45% of the family’s first $12,570 of earned income for families with three or more children and increased the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children). This proposal extends for an additional two years, through 2012, the American Recovery and Reinvestment Act provisions that increased the credit for families with three or more children and increased the phase-out range for all married couples filing a joint return.

Education Incentives

Temporarily extend expanded Coverdell Accounts. Coverdell Education Savings Accounts are tax-exempt savings accounts used to pay the higher education expenses of a designated beneficiary. The EGTRRA increased the annual contribution amount from $500 to $2,000 and expanded the definition of education expenses to include elementary and secondary school expenses. The proposal extends the changes to Coverdell accounts for an additional two years, through 2012.

Temporarily extend the expanded exclusion for employer-provided educational assistance. An employee may exclude from gross income up to $5,250 for income and employment tax purposes per year of employer-provided education assistance. Prior to 2001, this incentive was temporary and only applied to undergraduate courses. The EGTRRA expanded this provision to graduate education and extended the provision for undergraduate and graduate education to the end of 2010. The proposal extends the changes to this provision for an additional two years, through 2012.

Temporarily extend the expanded student loan interest deduction. Certain individuals who have paid interest on qualified education loans may claim an above-the-line deduction for such interest expenses up to $2,500. Prior to 2001, this benefit was only allowed for 60 months and phased-out for taxpayers with income between $40,000 and $55,000 ($60,000 and $75,000 for joint filers). The EGTRRA eliminated the 60 month rule and increased the income phase-out to $55,000 to $70,000 ($110,000 and $140,000 for joint filers). The proposal extends the changes to this provision for an additional two years, through 2012.

Temporarily extend the exclusion from income of amounts received under certain scholarship programs. Scholarships for qualified tuition and related expenses are excludible from income. Qualified tuition reductions for certain education provided to employees are also excluded. Generally, this exclusion does not apply to qualified scholarships or tuition reductions that represent payment for teaching, research, or other services. The National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program provide education awards to participants on the condition that the participants perform certain services. The EGTRRA allowed the scholarship exclusion to apply to these programs. The proposal extends the changes to this provision for an additional two years, through 2012.

Arbitrage rebate exception for school construction bonds. Under current law, issuers of tax-exempt bonds must rebate to the U.S. Treasury arbitrage (excess interest income) earned from the investment of tax-exempt bond proceeds in higher-yielding taxable securities. The calculation of excess interest income can be complex, and as a result, many governments incur large costs to comply with the requirements. To ease the burden on small issuers, the federal tax code exempts governments that issue a relatively small number of tax-exempt bonds in a given year from the requirement. In general, the small issuer rebate exception can only be used by state and local governments that issue less than $5 million in governmental and 501(c)(3) bonds annually. This exception is $10 million for bonds issued for qualified educational facilities. The EGTRRA increased the small-issuer arbitrage rebate exception for school construction from $10 million to $15 million. This proposal extends the $15 million arbitrage rebate exception for school construction for an additional two years, through 2012.

Tax-exempt private activity bonds for qualified education facilities. Under current law, proceeds from private activity bonds issued by a state or local government qualify as tax-exempt if 95% or more of the net bond proceeds are used for a qualified purpose as defined by the Internal Revenue Code. The EGTRRA expanded the definition of a private activity for which tax-exempt bonds may be issued to include bonds for qualified public educational facilities. Bonds issued for qualified educational facilities are not counted against a state’s private-activity volume cap. Instead, these bonds have their own volume capacity limit equal to the lesser of $10 per resident or $5 million. This proposal extends the allowance to issue tax-exempt private activity bonds for public school facilities for an additional two years, through 2012.

Temporarily extend the American Opportunity Tax Credit. Created under the American Recovery and Reinvestment Act, the American Opportunity Tax Credit is available for up to $2,500 of the cost of tuition and related expenses paid during the taxable year. Under this tax credit, taxpayers receive a tax credit based on 100% of the first $2,000 of tuition and related expenses (including course materials) paid during the taxable year and 25% of the next $2,000 of tuition and related expenses paid during the taxable year. Forty percent of the credit is refundable. This tax credit is subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). This proposal extends the American Opportunity Tax Credit for an additional two years, through 2012.

Other EGTRRA Provisions

Temporarily extend tax relief for Alaska settlement funds. The EGTRRA allowed an election in which Alaska Native settlement trusts can elect to pay tax at the same rate as the lowest individual marginal rate, rather than the higher rates that generally apply to trusts. Beneficiaries of the trust do not pay tax on the distributions of an electing trust’s taxable income. Finally, contributions by an Alaska Native corporation to an electing trust will not be deemed distributions to the corporation’s shareholders. This proposal makes extends the elective tax treatment for Alaska Native settlement trusts for an additional two years, through 2012.

II. Temporary Individual Alternative Minimum Tax (AMT) Relief

Two-year AMT patch. Currently, a taxpayer receives an exemption of $33,750 (individuals) and $45,000 (married filing jointly) under the AMT. Current law also does not allow nonrefundable personal credits against the AMT. The proposal increases the exemption amounts for 2010 to $47,450 (individuals) and $72,450 (married filing jointly) and for 2011 to $48,450 (individuals) and $74,450 (married filing jointly). The proposal also allows the nonrefundable personal credits against the AMT. The proposal is effective for taxable years beginning after December 31, 2009.

III. Temporary Estate Tax Relief

Temporary estate, gift and generation skipping transfer tax relief. The EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. The proposal sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.

Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.

Reunification. Prior to the EGTRRA, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The EGTRRA decoupled these systems. The proposal reunifies the estate and gift taxes. The proposal is effective for gifts made after December 31, 2010.

IV. Temporary Extension of Investment Incentives

Extension of bonus depreciation. Under current law, businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule. Congress allowed businesses, beginning January 1, 2008 through December 31, 2009, to take an additional depreciation deduction allowance equal to 50 percent of the cost of the depreciable property placed in service in those years. Under the Small Business Jobs Act of 2010, this temporary increase in the depreciation deduction allowance was extended through December 31, 2010. The bill extends and temporarily increases this bonus depreciation provision for investments in new business equipment. For investments placed in service after September 8, 2010 and through December 31, 2011, the bill provides for 100 percent bonus depreciation. For investments placed in service after December 31, 2011 and through December 31, 2012, the bill provides for 50 percent bonus depreciation. The provision also allows taxpayers to elect to accelerate some AMT credits in lieu of bonus depreciation for taxable years 2011 and 2012.

Temporarily extend increase in the maximum amount and phase-out threshold under section 179. Under current law, a taxpayer with a sufficiently small amount of annual investment may elect to deduct the cost of certain property placed in service for the year rather than depreciate those costs over time. The 2003 tax cuts temporarily increased the maximum dollar amount that may be deducted from $25,000 to $100,000. The tax cuts also increased the phase-out amount from $200,000 to $400,000. In 2007, tax cuts temporarily increased these thresholds to $125,000 and $500,000 respectively, indexed for inflation. These amounts have been further increased and extended several times on a temporary basis, including most recently as part of the Small Business Jobs Act which increased the thresholds to $500,000 and $2,000,000 for the taxable years beginning in 2010 and 2011. This proposal extends the 2007 maximum amount and phase-out thresholds for taxable years beginning in 2012, at $125,000 and $500,000 respectively, indexed for inflation. The proposal is effective for taxable years beginning after December 31, 2011.

V. Temporary Extension of Unemployment Insurance

Extension of unemployment insurance. The unemployment insurance proposal provides a one-year reauthorization of federal UI benefits. The proposal continues the Emergency Unemployment Compensation (EUC) benefits for one year. In addition, it continues 100% Federal Financing of Extended Benefits (EB) for one year, and makes changes to the EB look-back enabling states to continue to trigger on EB.

VI. Temporary Employee Payroll Tax Cut

Temporary reduction in employee-paid payroll taxes. Under current law employees pay a 6.2 percent Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay a 12.4 percent Social Security self-employment taxes of on all their self-employment income up to the same threshold. The bill provides a payroll/self-employment tax holiday during 2011 of two percentage points. This means employees will pay only 4.2 percent on wages and self-employment individuals will pay only 10.4 percent on self-employment income up to the threshold.

VII. Temporary Extension of Certain Expiring Provisions

Energy

Biodiesel and renewable diesel. The bill extends through 2011 the $1.00 per gallon production tax credit for biodiesel, as well as the small agri-biodiesel producer credit of 10 cents per gallon. The bill also extends through 2011 the $1.00 per gallon production tax credit for diesel fuel created from biomass.

Refined Coal. The bill extends through 2011 the placed-in-service deadline for qualifying refined coal facilities.

Energy-efficient new homes credit. The bill extends through 2011 the credit for manufacturers of energy-efficient residential homes.

Alternative fuels credit. The bill extends through 2011 the $0.50 per gallon alternative fuel tax credit. The bill does not extend this credit any liquid fuel derived from a pulp or paper manufacturing process (i.e., black liquor).

Special rule for sales of electric transmission property. The bill extends through 2011 the present law deferral of gain on sales of transmission property by vertically integrated electric utilities to FERC-approved independent transmission companies.

Special rule for marginal wells. The bill extends through 2011 the suspension on the taxable income limit for purposes of depleting a marginal oil or gas well.

Section 1603. The bill extends for one year the start-of-construction deadline for the cash grant in lieu of tax credit program, established in Section 1603 of the American Recovery and Reinvestment Act.

Ethanol. The bill extends through 2011 the per-gallon tax credits and outlay payments for ethanol. The bill also extends through 2011 the existing 14.27 cents per liter (54 cents per gallon) tariff on imported ethanol and the related 5.99 cents per liter (22.67 cents per gallon) tariff on ethyl tertiary-butyl ether (ETBE).

Energy-efficient appliances. The bill extends through 2011 and modifies standards for the Section 45M credit for US-based manufacture of energy-efficient clothes washers, dishwashers and refrigerators.

Energy-efficient existing homes. The bill extends through 2011 the credit under Section 25C of the Code for energy-efficient improvements to existing homes, reinstating the credit as it existed before passage of the American Recovery and Reinvestment Act. Standards for property eligible under 25C are updated to reflect improvements in energy efficiency.

Alternative vehicle refueling property. The bill extends through 2011 the 30% investment tax credit for alternative vehicle refueling property.

Individual Tax Relief

Above-the-line deduction for certain expenses of elementary and secondary school teachers. The bill extends for two years (through 2011) the $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom.

Deduction of State and local general sales taxes. The bill extends for two years (through 2011) the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes.

Extension of provision encouraging contributions of capital gain real property for conservation purposes. The bill extends for two years (through 2011) the increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes.

Above-the-line deduction for qualified tuition and related expenses. The bill extends for two years (through 2011) the above-the-line tax deduction for qualified education expenses.

Extension of tax-free distributions from individual retirement plans for charitable purposes. The bill extends for two years (through 2011) the provision that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per taxable year. The bill allows individuals to make charitable transfers during January of 2011 and treat them as if made during 2010.

Estate tax look-through of certain Regulated Investment Company (RIC) stock held by nonresidents. Although stock issued by a domestic corporation generally is treated as property within the United States, stock of a RIC that was owned by a nonresident non-citizen is not deemed property within the United States in the proportion that, at the end of the quarter of the RIC’s taxable year immediately before a decedent’s date of death, the assets held by the RIC are debt obligations, deposits, or other property that would be treated as situated outside the United States if held directly by the estate (the “estate tax look-through rule for RIC stock”). The proposal permits the look-through rule for RIC stock to apply to estates of decedents dying before January 1, 2012.

Parity for mass transit benefits. The bill extends through 2011 the increase in the monthly exclusion for employer-provided transit and vanpool benefits to that of the exclusion for employer-provided parking benefits.

Refund and tax credit disregard for means tested programs. Current law ensures that the refundable components of the EITC and the Child Tax Credit do not make households ineligible for means-tested benefit programs and includes provisions stating that these tax credits do not count as income in determining eligibility (and benefit levels) in means-tested benefit programs, and also do not count as assets for specified periods of time. Without them, the receipt of a tax credit would put a substantial number of families over the income limits for these programs in the month that the tax refund is received. The proposal disregards all refundable tax credits and refunds as income for means tested programs. The proposal is effective for amounts received after December 31, 2009 and does not apply to amounts received after December 31, 2012.

Business Tax Relief

R&D credit. The bill reinstates for two years (through 2011) the research credit.

Indian employment credit. The bill extends for two years (through 2011) the business tax credit for employers of qualified employees that work and live on or near an Indian reservation. The amount of the credit is 20 percent of the excess of wages and health insurance costs paid to qualified employees (up to $20,000 per employee) in the current year over the amount paid in 1993.

New Markets Tax Credit. Through the New Markets Tax Credit (NMTC) program, the federal government is able to leverage federal tax credits to encourage significant private investment in businesses in low-income communities. For each dollar of qualified private investment, the NMTC program provides investors with either five cents or six cents of federal tax credits (depending on the amount of time that has passed since the original investment was made). The bill extends for two years (through 2011) the new markets tax credit, permitting a maximum annual amount of qualified equity investments of $3.5 billion each year. This is effective for calendar years beginning after December 31, 2009.

Extension of railroad track maintenance credit. The bill extends for two years (through 2011) the railroad track maintenance credit.

Mine rescue team training credit. The bill extends for two years (through 2011) the credit for training mine rescue team members.

Employer wage credit for activated military reservists. The bill extends for two years (through 2011) the provision that provides eligible small business employers with a credit against the taxpayer’s income tax liability for a taxable year in an amount equal to 20 percent of the sum of differential wage payments to activated military reservists.

Tax benefits for certain real estate developments. The bill extends for two years (through 2011) the special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements.

Extension of seven year straight line cost recovery period for motorsports entertainment complexes. The bill extends for two years (through 2011) the special seven year cost recovery period for property used for land improvement and support facilities at motorsports entertainment complexes.

Accelerated depreciation for business property on an Indian reservation. The bill extends for two years (through 2011) the placed-in-service date for the special depreciation recovery period for qualified Indian reservation property. In general, qualified Indian reservation property is property used predominantly in the active conduct of a trade or business within an Indian reservation, which is not used outside the reservation on a regular basis and was not acquired from a related person.

Extension of enhanced charitable deduction for contributions of food inventory. The bill extends for two years (through 2011) the provision allowing businesses to claim an enhanced deduction for the contribution of food inventory.

Extension of enhanced charitable deduction for contributions of book inventories to public schools. The bill extends for two years (through 2011) the provision allowing C corporations to claim an enhanced deduction for contributions of book inventory to public schools (kindergarten through grade 12).

Extension of enhanced charitable deduction for corporate contributions of computer equipment for educational purposes. The bill extends for two years (through 2011) the provision that encourages businesses to contribute computer equipment and software to elementary, secondary, and post-secondary schools by allowing an enhanced deduction for such contributions.

Election to expense advanced mine safety equipment. The bill extends for two years (through 2010) the provision that provides businesses with 50 percent bonus depreciation for certain qualified underground mine safety equipment.

Extension of special expensing rules for U.S. film and television productions. The bill extends for two years (through 2011) the provision that allows film and television producers to expense the first $15 million of production costs incurred in the United States ($20 million if the costs are incurred in economically depressed areas in the United States).

Extension of expensing of environmental remediation costs. The bill extends for two years (through 2011) the provision that allows for the expensing of costs associated with cleaning up hazardous sites.

Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. The bill extends for two years (through 2011) the provision extending the section 199 domestic production activities deduction to activities in Puerto Rico.

Extension of special tax treatment of certain payments to controlling exempt organizations. The bill extends for two years (through 2011) the special rules for interest, rents, royalties and annuities received by a tax exempt entity from a controlled entity.

Treatment of certain dividends of Regulated Investment Companies (RICs). The bill extends a provision allowing a RIC, under certain circumstances, to designate all or a portion of a dividend as an “interest-related dividend,” by written notice mailed to its shareholders not later than 60 days after the close of its taxable year. In addition, an interest-related dividend received by a foreign person generally is exempt from U.S. gross-basis tax under sections 871(a), 881, 1441 and 1442 of the Code. The proposal extends the treatment of interest-related dividends and short-term capital gain dividends received by a RIC to taxable years of the RIC beginning before January 1, 2012.

Treatment of RIC investments as “Qualified Investment Entities” under FIRPTA. The bill extends the inclusion of a RIC within the definition of a “qualified investment entity” under section 897 of the Tax Code through December 31, 2011.

Active financing exception. The bill extends for two years (through 2011) the active financing exception from Subpart F of the tax code.

Look-through treatment of payments between related controlled foreign corporations. The bill extends for two years (through 2011) the current law look-through treatment of payments between related controlled foreign corporations.

Extension of special rule for S corporations making charitable contributions of property. The bill extends for two years (through 2011) the provision allowing S corporation shareholders to take into account their pro rata share of charitable deductions even if such deductions would exceed such shareholder’s adjusted basis in the S corporation.

Empowerment Zones. The bill extends for two years (through 2011) the designation of certain economically depressed census tracts as Empowerment Zones. Businesses and individual residents within Empowerment Zones are eligible for special tax incentives.

District of Columbia Enterprise Zone. The bill extends for two years (through 2011) the designation of certain economically depressed census tracts within the District of Columbia as the District of Columbia Enterprise Zone. Businesses and individual residents within this enterprise zone are eligible for special tax incentives. The bill also extends for two years (through 2011) the $5,000 first-time homebuyer credit for the District of Columbia.

Extension of temporary increase in limit on cover over of rum excise tax revenues to Puerto Rico and the Virgin Islands. The bill extends for two years (through 2011) the provision providing for payment of $13.25 per gallon to cover over a $13.50 per proof gallon excise tax on distilled spirits produced in or imported into the United States.

Extension of American Samoa economic development credit. The bill extends through 2011 the American Samoa economic development credit.

Work opportunity tax credit (WOTC). Under current law, businesses are allowed to claim a work opportunity tax credit equal to 40 percent of the first $6,000 of wages paid to new hires of one of nine targeted groups. These groups include members of families receiving benefits under the Temporary Assistance to Needy Families (TANF) program, qualified veterans, designated community residents, and others. The WOTC program is currently set to expire August 31, 2011. The bill extends this provision through December 31, 2011 and would be effective for employees hired after date of enactment.

Extension and increase in authorization for qualified zone academy bonds (QZABs). QZABs are a form of tax credit bond which offer the holder a Federal tax credit instead of interest. QZABs can be used to finance renovations, equipment purchases, developing course material, and training teachers and personnel at a qualified zone academy. In general, a qualified zone academy is any public school (or academic program within a public school) below college level that is located in an empowerment zone or enterprise community and is designed to cooperate with businesses to enhance the academic curriculum and increase graduation and employment rates. The provision extends the QZAB program providing an additional $400 million for 2011. It also repeals the direct subsidy feature created as part of the American Recovery and Reinvestment Act for 2011 and for any carryforward of unused allocation.

Premiums for mortgage insurance deductible as interest that is qualified residence interest. Under current law, a taxpayer may itemize the cost of mortgage insurance on a qualified personal residence. The deduction is phased-out ratably by 10% for each $1,000 by which the taxpayer’s AGI exceeds $100,000. Thus, the deduction is unavailable for a taxpayer with an AGI in excess of $110,000. The bill extends this provision for an additional year, through 2011.

Exclusion of small business capital gains. Generally, non-corporate taxpayers may exclude 50 percent of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion is increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2011, the exclusion is 100 percent and the AMT preference item attributable for the sale is eliminated. Qualifying small business stock is from a C corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and who meets a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation. The provision extends the 100 percent exclusion of the gain from the sale of qualifying small business stock that is acquired before January 1, 2012 and held for more than five years.

Disaster Relief Provisions

Extension of tax incentives for the New York Liberty Zone. The bill extends for two years (through 2011) the time for issuing New York Liberty Zone bonds effective for bonds issued after December 31, 2009.

Extension of increased rehabilitation credit for historic structures in the Gulf Opportunity Zone. The bill extends for two years (through 2011) the increased rehabilitation credit for qualified expenditures in the Gulf Opportunity Zone. The Gulf Opportunity Zone Act of 2005 increased the rehabilitation credit from 10 percent to 13 percent of qualified expenditures for any qualified rehabilitated building other than a certified historic structure, and from 20 percent to 26 percent of qualified expenditures for any certified historic structure.

One-year extension of Gulf Opportunity Zone low-income housing placed-in-service date. The Gulf Opportunity Zone Act of 2005 provided an additional allocation of low-income housing tax credits to the Gulf Opportunity Zone in an amount equal to the product of $18.00 multiplied by the portion of the State population which is in the Gulf Opportunity Zone. The additional allocations were made in calendar years 2006, 2007, and 2008, and required that the properties be placed in service before January 1, 2011. The bill extends that placed-in-service date for one year (through 2011).

Extension of Tax-Exempt Bonds for the Gulf Opportunity Zone. Under current law, bonds were authorized to help rebuild areas devastated by Hurricane Katrina and must be issued by December 31, 2010. The amendment provides one additional year to utilize these bonds, through December 31, 2011.

Temporary Depreciation Allowance for Gulf Opportunity Zone Property. The bill extends for two years, through 2011, an additional depreciation deduction claimed by businesses equal to 50 percent of the cost of new property investments made in the Gulf Opportunity Zone. The provision makes expenditures in 2011 eligible provided the property is placed in service by December 31, 2011.

Links

• Library of Congress' Thomas listing for S.A. 4753 (listing at the top of this page is a link to the Senate's website).
• CCH Special Report: Senate Set To Approve Two-Year Extension Of Bush-Era Tax Cuts, Payroll Tax Relief And Estate Tax Compromise (December 10, 2010).

Extension of the Bush tax cuts - It ain't over until 2 of the 3 branches of government sing

No doubt you've been hearing about the continuing dance between President Obama, the Democrats, and the Republicans:  Extend the Bush tax cuts for only some?  If so, for who?  For all?  What else will it take to pass? 

Short answer:  Who knows?  What just yesterday seemed like a bit of welcome certainty was replaced today with additional opposition and infighting.  Nevertheless, my personal feeling is that they probably will eventually be extended, including for upper-income taxpayers.  But then again, that and $5 will get you an iced cappuccino.

At this point, a bit of background is in order.  What exactly *are* the "Bush Tax Cuts" that are dominating the news? In short, they are as follows (quoting CCH's Sunset of the 2001 & 2003 Tax Relief Acts: Law, Explanation & Analysis):

On May 26, 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The Act included cuts in marginal income tax rates, marriage penalty relief, the phase-out and ultimate repeal of the estate tax, and more, as well as a complicated series of phase-in rules and effective dates. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which was signed into law on May 28, 2003, accelerated many of the tax cuts set in motion under EGTRRA. Commonly referred to as the “Bush Tax Cuts,” these two Acts made changes to over 50 provisions of the Internal Revenue Code and impacted a wide variety of taxpayers.

In order to comply with budget requirements, however, each provision in EGTRRA was subject to a sunset provision. Pursuant to the sunset provision, the changes made by EGTRRA would no longer apply after December 31, 2010. The provisions contained in JGTRRA were subject to similar sunset rules. When EGTRRA and JGTRRA were enacted with these sunset provisions, few members of Congress expected those sunsets to ever take place. But, with mere months before the sunset occurs, it is not clear what, if anything, Congress will do to extend these tax cuts. This uncertainty in the tax law generates a myriad of complexities for taxpayers and tax professionals.

Impact on Individuals

• Individual, Estate and Trust Tax Rates. Temporary decreases in the marginal tax rates for noncorporate taxpayers are scheduled to expire for tax years beginning after 2010. Thus, the tax rates for individuals, estates and trusts will revert to 15, 18, 31, 36 and 39.6 percent, and the 10-percent rate for individuals will disappear (Code Sec. 1).
• 15-Percent Tax Rate Bracket for Joint Filers. Marriage penalty relief that increased size of the 15-percent tax bracket for joint filers to twice the size of the corresponding rate bracket for single filers is scheduled to expire for tax years beginning after 2010 (Code Sec. 1).
• Standard Deduction for Married Taxpayers. The increased standard deduction amounts for married taxpayers based on the amount allowed for single taxpayers are scheduled to expire for tax years beginning after December 31, 2010. Thus, the basic standard deduction will be $5,000 for joint filers, and $2,500 for married taxpayers filing separately, both as adjusted annually for inflation (Code Sec. 63).
• Limit on Itemized Deductions for Higher-Income Individuals. The limitation on the amount of allowable itemized deductions for higher-income individuals is scheduled to be reinstated for tax years beginning after 2010. Thus, taxpayers with AGI in excess of the applicable levels will have to the reduce the amount of itemized deductions they actually deduct (Code Sec. 68).
• Phaseout of Personal Exemptions. The elimination of the phaseout of personal exemptions for higher-income taxpayers is scheduled to expire for tax years beginning after 2010. Thus, higher income taxpayers will have to reduce the amount of their personal exemptions when their AGI exceeds certain thresholds (Code Sec. 151(d)(3)).
• Coverdell Education Savings Accounts. Several modifications of Coverdell education savings accounts are scheduled to expire for tax years beginning after 2010. The annual contribution limit will revert to $500, the AGI ceilings for eligible contributors will reflect a marriage penalty, elementary and secondary school costs will not be qualified educational expenses, and several extended deadlines will no longer apply (Code Sec. 530).
• Employer-Provided Educational Assistance. An employee’s annual exclusion of up to $5,250 in employer-provided educational assistance is scheduled to expire for tax years beginning after 2010 (Code Sec. 127).
• Excludable Federal Health Scholarships. The exclusion from gross income for certain federal and military medical scholarships that include obligatory service requirements is scheduled to expire for tax years beginning after 2010 (Code Sec. 117).
• Student Loan Interest Deduction. Expansions of the student loan interest deduction are scheduled to expire for tax years beginning after 2010, so that the deduction will not apply to voluntary interest payments or interest paid after the first 60 months of repayment, and the deduction will phase out at lower AGI levels (Code Sec. 221).
• Tuition deduction. For tax years beginning after 2009, the above-the-line deduction for qualified tuition and related expenses expires (Code Sec. 222).
• Earned Income Tax Credit. Several changes to the earned income credit are scheduled to expire for tax years beginning after 2010, so that the credit phase-outs will be based on modified AGI and will include a larger marriage penalty, earned income will no longer be limited to amounts included in gross income, the credit will be reduced by the taxpayer’s AMT liability, and the IRS will no longer be authorized to deny the credit based on information from the federal child support database (Code Sec. 32).
• Child Tax Credit. The child credit is scheduled to revert to $500 for tax years beginning after 2010, and the refundable credit will be limited to taxpayers with at least three qualifying children (via the supplemental child credit component of the earned income credit) (Code Sec. 24).
• Child and Dependent Care Credit. The child and dependent care credit is scheduled to decrease for tax years beginning after 2010 because of reductions in the credit percentage, creditable expenses, and income phase-outs (Code Sec. 21).
• Adoption Credit and Adoption Assistance Programs. For tax years beginning after 2011, the maximum adoption credit is scheduled to revert to $5,000 ($6,000 for a child with special needs) and the exclusion for employer-paid or employer-reimbursed adoption expenses is scheduled to expire (Code Secs. 36C and 137).
• Alternative Minimum Tax Exemption. The AMT exemption amounts for tax years beginning after 2009 are $45,000 for married individuals filing joint returns and surviving spouses, $33,750 for unmarried individuals and $22,500 for married individuals filing separate returns (Code Sec. 55).

Impact on Business and Investment

• Capital Gains Tax Rates. General reductions in the maximum tax rates for noncorporate taxpayers’ capital gains are scheduled to expire for tax years beginning after 2010, so that the maximum rate will be 20 percent (10 percent for taxpayers in the 15-percent income tax bracket). These rated will be reduced to 18 percent and 8 percent, respectively, for qualified five-year gain (Code Secs. 1(h) and 55(b)(3)(C)).
• AMT Preference for Small Business Stock. The amount of excluded gain on small business stock that is treated as an alternative minimum tax (AMT) preference item is scheduled to increase for tax years beginning after 2010 (Code Sec. 57(a)(7)).
• Dividends. Dividends received by noncorporate taxpayers (including dividends received through mutual funds, REITs and other pass-through entities) are scheduled to be taxed as ordinary income, rather than as capital gains, for tax years beginning after 2010 (Code Sec. 1(h)(11)).
• Credit for Employer-Provided Child Care Facilities. The income tax credit for qualified expenses incurred by an employer in providing child care for employees is scheduled to expire for tax years beginning after 2010 (Code Sec. 45F).
• Accumulated Earnings Tax Rate. The tax rate on corporate accumulated earnings is scheduled to revert to 39.6 percent from 15 percent for tax years beginning after 2010 (Code Sec. 531).
• Personal Holding Company Tax Rate. The tax rate on personal holding companies is scheduled to revert to 39.6 percent from 15 percent for tax years beginning after 2010 (Code Sec. 541).
• Collapsible Corporations. The collapsible corporation rules are scheduled to take effect again for tax years beginning after 2010, so that shareholders’ distributions and gain on stock sales may constitute ordinary income rather than capital gain (Code Sec. 341).
• Alaska Native Settlement Trusts. Several special rules for calculating, taxing and reporting the income of Alaska Settlement Trusts and their beneficiaries are scheduled to expire for tax years beginning after 2010 (Code Secs. 646 and 6039H).
• Rebate Exception for School Construction Bonds. The amount of public schools bonds that small governmental units may issue without being subject to arbitrage rebate requirements is scheduled to revert to $10 million from $15 million for tax years beginning after 2010 (Code Sec. 148).
• Exempt Facility Bonds. The treatment of public school bonds as exempt facility bonds is scheduled to expire for tax years beginning after 2010 (Code Sec. 142(a)(13)).

Impact on Estate, Gift, and Generation-Skipping Taxes

• Estate and Generation-Skipping Transfer Taxes. The one-year repeal of federal estate and generation-skipping transfer (GST) taxes is scheduled to expire, so that federal estate and GST taxes will again apply to the estates of decedents dying and GSTs made after 2010.
• Transfer Tax Rates. Lower transfer tax rates are scheduled to expire with respect to the estates of decedents dying and gifts and GSTs made after 2010, so that the maximum rate will again be 55 percent, and a five-percent surtax will apply to many estates and gifts that exceed $10 million (Code Sec. 2001).
• Transfer Tax Exclusion and Exemption Amounts. The increases in the estate tax applicable exclusion amount and the GST tax exemption amount are scheduled to expire, so that the estate tax applicable exclusion amount for decedents dying and GSTs made after 2010 will be $1 million (as adjusted for inflation) (Code Secs. 2010 and 2505).
• Qualified Family-Owned Business Interest Deduction. The qualified family-owned business interest (QFOBI) deduction is scheduled to be restored for estates of decedents dying after 2010, so up to $675,000 of the adjusted value of QFOBIs will be excludable by an electing estate (Code Sec. 2057).
• State Death Taxes. For the estates of decedents dying after 2010, the tax credit for estate, inheritance, legacy, or succession taxes paid to any state or the District of Columbia is scheduled to be restored, and the state death tax deduction is scheduled to expire (Code Secs. 2011 and 2058).
• Estate Tax Exclusion for Qualified Conservation Easements. The easing of location requirements for an estate’s excludable qualified conservation easements is scheduled to expire for decedent’s dying after 2010 (Code Sec. 2031(c)).
• Basis for Property Acquired from a Decedent. The modified carryover basis rules applicable to property acquired from a decedent are scheduled to expire for persons dying after 2010, so that the income tax basis of property acquired from a decedent at death generally will be stepped-up (or down) to its value as of the date of the decedent’s death. Executor reporting requirements and penalty provisions relating to the carryover-basis regime are also scheduled to expire (Code Secs. 1014 and 1022).
• Income Tax Exclusion for Sale of Principal Residence. The exclusion from gross income for gain realized on the sale of a decedent’s principal residence by the estate, heir or qualified revocable trust is scheduled to expire for decedent’s dying after 2010 (Code Sec. 121(d)(11)).
• Gain on Distributions of Appreciated Property. The limitation on the recognition of gain on appreciated carryover basis property in satisfaction of a pecuniary bequest (or an equivalent distribution from a trust) is scheduled to expire for estates of decedents dying (or trust distributions made) after 2010, so the limitation will again apply only to transfers of appreciated farm or closely held business real estate (Code Sec. 1040).
• Miscellaneous Amendments to Incorporate Carryover Basis Rules. Several amendments to the Internal Revenue Code that incorporated the modified carryover basis rules are scheduled to expire with respect to decedents dying after 2010, including: the recognition of gain on transfers of assets by a U.S. person to a nonresident alien by bequest (Code Sec. 684); the capital gains treatment of the sale of certain inherited creative works (Code Sec. 1221(a)(3)(C)); the imposition of private foundation rules on split-interest trusts (Code Sec. 4947(a)(2)(A)); and the definition of the term "executor" (Code Sec. 7701(a)(47)).
• Deemed and Retroactive Allocations of GST Exemption. For purposes of the GST tax, the deemed allocation and retroactive allocation provisions are scheduled to expire for GSTs made after 2010 (Code Sec. 2632).
• Severing a Trust. The provision allowing for a qualified severance of a trust for purposes of the GST tax is scheduled to expire for GSTs made after 2010 (Code Sec. 2642).
• Modification of Valuation Rules. The clarification of the valuation rules with respect to the determination of the inclusion ratio for GST tax purposes is scheduled to expire for transfers made after December 31, 2010 (Code Sec. 2642).
• Late Elections and Substantial Compliance. The provisions providing relief from late GST allocations and elections are scheduled to expire for GSTs made after 2010 (Code Sec. 2642).
• Deferred Estate Tax Payments. The expansion of eligibility for deferred estate tax payments is scheduled to expire for estates of decedents dying after 2010, so deferred payments will not be allowed if the decedent’s closely held business had more than 15 partners or shareholders (Code Sec. 6166(b)).
• Estate Tax Installment Payments and Stock in Lending and Finance Businesses. The rule permitting stock in qualifying lending and financing entities to be treated as stock in an active trade or business for purposes of the election to pay estate tax in installments is scheduled to expire for decedents dying after 2010 (Code Sec. 6166(b)).
• Estate Tax Installment Payments and Holding Company Stock. Special rules regarding holding company stock are scheduled to expire for decedents dying after 2010,, so the rule requiring that stock in a holding company must be non-readily tradable in order to qualify for purposes of the installment payment rules will apply to operating subsidiaries, as well as the holding company (Code Sec. 6166(b)). 

So there you have it.  Probably more than you wanted to know, but that's often how it goes in the wonderful world of tax!



Links/Additional Reading:

• U.S. Government Printing Office:  Text of Public Law 107-16 (The Economic Growth And Tax Relief Reconciliation Act Of 2001 or "EGTRRA")  [http://www.gpo.gov/fdsys/pkg/PLAW-107publ16/pdf/PLAW-107publ16.pdf]
• U.S. Government Printing Office:  Text of Public Law108-27 (The Jobs And Growth Tax Relief Reconciliation Act Of 2003 or "JGTRRA")  [http://www.gpo.gov/fdsys/pkg/PLAW-108publ27/pdf/PLAW-108publ27.pdf]
• Joint Committee on Taxation:  Summary Of Provisions Contained In The Conference Agreement For H.R. 1836, The Economic Growth And Tax Relief Reconciliation Act Of 2001  [http://www.jct.gov/publications.html?func=download&id=2003&chk=2003&no_html=1]
• Joint Committee on Taxation: Summary Of Conference Agreement On H.R. 2, Jobs And Growth Tax Relief Reconciliation Act Of 2003  [http://www.jct.gov/publications.html?func=download&id=1747&chk=1747&no_html=1]
• Tax Policy Center (Urban Institute and Brookings Institution):  The Tax Policy Briefing Book, A Citizens' Guide for the 2008 Election and Beyond - Bush Tax Cuts  [http://www.taxpolicycenter.org/upload/Background/I-11thru1-14TheBushTaxCuts.final.pdf]
• CCH:  EGTRRA Sunset Brings New Challenges to Planning for 2011 [http://www.cchgroup.com/opencms/opencms/web/TAA/PDFs/legislation/sunsettax.pdf]

Thank you IRS! IRS Website Provides links to Tax Code, Regulations and Official Guidance

For those of us who practice in the tax arena, getting access to the Internal Revenue Code ("IRC"), Treasury Regulations, and other official guidance is usually not a problem.

However, for the average person who wants to look up a specific IRC section they've heard about (e.g., section 1221 which defines a "capital asset" in determining whether a disposition of an asset gives rise to a capital gain or loss), it's often a frustrating task.  And let's not even get started on where they can find Treasury Regulations or various IRS pronouncements (like IRS Revenue Rulings).

Thankfully, the IRS in an effort to make the increasingly-complex tax law more accessible to the public, has created a resource that puts a portal to these authorities right on its website at http://www.irs.gov/taxpros/article/0,,id=98137,00.html.

Moreover, it has even provided a page entitled Understanding IRS Guidance - A Brief Primer that explains the relevance of a number of different types of authorities. Since it's fairly brief (just like the title), I've reproduced it here:

For anyone not familiar with the inner workings of tax administration, the array of IRS guidance may seem, well, a little puzzling at first glance. To take a little of the mystery away, here's a brief look at seven of the most common forms of guidance.

In its role in administering the tax laws enacted by the Congress, the IRS must take the specifics of these laws and translate them into detailed regulations, rules and procedures. The Office of Chief Counsel fills this crucial role by producing several different kinds of documents and publications that provide guidance to taxpayers, firms and charitable groups.

Regulation
A regulation is issued by the Internal Revenue Service and Treasury Department to provide guidance for new legislation or to address issues that arise with respect to existing Internal Revenue Code sections. Regulations interpret and give directions on complying with the law. Regulations are published in the Federal Register. Generally, regulations are first published in proposed form in a Notice of Proposed Rulemaking (NPRM). After public input is fully considered through written comments and even a public hearing, a final regulation or a temporary regulation is published as a Treasury Decision (TD), again, in the Federal Register.

Revenue Ruling
A revenue ruling is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties and regulations. It is the conclusion of the IRS on how the law is applied to a specific set of facts. Revenue rulings are published in the Internal Revenue Bulletin for the information of and guidance to taxpayers, IRS personnel and tax professionals. For example, a revenue ruling may hold that taxpayers can deduct certain automobile expenses.

Revenue Procedure
A revenue procedure is an official statement of a procedure that affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code, related statutes, tax treaties and regulations and that should be a matter of public knowledge. It is also published in the Internal Revenue Bulletin. While a revenue ruling generally states an IRS position, a revenue procedure provides return filing or other instructions concerning an IRS position. For example, a revenue procedure might specify how those entitled to deduct certain automobile expenses should compute them by applying a certain mileage rate in lieu of calculating actual operating expenses.

Private Letter Ruling
A private letter ruling, or PLR, is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer's specific set of facts. A PLR is issued to establish with certainty the federal tax consequences of a particular transaction before the transaction is consummated or before the taxpayer's return is filed. A PLR is issued in response to a written request submitted by a taxpayer and is binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described. A PLR may not be relied on as precedent by other taxpayers or IRS personnel. PLRs are generally made public after all information has been removed that could identify the taxpayer to whom it was issued.

Technical Advice Memorandum
A technical advice memorandum, or TAM, is guidance furnished by the Office of Chief Counsel upon the request of an IRS director or an area director, appeals, in response to technical or procedural questions that develop during a proceeding. A request for a TAM generally stems from an examination of a taxpayer's return, a consideration of a taxpayer's claim for a refund or credit, or any other matter involving a specific taxpayer under the jurisdiction of the territory manager or the area director, appeals. Technical Advice Memoranda are issued only on closed transactions and provide the interpretation of proper application of tax laws, tax treaties, regulations, revenue rulings or other precedents. The advice rendered represents a final determination of the position of the IRS, but only with respect to the specific issue in the specific case in which the advice is issued. Technical Advice Memoranda are generally made public after all information has been removed that could identify the taxpayer whose circumstances triggered a specific memorandum.

Notice
A notice is a public pronouncement that may contain guidance that involves substantive interpretations of the Internal Revenue Code or other provisions of the law. For example, notices can be used to relate what regulations will say in situations where the regulations may not be published in the immediate future.

Announcement
An announcement is a public pronouncement that has only immediate or short-term value. For example, announcements can be used to summarize the law or regulations without making any substantive interpretation; to state what regulations will say when they are certain to be published in the immediate future; or to notify taxpayers of the existence of an approaching deadline.

Page Last Reviewed or Updated [by IRS]: October 06, 2010

Unrealized Built-in Gains and Losses Under Section 382 and the Tax Accounting Rules

Originally published in The Tax Adviser, November 2010  [http://www.aicpa.org/Publications/TaxAdviser/2010/November/Pages/clinic_nov10-story-10.aspx]

Many practitioners already know that section 382 generally limits the use of a corporation’s net operating losses (NOLs) in cases where there is an increase in ownership of more than 50 percentage points by one or more 5% shareholders during a three-year testing period.

Many practitioners also know that section 382 addresses cases in which corporations have either net unrealized built-in gains (NUBIGs) or net unrealized built-in losses (NUBILs) as of the ownership change date. In such cases, under section 382(h) generally,

1. For corporations with NUBIGs, a year’s section 382 limitation is increased by recognized built-in gains for that year during the five-year recognition period following the change or
2. For corporations with NUBILs, recognized built-in losses for a year during the five-year recognition period following the change are treated as if they were pre-change NOLs.

Section 382(h)(3)(A) defines the terms NUBIG and NUBIL as the amounts by which the fair market value (FMV) of the corporation’s assets immediately before an ownership change is more or less, respectively, than the aggregate adjusted basis of such assets at such time.

Interestingly, what practitioners and taxpayers sometimes do not consider is section 382(h)(6)(C)’s requirement that NUBIGs and NUBILs must generally be further adjusted for items of accrued income and accrued deductions attributable to the pre-change period (to the extent not already recognized as of the change date).

This provision can yield unexpected results (sometimes good, sometimes bad). As shown in Example 1, it can mean that a corporation that at first appears to have a NUBIL might actually have a NUBIG. Alternatively (as shown in Example 2 below), given a seemingly minor factual difference, it can mean a corporation that at first appears not to have a NUBIL might not be able to avoid having one.

Example 1: All amounts are determined as of the change date (December 31, year 1). Legal settlement accrual is reasonably ascertainable in amount but is not agreed to or paid until January 5, year 2 (i.e., neither the all-events test of section 461(h)(4) nor economic performance per section 461(h)(1) is met as of the change date).

The corporation has a net unrealized built-in gain of $1.7 million, computed as follows (see exhibit below):

• Intangible: The FMV exceeds the basis by $2 million.
• Land: The basis exceeds the FMV by $300,000.
• Accrued legal settlement (related to a tort): This $3 million amount is excluded from the calculation because it did not represent a proper accrual (aside from required economic performance) as of the change date. Therefore, it is not treated as being attributable to the pre-change period and is not a component of any NUBIG or NUBIL.

Example 2: All amounts are determined as of the change date (December 31, year 1). Legal settlement accrual is reasonably ascertainable in amount and is agreed to but is not paid until January 5, year 2 (i.e., the all-events test is met as of the change date, with economic performance occurring after the change date). Pre-change NOLs are $500,000. The section 382 limitation is $1 million.

The corporation has a net unrealized built-in loss of $1.3 million, computed as follows (see exhibit below):

• Intangible: The FMV exceeds the basis by $2 million.
• Land: The basis exceeds the FMV by $300,000.
• Accrued legal settlement (related to a tort): This $3 million amount is included in the calculation because the deduction was a proper accrual at the change date under the all-events test but was deferred until paid under section 461(h)(2)(C). Therefore, it is treated as being attributable to the pre-change period and is a component of any NUBIG or NUBIL.

This means that the deduction (to the extent of the NUBIL of $1.3 million) is lumped together with the corporation’s pre-change NOLs and (in this case) is subject to the section 382 limitation as a realized built-in loss.

Exhibit

	Tax Basis	Fair Market Value	Difference
Assets
Intangible	0	2,000,000	2,000,000
Land	2,000,000	1,700,000	(300,000)
Liabilities
Accrued legal settlement (tort)			(3,000,000)

Using the numbers above, there would be a post-change deemed NOL of $1.8 million (pre-change losses of $500,000 plus $1.3 million of realized built-in losses), which could only offset income in the subsequent year (December 31, year 2) of up to the $1 million section 382 limitation, with the remainder ($800,000) of the disallowed realized built-in losses being carried forward under the rules applicable to NOLs.

While these two examples are admittedly simple (and focus only on accrued deductions), they do make one thing clear—corporate tax practitioners must pay close attention not only to the unrealized gains and losses inherent in a corporation’s assets when facing a section 382 limitation, but also to those less-obvious items of accrued income and expense. In fact, the author was approached about a year ago by another practitioner on a matter fairly similar to Example 1 above, where the numbers were many times higher than those given here. As a result, what initially looked like a large NUBIL instead turned out to be a substantial NUBIG, much to the relief of all involved.

Bottom line: Don't forget to consider the tax accounting method rules (for accrued income or expense items) when dealing with section 382.

Enhanced Federal Research Tax Credits? Hopefully, but not quite yet...

By now, many have already heard about how President Obama signed the Small Business Jobs Act of 2010 into law on September 27.  Rather than go into a detailed discussion of the Act, I'd like to clarify two particular items that seem to be widely misreported.

In short, the federal research tax credit does not (under current law) qualify for either of the following provisions in the new law:

• Five-year carryback of general business credit of eligible small business - This provision extends the carryback period for eligible small business tax credits from one to five years for eligible small business taxpayers.  However, this provision is only effective for credits determined (i.e., generated) in the taxpayer's first taxable year beginning after December 31, 2009.  And since the federal research tax credit has (under current law as of the time of this writing) expired for qualified expenditures paid/incurred after December 31, 2009, there are no federal research tax credits to be determined during that period.

• General business credit of eligible small business not subject to alternative minimum tax - This provision effectively allows eligible small business tax credits to offset an eligible small business taxpayer's AMT liability.  However (similar to the 5-year carryback provision), this provision is only effective for credits determined (i.e., generated) in the taxpayer's first taxable year beginning after December 31, 2009.  Again, since the federal research tax credit has (under current law as of the time of this writing) expired for qualified expenditures paid/incurred after December 31, 2009, there are no federal research tax credits to be determined during that period.

Despite this bad (and hopefully temporary) news, there is still hope that Congress will extend the federal research tax credit retroactively from January 1, 2010, but we'll have to wait and see about that.  As for my personal thoughts on the prospects of a retroactive extension, I think there's a good chance of it for the following reasons:

• President Obama on September 8 has already identified the federal research tax credit as an important item (see http://tax-fishing-and-other.blogspot.com/2010/09/white-house-releases-research-tax.html).
• The House (albeit back in January 2009) introduced H.R. 422 which would (1) extend the regular federal research tax credit through December 31, 2010, (2) increase the Alternative Simplified Credit ("ASC") method of computing the federal research tax credit to 20%, and (3) make the ASC permanent.  So there is (or at least was) clearly some support in the House as it was introduced with 105 co-sponsors.
• The Senate (albeit back in June 2009) introduced S. 1203, which effectively mirrors H.R. 422. So there is (or at least was) clearly some support in the Senate as it was introduced with 22 co-sponsors.

Note: The Act was passed by Congress as H.R. 5297 and became Public Law No. 111-240 when it was signed into law.

Links:

• Joint Committee on Taxation's writeup (JCX-47-10)
• H.R. 5297 on Thomas (at the Library of Congress)
• H.R. 422 on Thomas (at the Library of Congress)
• S. 1203 on Thomas (at the Library of Congress)