By Brad Eriksen
The 2010 Tax Relief Act recently passed by Congress and signed into law by the President has a number of provisions that should make the New Year a little happier for employers and employees in the long-suffering design and construction industry.
Everyone Gets a Raise
A 2 percent reduction (from 6.2 to 4.2 percent) in the employee's share of the OASDI portion of Social Security taxes effectively gives all employees a 2 percent raise. With no phase-outs or limits based on income, that equates to a raise of $1,000 for employees earning $50,000 per year and up to $2,136 for those making up to the taxable wage base of $106,800.
While there was no similar relief for the employer's share of Social Security taxes, self-employed workers do get a raise as well. The tax rate was reduced from 12.4 percent to 10.4 percent on self-employment income.
100% Bonus Depreciation
Not to be confused with double secret probation, Bonus Depreciation is boosted from the current 50 percent bonus depreciation to 100 percent bonus depreciation for qualified investments made after September 8, 2010 and before January 1, 2012. Qualified investments include certain long-lived property, such as new machinery, and transportation property. Bonus Depreciation is much more expansive than Section 179 expensing, in that it is not limited to small businesses and is not capped at a particular dollar level.
For businesses that do not have a tax liability for 2010 or 2011, a business that is eligible for Bonus Depreciation can elect to claim additional refundable research or minimum tax credits in lieu of claiming Bonus Depreciation. Refundable tax credits can supply needed cash flow in this slow economic environment.
The 2010 Tax Relief Act extends a number of energy tax credits aimed primarily at businesses. This includes the new energy-efficient home credit for qualified builders and manufacturers of homes purchased before 2012. An energy-efficient appliance credit was extended for one year.
Alternative fuel facilities also scored well with credits for biodiesel and renewable diesel fuels, refined coal facilities, and ethanol. Grants for certain energy property are available in lieu of tax credits.
More of the Same
The 2010 Tax Relief Act also contains a number of business-tax extenders, extending for an additional two years, generally through 2011, provisions that had expired in 2009. The extenders included the 15-year recovery period for qualified leasehold improvements, restaurant buildings and improvements, and retail improvements. Expensing of Brownfield remediation costs was also extended. And for the gentlemen farmers in the crowd, the extenders included a 5-year write-off for farming machinery and equipment.
Current capital gains rates were extended through December 31, 2012. In most cases, capital gains are currently taxed at the maximum rate of 15 percent. Without the 2010 Tax Relief Act, capital gains were scheduled to increase to a maximum 20 percent tax rate. Keeping the current tax rates should help retain the modest momentum that has recently developed in real estate transactions. Note however, that installment payments are subject to the tax rate in effect for the year in which the payment is made, not the year in which the sale occurred. Accordingly, any current sales that provide for a portion of the payment to occur after 2012 will probably be subject to the 20 percent capital gains tax rate under the sunset provision of the Tax Relief Act.
The 2010 Small Business Jobs Act, previously adopted by Congress on September 27, 2010, increased the exclusion of gain from the sale of qualified small-business stock from 50 percent to 100 percent. However, the Act provided only a narrow window for taking advantage of this opportunity. Previously, gain on the sale of qualified small-business stock was eligible for the 100 percent exclusion on gains up to $10 million if the stock was held for at least 5 years acquired by a noncorporate taxpayer only if it was acquired after September 27, 2010 and before January 1, 2011. The 2010 Tax Relief Act expands this narrow 3+ month opportunity and provides that the 100 percent exclusion of gain is available for stock acquired between September 27, 2010 and before January 1, 2012.
This year-long extension provides significant planning opportunities for existing businesses as well as new ventures.
The End (for now)
As is usually the case, last-minute compromise tax legislation provides a little something for everyone. Numerous other provisions were included in the legislation, so close review of the planning opportunities with your tax adviser is recommended. While the two-year term of the Tax Relief Act (and many provisions are effective for only one year) does not provide an opportunity for long-term comprehensive tax planning, the near-term opportunities in the Act should be explored and implemented.