Business Tax Provisions Expiring After 2013

Several long-standing business tax provisions are once again set to expire at the end of this year. Congress has routinely extended many of them, namely additional first-year bonus depreciation, enhanced expensing limits under Code Sec. 179, the research tax credit, the Work Opportunity Tax Credit, and many more. Nevertheless, extension is never set in stone, and good tax planning should factor in the possibility that a particular tax extender will lapse or its benefit will decrease.

The cost of these extenders versus their actual benefit to business and industry have stirred greater uncertainty over whether or not certain provisions will be extended again immediately after 2013.

EXPIRING BUSINESS TAX PROVISIONS INCLUDE:

Additional first-year bonus depreciation. Congress has consistently extended this provision allowing businesses to take an additional depreciation deduction for the cost of qualified property placed in service in a certain year on top of the property original depreciation allowance. The amount of this bonus depreciation was extended into 2012 dropping to 50%. The American Tax Relief Act (ATRA) of 2012 extended the 50-percent bonus depreciation through the end of 2013.

Increased expensing limits for Code Sec. 179 property. ATRA extended through 2013 Code Sec. 179 small business expensing. The Code Sec. 179 dollar limit for tax years 2012 and 2013 is $500,000 with a $2 million investment limit, meaning businesses can take a deduction for costs up to $500,000, until the cost of the property exceeds $2 million. At that point, the $500,000 deduction would begin to phase out.

15-year straight-line cost recovery for qualified leasehold, restaurant, and retail improvements. ATRA extended through 2013 the 15-year recovery period for qualified leasehold improvements, qualified retail improvements and qualified restaurant property.

Pending legislation, if passed by Congress, would permanently extend the 15-year recovery period for this class of property, nevertheless, this provision will expire after 2013.

Work Opportunity Tax Credit (WOTC). ATRA extended the WOTC through 2013. The credit rewards employers that hire individuals from targeted groups. Employers hiring an individual within a targeted group (generally, otherwise hard-to-employ workers) are eligible for a credit generally equal to 40 percent of first-year wages up to $6,000, higher in the case of some qualified veterans.

Again, pending legislation, if passed by Congress, would permanently extend the WOTC to encourage employers to hire recently discharged veterans.

Research Tax Credit. The research credit may be claimed for increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research. The credit applies to the excess of qualified research expenditures for the tax year over the average annual qualified research expenditures measured over the four preceding years. The credit expired after 2011, but ATRA extended it through 2013.

The research tax credit enjoys significant support in Congress and President Obama has also called for making permanent the credit. One obstacle to its extension is its cost, which the Joint Committee on Taxation has estimated to be $14.3 billion over 10 years.

Reduced recognition period for S corporation built-in gains tax. In general, an S corporation shareholder is not subject to tax on corporate distributions. However, if a C corporation converts to an S corporation and then liquidates, then the built-in-gains tax provisions under Code Sec. 1374 are designed to prevent that C corporation from avoiding payment of a corporate-level tax on its distributions made during a recognition period. The recognition period was originally 10 years, but was reduced to seven years and then five years by various pieces of legislation. ATRA temporarily extended the five-year recognition period.

This would mean, for example, that a C corporation that had converted to an S corporation six years prior to 2012 could make distributions without having them become subject to the built-in gains tax.

With these uncertain times and budget issues faced by Congress could mean that many of the above provisions may indeed not be extended beyond 2013. As the year end approaches you should discuss the above expiring provisions with your ATA representative in planning for your 2013 Year End and into 2014.