What’s New in the 2010 Tax Law?
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“2010 TRA”), which was enacted at the end of last year, contains several provisions that will likely have an impact on contractors both professionally and personally. The law retains many favorable tax rules that applied in prior years, modifies certain old rules, and introduces several new tax breaks. A brief overview of the provisions that may be important to your business follows.
Incentives for Investing in Equipment
The new law has several tax incentives designed to encourage businesses to invest in new machinery and equipment, as well as other assets.
100% Write-off. A business can deduct 100% of the cost of qualified property acquired and placed in service after September 8, 2010, and before January 1, 2012. In the case of certain longer-lived and transportation property, businesses have until January 1, 2013, to place such property in service. The deduction is available only for new property. Importantly, the 2010 TRA does not place a dollar limit on the amount of qualified property eligible for the 100% write-off.
A business has to meet certain conditions to qualify for the 100% first-year write-off. For example, the property has to be otherwise depreciable under the modified accelerated cost recovery system (MACRS) and have an applicable recovery period of 20 years or less. This provision potentially qualifies a wide variety of assets, including most machinery and equipment, computers, and office furniture and equipment. Qualified leasehold improvement property and computer software also can qualify.
50% Depreciation Bonus. In 2012, businesses can elect to write off 50% of the cost of qualified property placed in service during that year (it’s 2013 for certain longer-lived and transportation property). The 50% first-year depreciation “bonus” is allowed for both regular tax and alternative minimum tax purposes, and it reduces the property’s basis for purposes of the regular depreciation deductions. You should be aware that the 50% additional first-year depreciation allowance is also available for certain earlier tax years under pre-2010 TRA law.
Section 179 Expensing Limit. The dollar limitation on property eligible for the Section 179 expensing election, which is $500,000 in 2011, is set at $125,000 (as indexed for inflation) for the 2012 tax year. This is a $100,000 increase over the 2012 expensing limit set by prior law. The $125,000 limit will be reduced dollar for dollar as the cost of Section 179-eligible property placed in service during the 2012 tax year exceeds $500,000, as indexed for inflation. The expensing limit will fall to $25,000 and the phaseout threshold will drop to $200,000 for tax years beginning after 2012.
Several business tax credits that were set to expire have been extended under the new tax law. They include:
Energy-efficient Home Credit. This credit is available to contractors that construct qualified new energy-efficient homes and to energy-efficient manufactured home producers. The credit has been retroactively extended two years for homes acquired in 2010 and 2011.
Work Opportunity Credit. This credit has been extended four months and covers qualifying individuals who begin work after August 31, 2011, and before January 1, 2012.
Differential Wage Credit. This credit applies to wage payments made to employees serving on active duty in the armed forces and has been retroactively restored and extended for two years through 2011.
The new law also contains provisions that relate to the following issues:
Accumulated Earnings Tax Rate. The penalty tax rate that applies to “excess” earnings and profits that are retained by a regular C corporation will be 15% instead of 20% for tax years beginning before 2013.
Employee Benefits. The new law allows employers to continue to provide up to $5,250 of educational assistance free of federal income tax through 2012.
The estate tax was supposed to expire in 2010 but was scheduled to return in 2011 with higher rates and lower exemptions than those in effect from 2002 through 2009. Generally, the 2010 TRA reinstates the estate tax for 2010, but executors may “elect out” of the estate tax for decedents dying in 2010 if certain requirements are met. The new law provides tax rates and exemptions for 2010, 2011, and 2012 that are more favorable than those that had been scheduled to go into effect. Under the new law, the highest estate-tax rate for 2011 and 2012 is 35% and the exemption amount is $5 million for both years.
Personal Income Taxes
Capital Gains and Qualified Dividends. For several years, the maximum tax rate on net capital gains has been 15% (0% for taxpayers in the 10% and 15% regular income-tax brackets). Instead of reverting to rates ranging as high as 20% starting in 2011, the 2010 TRA extends the 2010 capital gains rates for two additional years.
Qualified dividends, which were subject to the same maximum rates as net capital gains in 2010, were to be treated as ordinary income (subject to tax rates of up to 39.6%) in 2011. The new law extends the favorable tax rates on qualified dividends for another two years.
Alternative Minimum Tax (AMT) Exemptions. Under the new law, the AMT exemption amounts for 2011 will be: $74,450, married filing jointly; $48,450, unmarried individuals; and $37,225, married filing separately. As under prior law, the AMT exemptions are subject to an income-based phaseout, so higher income taxpayers still need to plan for possible AMT exposure.
These and other 2010 TRA provisions can be explained in more detail by our tax professionals. We suggest that you seek our professional guidance before acting on anything covered in this article.