Although it’s only August, taxpayers are well-advised to consider how to make the most of tax breaks that are available this year but may not be around next year, or may survive only in diluted form. Given the wrenching political battle that played out in July over deficits and the debt ceiling, many tax provisions expiring at the end of this year may not be given another lease on life. Those provisions that aid a particular industry or group of taxpayers could be the most at risk. This article, the first of a multi-part series on year-end planning, reviews the tax breaks for businesses that are available right now but may sunset on Dec. 31, 2011.
Tax Deductions
100% bonus depreciation.
The 100% bonus depreciation allowance applies only for qualified property acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012 (placed in service before Jan. 1, 2013 for certain aircraft and long-production-period property). For qualified property acquired and placed in service after Dec. 31, 2011 and before Jan. 1, 2013 (placed in service after Dec. 31, 2012 and before Jan. 1, 2014 for certain aircraft and long-production-period property), a 50% bonus depreciation allowance will apply.
Expensing allowance.
The maximum amount that may be expensed under Code Sec. 179 for tax years beginning in 2010 or 2011 is $500,000. For tax years beginning in 2012, the maximum amount will be $125,000 (indexed for inflation with 2006 as the base year). For tax years beginning in 2010 and 2011, the maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of section 179 property placed in service during the tax year in excess of $2,000,000 (the investment ceiling). For tax years beginning in 2012, the investment ceiling will be $500,000 (indexed for inflation with 2006 as the base year).
Additionally, if placed in service in a tax year beginning in 2010 or 2011, up to $250,000 per year of qualified real property is eligible for Code Sec. 179 expensing. Qualified real property is one of the following types of property: (1) qualified leasehold improvement property, (2) qualified restaurant property or (3) qualified retail improvement property.
15-year write-off for specialized realty assets.
Qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property placed in service after Dec. 31, 2011, will no longer be eligible for a 15-year depreciation write-off under MACRS. Instead, such property will have to be depreciated over 39 years.
Future year-end planning articles will discuss in detail the year-end planning opportunities inherent in the robust depreciation and expensing rules that apply this year but may well be gone next year.
Enhanced charitable contribution deductions.
The following enhanced charitable contribution rules will not apply to contributions made after Dec. 31, 2011:
• C corporation’s enhanced charitable contribution deduction equal to the lesser of (a) basis plus half of the property’s appreciation, or (b) twice the property’s basis, for contributions of food inventory that is apparently wholesome food, i.e., meant for human consumption and meeting certain quality and labeling standards. The enhanced contribution is also available for a taxpayer other than a C corporation, but the aggregate amount of contributions of apparently wholesome food that may be taken into account for the tax year can’t exceed 10% of the taxpayer’s aggregate net income for that tax year from all trades or businesses from which those contributions were made for that tax year.
• C corporation’s enhanced charitable contribution deduction equal to the lesser of (a) basis plus half of the property’s appreciation, or (b) twice the property’s basis, for qualified contributions of book inventory to certain public schools if certain donee certification requirements are met.
• C corporation’s enhanced charitable contribution deduction equal to the lesser of (a) basis plus half of the property’s appreciation, or (b) twice the property’s basis, for certain contributions of computer technology or equipment (software, computer or peripheral equipment, and fiber optic cable) to schools or libraries for use in the U.S. for educational purposes that are related to the donee’s purpose or function.
Lower shareholder basis adjustments for charitable contributions by S corporations.
A temporary tax incentive to encourage S corporations to make charitable donations of appreciated assets is available for contributions made in tax years beginning before Jan. 1, 2012. Generally, an S corporation’s charitable contribution of property provides its shareholders with a fair market value (FMV) deduction for gifts of property. In association with the charitable gift, shareholders must reduce their basis of shares in the corporation. Under the temporary incentive, shareholders reduce their basis in the stock of the S corporation by their pro rata share of the adjusted basis of the contributed property, rather than by the FMV of the charitable contribution that flows through to the shareholder. The lower basis reduction results in a proportionately larger gain when the stock is later sold by the shareholder. Thus, the shareholder benefits by having that reduction determined by the basis of the property (which is a smaller amount) rather than its FMV (a larger amount). For example, if in 2011 an S corporation with one individual shareholder makes a charitable contribution of stock with a basis of $100 and a FMV of $500, the shareholder is treated as having made a $500 charitable contribution and reduces the basis of his S corporation stock by $100. If the S corporation makes the contribution in tax years beginning after 2011, the shareholder will be treated as having made a $500 charitable contribution and will reduce the basis of his S corporation stock by $500.
Expensing election for costs of film and TV production. Taxpayers may elect to expense production costs of qualified film and television (TV) productions in the U.S., but only for productions commencing before Jan. 1, 2012. Expensing doesn’t apply to the part of the cost of any qualifying film or TV production that exceeded $15 million for each qualifying production. The limit is $20 million if production expenses are “significantly incurred” in certain low-income communities or isolated areas of distress.
Expensing of environmental remediation costs.
Taxpayers may elect to treat qualified environmental remediation expenses that would otherwise be chargeable to a capital account as deductible in the year paid or incurred, but only if the expenses are paid or incurred before Jan. 1, 2012. To be deductible currently, pre-2012 expenses must be paid or incurred in connection with the abatement or control of hazardous substances (including petroleum products) at a qualified contaminated site.
Domestic production activities deduction for Puerto Rico.
The Code Sec. 199 domestic production activities deduction is available only if, among other conditions, the taxpayer has domestic production gross receipts (DPGR) from: (1) any sale, exchange or other disposition, or any lease, rental or license, of qualifying production property manufactured, produced, grown or extracted by the taxpayer in whole or in significant part within the U.S.; (2) any sale, exchange, etc., of qualified films produced by the taxpayer; (3) any sale, exchange or other disposition of electricity, natural gas, or potable water produced by the taxpayer in the U.S.; (4) construction activities performed in the U.S.; or (5) engineering or architectural services performed in the U.S. for construction projects located in the U.S. For a taxpayer’s first six tax years beginning after 2005 and before Jan. 1, 2012, Puerto Rico is included in the term “U.S.” in determining DPGR, but only if all of the taxpayer’s Puerto Rico-sourced gross receipts are taxable under the federal income tax for individuals or corporations.
Empowerment Zone tax breaks.
The designation of an economically depressed census tract as an “Empowerment Zone” makes businesses and individual residents within such a Zone eligible for special tax incentives, including: the 20% wage credit under Code Sec. 1396 ; liberalized Code Sec. 179 expensing rules ($35,000 extra expensing and the break allowing only 50% of expensing eligible property to be counted for purposes of the investment-based phase-out of expensing); tax-exempt bond financing under Code Sec. 1394 ; and deferral under Code Sec. 1397B of capital gains tax on sale of qualified assets sold and replaced. Empowerment Zone designations expire on Dec. 31, 2011.
If you have any questions regarding this newsletter or any other recent tax issues, please call us at (636) 498-1900 or (573) 756-6400
Sincerely,
Your Professional Team
Rackers & Fernandez, LLC
