Small Business Taxes & Management

Special Report


Summary of Tax Provisions in Job Creation and Tax Cut Act of 2010

 

Small Business Taxes & ManagementTM--Copyright 2010, A/N Group, Inc.

 

The text below is a summary of the tax provisions in the Job Creation and Tax Cut Act of 2010 bill introduced by Senator Baucus. There have been changes since the original bill was introduced, including the deletion of the provision that would have imposed the self-employment tax on S corporation earnings. The new version is expected to gain votes in the Senate. The bill has been referred to as the "Extenders Bill" because many of the provisions represent extensions of current tax law. There are a number of nontax provisions as well as tax provisions of limited interest. We've listed without details some of the tax provisions of lesser interest.

 

General Business Relief

R&D credit. The bill would reinstate for one year (through 2010) the research credit.

Refundable AMT credits for corporations making domestic investments. Under current law, corporations are allowed to take a credit against their regular tax liability for previously paid alternative minimum taxes (AMT). However, in order to claim these tax credits, the corporation must be subject to the regular tax instead of the AMT. Many corporations are subject to the AMT for substantial periods of time. As a result, these corporations accumulate substantial AMT credits. The bill would allow corporations to receive a refund of a portion of their AMT credits if they invest during 2010 in capital equipment for use in the United States.

Tax benefits for certain real estate developments. The bill would extend for one year (through 2010) the special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements.

Employer wage credit for activated military reservists. The bill would extend for one year (through 2010) 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.

Five year depreciation for farming business machinery and equipment. The bill would extend for one year (through 2010) the provision that provides a five-year recovery period for certain machinery and equipment which is used in a farming business.

Other provisions of more limited interest include:

 

Tax Relief for Businesses in Economically-Depressed Areas

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 value of these tax credits depends on a taxpayer's ability to use these credits to offset tax liability. The NMTC program will not encourage investors to make investments in low-income communities if these investors are unable to use these credits to offset tax liability. Taxpayers that are subject to the alternative minimum tax (AMT) are unable to use NMTC to offset their AMT tax liability. The bill would extend for one year (through 2010) the new markets tax credit, permitting a maximum annual amount of qualified equity investments of $5 billion. In order to ensure that the NMTC encourages AMT taxpayers to make qualifying investments, the bill would also allow NMTC to be claimed against the AMT with respect to qualified investments made between March 15, 2010 and January 1, 2012.

Empowerment Zones. The bill would extend for one year (through 2010) the designation of certain economically depressed census tracts as Empowerment Zones. Businesses and individual residents within Empowerment Zones are eligible for special tax incentives.

Renewal Communities. The bill would extend for one year (through 2010) the designation of certain economically depressed census tracts as Renewal Communities. Businesses and individual residents within Renewal Communities are eligible for special tax incentives.

District of Columbia Enterprise Zone. The bill would extend for one year (through 2010) 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 would also extend for one year (through 2010) the $5,000 first-time homebuyer credit for the District of Columbia.

 

Youth Jobs

Youth jobs. The bill would support over 350,000 jobs for youth ages 14 to 24 through youth employment programs. This age group has some of the highest unemployment levels--25% unemployment for those aged 16 to 19. This funding will allow local Workforce Investment Boards to expand successful youth jobs programs that were funded in the American Recovery and Reinvestment Act.

 

Individual Tax Cuts

Deduction of State and local general sales taxes. The bill would extend for one year (through 2010) 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.

Additional standard deduction for real property taxes. The bill would extend for one year (through 2010) the additional standard deduction for State and local real property taxes.

Above-the-line deduction for qualified tuition and related expenses. The bill would extend for one year (through 2010) the above-the-line tax deduction for qualified education expenses.

Above-the-line deduction for certain expenses of elementary and secondary school teachers. The bill would extend for one year (through 2010) 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.

 

Hold Harmless Provisions for Low-Income Families

Uniform tax disregard for federally-funded programs. The legislation would exclude federal tax refunds from income in the month received and from resources for FY2010 for the purpose of determining eligibility for federal or federally-assisted programs. This single standard would replace the various disregards that now apply to certain tax credits.

 

Federally-Declared Disaster Areas

Expanded and enhanced casualty loss deductions relating to federal disasters. The bill would extend for one year (through 2010) the provision that allows taxpayers who have suffered loss as a result of a Federally-declared disaster to claim a deduction for casualty losses (i.e., both itemizers and non-itemizers) and would allow these taxpayers to calculate their casualty loss deduction without regard to their adjusted gross income. The bill would also extend for one year (through 2010) the current law $500 per loss threshold.

Expensing of qualified disaster expenses. The bill would extend for one year (through 2010) the provision that allows businesses that have been affected by a Federally-declared disaster to currently deduct demolition, repair, clean-up, and environmental remediation expenses ("Qualified Disaster Expenses").

Five-year carry-back period for certain losses relating to federal disasters. The bill would extend for one year (through 2010) the provision that allows businesses to carry back to the previous five years the following losses: (1) casualty losses that are attributable to a Federally-declared disaster; and (2) Qualified Disaster Expenses.

Relaxed mortgage revenue bond limitations for federal disasters. The bill would extend for one year (through 2010) the provision that allows states to waive certain rules that limit their ability to use tax-exempt housing bonds to provide loans to taxpayers that wish to acquire residences in Federally-declared disaster areas. The bill would also extend for one year (through 2010) the provision that allows states to use their tax-exempt housing bonds to provide loans to repair or reconstruct homes and rental housing units that have been rendered unsafe for use as a residence by reason of a Federally-declared disaster or have been demolished or relocated by reason of government order on account of a Federally-declared disaster. Such loans are limited to the lower of (1) the actual cost of the repair or reconstruction or (2) $150,000.

Bonus depreciation for qualified disaster property. The bill would extend for one year (through 2010) the provision that permits businesses that suffered damage as a result of a Federally-declared disaster to claim an additional first-year depreciation deduction equal to 50 percent of the cost of new real and personal property investments made in the Presidentially-declared disaster area.

Increased small business expensing for expenditures relating to federal disasters. The bill would extend for one year (through 2010) the provision that increases by $100,000 (or the cost of qualified property, if less) the amount of expensing available for qualifying expenditures made in a Federally-declared disaster area. The bill would also extend for one year (through 2010) the provision that increases by $600,000 (or the cost of qualified property, if less) the level of investment at which the small business expensing benefits phase-out.

 

Other Expiring Disaster Relief Provisions

Extension of tax incentives for the New York Liberty Zone. The bill would extend for one year (through 2010) the special depreciation allowance for certain real property within the New York Liberty Zone and the time for issuing New York Liberty Zone bonds.

Extend Work Opportunity Tax Credit (WOTC) for Hurricane Katrina Employees. The bill would extend for one year (through August 28, 2010) the work opportunity tax credit for certain employers hiring in the Hurricane Katrina core disaster area.

Extension of increased rehabilitation credit for historic structures in the Gulf Opportunity Zone. The bill would extend for one year (through 2010) 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.

Two-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 would extend that placed-in-service date by two years (through 2012).

Disaster Low-Income Housing Tax Credits. Under current law, every year states receive allocations of low-income housing tax credits (LIHTC) based on population or a small state set-aside. In response to Hurricane Katrina in 2005, as well as the floods in the Midwest in 2007, the LIHTC was expanded to allow for additional credits, called "disaster credits", to help affected states rebuild. This amount is on top of what States receive under current law. As part of the American Recovery and Reinvestment Act of 2009, LIHTCs are eligible to be exchanged for grants. This exchange program only applies to LIHTCs allocated based on population -- it did not apply to disaster credits. In the underlying bill, LITHCs allocated in 2010 are eligible to be refundable credits. This provision also allows disaster credits from the Katrina and Midwestern flood disasters to be exchanged for either grants or refundable credits.

 

Domestic Energy

Extension of energy-efficient new homes credit. The bill would extend the tax credit for manufacturers of energy-efficient residential homes for one year (through 2010).

Energy-efficient windows. In order to claim the section 25C tax credit for energy-efficient windows, taxpayers must purchase windows that meet certain specifications. Many have raised concerns that the current specifications fail to account for different climate regions in the United States. Recently, the EPA updated the Energy Star requirements to take these climate regions into account. The bill would link eligibility for the tax credit to the Energy Star requirements.

Extension of the alternative motor vehicle credit for heavy hybrids. The bill would extend for one year (through 2010) the alternative motor vehicle credit for heavy hybrids (i.e., hybrid motor vehicles that are not passenger automobiles or light trucks).

Other provisions of more limited interest include:

 

Extension of Other Expiring Tax Provisions

Extension of provision encouraging contributions of capital gain real property for conservation purposes. The bill would extend for one year (through 2010) the increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes.

Extension of enhanced charitable deduction for contributions of food inventory. The bill would extend for one year (through 2010) 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 would extend for one year (through 2010) 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 would extend for one year (through 2010) 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.

Extension of tax-free distributions from individual retirement plans for charitable purposes. The bill would extend for one year (through 2010) 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.

Extension of special tax treatment of certain payments to controlling exempt organizations. The bill would extend for one year (through 2010) the special rules for interest, rents, royalties and annuities received by a tax exempt entity from a controlled entity.

Extension of special rule for S corporations making charitable contributions of property. The bill would extend for one year (through 2010) 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.

 

Miscellaneous Tax Relief

Extension of seven year straight line cost recovery period for motorsports entertainment complexes. The bill would extend for one year (through 2010) the special seven year cost recovery period for property used for land improvement and support facilities at motorsports entertainment complexes.

Taxation of Qualified Timber Gain and Timber REIT Provisions. Under current law, gains on timber sales are eligible for capital gains tax treatment. The bill provides an extension of a provision included in the Farm Bill of 2008 that created an alternative maximum tax rate of 15 percent for gain on qualified timber harvest by a C corporation. Qualified timber gain is gain from the sale or exchange of timber held for at least 15 years. In addition, the bill extends other Farm Bill provisions intended to modernize the taxation of timber real estate investment trusts (REITS) including: (1) clarifying that gains from the sale of timber held for less than one year is qualifying income; (2) providing that mineral royalty income is qualifying income; and (3) making changes to the safe harbors for timber property sales.

Other provisions of more limited interest include:

 

Closing Tax Loopholes

Changes to the taxation of carried interest. The bill would prevent investment fund managers from paying taxes entirely at capital gains rates on investment management services income received as carried interest in an investment fund. To the extent that carried interest reflects a return on invested capital, the bill would continue to tax carried interest at capital gain tax rates. However, to the extent that carried interest does not reflect a return on invested capital, the bill would require investment fund managers to treat 75 percent of the remaining carried interest as ordinary income beginning on January 1, 2011. The amount that will be treated as ordinary income is reduced to 50 percent for carried interest that does not reflect a return on invested capital but which is attributable to the sale of assets which are held for five or more years. The lower recharacterization percentage also applies to the gain or loss attributable to the underlying assets held for five or more years when a partnership interest is sold as well as to gain attributable to section 197 intangibles of a entity providing specific investment management services when the partnership interest has been held for five or more years.

Clarification of gain recognized in certain spin-off transactions (e.g., "Reverse Morris Trust" transactions). Under current law, taxes are generally imposed on parent corporations where they extract value in excess of basis from their subsidiaries prior to engaging in a tax-free spin-off transaction. Therefore, if a subsidiary corporation distributes cash or other property to its parent in excess of the parent's basis in the subsidiary or if a subsidiary corporation assumes parent debt in excess of the parent's basis in the subsidiary, the parent corporation will recognize gain. However, taxes are not assessed if a subsidiary corporation distributes its own debt securities to a parent corporation prior to a spin off transaction even where the value of these securities would exceed the parent corporation's basis in its subsidiary. The bill would treat distributions of debt securities in a tax-free spin-off transaction in the same manner as distributions of cash or other property. Subject to transition rules, the provision would apply to exchanges after December 31, 2010.

Taxation of dividends received in certain business reorganizations (e.g., the "boot-within-gain" limitation). Under current law, if a shareholder receives property other than stock (called "boot" by tax practitioners) in connection with certain business reorganizations then the amount of the dividend that the shareholder is required to recognize as income is limited to the amount of gain realized in the exchange (commonly referred to as the "boot within gain" limitation). This is so even if the property received would otherwise be considered to be a dividend for tax purposes. The President's FY 2011 Budget states that "there is not a significant policy reason to vary the treatment of a distribution that otherwise qualified as a dividend by reference to whether it is received in the normal course of a corporation's operations or is instead received as part of a reorganization exchange." In addition, the Administration has identified specific abuses of this rule in cross-border reorganizations. They state, "in cross-border reorganizations, the boot-within-gain limitation can permit U.S. shareholders to repatriate previously-untaxed earnings and profits of foreign subsidiaries with minimal U.S. tax consequences." The bill would repeal the boot-within-gain limitation in the case of any reorganization transaction (that is, it would apply to both domestic and cross-border transactions) if the exchange has the effect of the distribution of a dividend. The bill would also ensure that an appropriate amount of earnings is taken into account in determining the amount of the dividend. Subject to a transition rule, the provision would apply to exchanges after December 31, 2010.

 

Miscellaneous Non-Tax Provisions of Interest to Businesses

Extend increased small business Surety Bond Guarantee Program. To enable small businesses to compete for larger federal and state construction projects, this provision permanently increases the limit for Small Business Association-guaranteed surety bonds, from $2 billion to $5 billion. The limit was temporarily lifted from $2 million to $10 million under the Recovery Act, but the higher limit is scheduled to revert back to $2 million September 30, 2010.

Unemployment insurance overpayment reform. The bill includes a multi-prong effort to improve the accuracy of the unemployment insurance program by penalizing fraudulent overpayments, reducing data errors, and increasing the recovery of overpayments. The bill includes the following overpayment policies:

 

Infrastructure Investments

Though not tax specific, these provisions may be of interest to taxpayers and small business owners: Build America Bonds ("BABs"). For direct-pay Build America Bonds issued in 2011, the amount of the direct payment would be reduced from 35% to 32% of the coupon interest. The bill would also allow issuers to issue Build America Bonds to effect a current refunding of outstanding Build America Bonds.

Recovery Zone Bonds ("RZBs"). The American Recovery and Reinvestment Act authorized $10 billion in Recovery Zone economic development bonds and $15 billion in Recovery Zone facility bonds. These bonds could be issued during 2009 and 2010. Because the formula that was used in the American Recovery and Reinvestment Act looked to net job losses instead of unemployment, some areas of the country with significant numbers of unemployed individuals did not receive any allocation of Recovery Zone bonds. The bill would make an additional allocation of Recovery Zone bonds to ensure that each local municipality receives a minimum allocation equal to at least its share of national unemployment in December 2009. The bill would also extend the authorization for issuing Recovery Zone bonds through 2011.

Water and sewer exempt-facility bonds excluded from state volume caps. The bill would exclude bonds financing facilities that furnish water and sewage facilities from state volume caps. The bill would also exclude bonds financing facilities that furnish water and sewage facilities from certain limitations on tribal government issuances.

Eliminate costs imposed on state and local governments by the alternative minimum tax. The alternative minimum tax (AMT) can increase the cost to state and local governments of issuing tax-exempt private activity bonds. In general, interest on tax-exempt private activity bonds is generally subject to the AMT. This limits the marketability of these bonds and, therefore, forces State and local governments to issue these bonds at higher interest rates. The American Recovery and Reinvestment Act excluded private activity bonds from the AMT if the bond was issued in 2009 or 2010, and allowed AMT relief for current refunding of private activity bonds issued after 2003 and refunded during 2009 and 2010. The bill would extend both of these American Recovery and Reinvestment Act provisions for one year (i.e., exempt from AMT tax-exempt private activity bonds issued in 2011 and current refunding of private activity bonds issued after 2003 and refunded during 2011).

Direct payment in-lieu-of low-income housing credit for 2010. The bill would extend for one year (through 2010) the program that was enacted as part of the American Recovery and Reinvestment Act that allows state housing agencies to elect to receive a payment in lieu of a portion of the State's allocation of low-income housing tax credits.

Extension of tax-exempt eligibility for loans guaranteed by Federal Home Loan Banks.

Extension of temporary small issuer rules for allocation of tax-exempt interest expense. The American Recovery and Reinvestment Act increased this dollar threshold to $30,000,000 when determining whether a tax-exempt obligation issued in 2009 and 2010 qualifies for this small issuer exception. The small issuer exception would also apply to an issue if all of the ultimate borrowers in such issue would separately qualify for the exception. The bill would extend this benefit for bonds issued through 2011.

Extension of expensing of "brownfields" environmental remediation costs. The bill would extend for one year (through 2010) the provision that allows for the expensing of costs associated with cleaning up hazardous "brownfield" sites.

 


Copyright 2010 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536


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--Last Update 09/17/10