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December 21, 2010

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

December 21, 2010

By Dan Eller


Dan Eller - Tax and Business Law Attorney - Portland, OR
By Dan Eller

Dan Eller - Tax and Business Law Attorney - Portland, OR

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "Act"). In the most general terms, the Act is a two-year extension of the current tax income-tax regime. In addition, the Act contains important tax provisions that may provide important tax-planning opportunities for you and your business.

Individual Taxpayers

The Act is designed to hold in place for two years the current income tax rates and related provisions that were set to expire on December 31, 2010. For example, marginal income-tax, capital-gain, and dividend rates do not change under the Act. Other familiar provisions such as the child tax credit, marriage-penalty relief, and personal-exemption and standard-deduction provisions remain constant through the 2012 tax year. The Act also provides alternative minimum tax ("AMT") relief through the 2011 tax year.

Perhaps the most notable provision in the Act for individual taxpayers is the temporary employee payroll-tax cut. Traditionally, an employee's share of the payroll-tax liability is 6.2 percent (the self-employed rate is 12.4 percent). For 2011 only, the Act reduces the employee's share by 2 percent to 4.2 percent (self-employed individuals receive a 2 percent reduction to 10.4 percent). Thus, the employee who earns $100,000 in 2011 can expect his or her after FICA-tax cash compensation to increase $2,000.

Business Investment Incentives

The Act provides significant planning opportunities for business-asset investments. In particular, the Act increases the current Section 168(k) "bonus depreciation" applicable to qualified property from 50 percent to 100 percent. That increased rate is applied against all such property placed in service after September 8, 2010, and before January 1, 2012. This increase in bonus depreciations is provided in connection with, or as an alternative to, two other important provisions. First, the Act extends through 2012 a corporate taxpayer's election to accelerate AMT and research credits in lieu of bonus depreciation. Second, for the 2012 tax year the Act increases Section 179 expensing maximum to $125,000 and the phase-out threshold to $500,000 (for 2011 those amounts are $500,000 and $2,500,000, respectively; however, those amounts are set to expire on December 31, 2011).

The important planning considerations arise in the manner in which those various provisions – bonus depreciation, Section 179 expensing, AMT acceleration, and research credits – may be balanced. For example, if your business is eligible to use Section 179 expensing but may exceed the phase-out amount, you should explore whether the other provisions will offer a better net-tax solution. We can help you make these decisions.

Extension of Section 1202 Qualified Small Business Stock ("QSBS") Provisions

QSBS is, as its name suggests, stock in certain small businesses. If a taxpayer obtains newly issued QSBS and holds it for a specified period, under Section 1202 the taxpayer is permitted to exclude a percentage of the gain on a sale of the QSBS (subject to the AMT for certain tax years). The Small Business Jobs Act of 2010 sweetened Section 1202 to provide for 100 percent gain exclusion for QSBS sold after a five-year holding period, if that stock was acquired after September 27, 2010, and before the end of 2010 (this act also eliminated a problem with the AMT associated with QSBS). The Act extends the provisions of the Small Business Jobs Act for QSBS acquired through December 31, 2011. The use of QSBS in your tax planning can be significant.

Miscellaneous Provisions

Extensions of other tax provisions afforded by the Act are too numerous to list in a summary of this kind. Of those remaining provisions, a few stand out as noteworthy. For example, developers who operate in low-income communities and expect to attract a new markets tax credit investment will be pleased to see that program is extended through 2011, with unused credits being available for use through 2016. Finally, renewable-energy project developers unable to procure tax-equity investors may benefit from the extension of the Section 1603 grant program through 2011.

Summary

The Act focuses primarily on maintaining the status quo for two additional years. Beyond those basic extension provisions, the Act offers taxpayers new tax-planning opportunities. If you have any questions, contact your Schwabe attorney, or Dan Eller at deller@schwabe.com or (503) 796-3762.


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