Mary Bernard
Mary Bernard
Significant Business Tax Incentives

Year-end legislation included several noteworthy tax incentives for businesses to take advantage of this year.

January 27, 2011
by Mary Bernard, CPA

The past year saw a number of notable tax law changes with the Hiring Incentives to Restore Employment Act of 2010 (HIRE) in March, the Small Business Jobs Act of 2010 (SBJA) in September and finally the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Tax Relief Act) in December. The legislation resulted in the extension of the individual tax rates and capital gains and dividend rates from the Bush administration, the extension of a fix to delay the unintended impact of the alternative minimum tax (AMT) on the middle class and a payroll tax cut impacting individuals. Businesses, however, may have received the biggest benefit in the form of incentives and extenders.

Bonus Depreciation Doubled

For qualified assets acquired after September 8, 2010 and before January 1, 2012, the Tax Relief Act increased bonus depreciation from 50 percent to 100 percent. There is no dollar limitation on the amount of property that can qualify for the bonus depreciation, provided the property is placed in service prior to January 1, 2012. Bonus depreciation is not limited to use by smaller businesses. This is probably the most expansive tax break for businesses in all the legislation passed last year.

Although the new tax law referred to 100 percent bonus depreciation as "100-percent expensing," this should not be confused with Internal Revenue Code Section 179 expensing.

Section 179 Expensing

Section 179 dollar and investment limits have been increased regularly and enhanced Congress in order to stimulate business spending. SBJA increased the dollar and investment limits to $500,000 and $2 million, respectively, for tax years beginning in 2010 and 2011. The Tax Relief Act provided for a dollar limit of $125,000 and investment limit of $500,000 for tax years beginning in 2012, both amounts to be adjusted for inflation and sunsetting after December 31, 2012.

The new law did not however extend the rule allowing the expensing of qualified real property. The election to expense qualified real property continues to apply only to qualifying property placed in service in a tax year that begins in 2010 or 2011. The Tax Relief Act did however extend the ability to expense off-the-shelf computer software placed in service prior to 2013. Additional enhancement to section 179 allows the expensing of qualified leasehold investment property, qualified restaurant property and qualified retail improvement property for 2010 and 2011.

Energy Incentives

The Tax Relief Act temporarily extended for one or two years a number of energy tax incentives impacting businesses as follows:

  • Credit for biodiesel and renewable diesel fuel (two years through Dec. 31, 2011);
  • Credit for refined coal facilities (two years with modifications through Dec. 31, 2011);
  • New energy efficient home credit for qualified builders and manufacturers (homes purchased before January 1, 2012);
  • Excise tax credits and outlay payments for alternative fuel and alternative fuel mixtures (two years through Dec. 31, 2011);
  • Sales of electric transmission property (before January 1, 2012);
  • Percentage depletion for oil and gas from marginal wells (two years through Dec. 31, 2012);
  • Grants for certain energy property in lieu of tax credits (Through Dec. 31, 2011);
  • Tax credits and outlay payments for ethanol and duties on imported ethanol (one year with modifications through Dec. 31, 2011); and
  • Energy efficient appliance credit (one year, for appliances manufactured in 2011).

Research Tax Credit

Since its inception in 1981, the research-tax credit has been extended regularly, despite recommendations that the credit be made permanent. The Tax Relief Act extended the previously expired credit through December 31, 2011. Although President Obama recommended an increased percentage for the credit, the calculation of the credit remains at 20 percent for investments over a certain base or a formula that provides a 14 percent credit in excess of a base amount.

Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) was enacted to encourage employment of individuals in targeted groups. The credit is equal to 40 percent of up to $6,000 of the employee's first year wages, subject to certain requirements and limitations. The WOTC was scheduled to expire after August 31, 2011. The Tax Relief Act extended the credit for individuals who begin employment after August 31, 2011 and before January 1, 2012, but with some modifications. Although the 2009 recovery Act added two new targeted groups, unemployed veterans and disconnected youth, the Tax Relief Act did not extend these two groups beyond 2010.

Business Tax Extenders

The Tax Relief Act also extended the following business tax incentives which expired in 2009 for various terms:

  • New Markets Tax Credit, with modifications;
  • Expensing election for certain film and television production costs;
  • Qualified environmental (brownfield) remediation expensing;
  • Code section 199 for Puerto Rico;
  • Tax incentives for empowerment zones;
  • Tax incentives for investment in the District of Columbia;
  • Railroad track maintenance credit;
  • Subpart F exception for active financing income;
  • Mine rescue team training credit and expensing of mine safety equipment; and
  • American Samoa economic development credit.

As many of the extended provisions include varied dates and restrictions, it would be wise to carefully read the appropriate legislation to ensure compliance with all requirements and limitations.

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Mary F. Bernard, CPA, is director -- income/franchise tax, at the Dallas, Texas-headquartered tax services firm of Ryan. Bernard formerly worked as principal, director of State & Local Tax Services, at Providence, RI-basedKahn, Litwin, Renza & Co., Ltd.