On Jan. 1, 2013,Congress passed the American Taxpayer Relief Act of 2012 (ATRA) to address projected tax-rate hikes and expiring tax incentives to avert the “fiscal cliff.” President Obama signed the legislation into law on Jan. 2, 2013. The Act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA), and the Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (JGTRRA). It temporarily extends other tax provisions that had lapsed at midnight on Dec. 31 along with others that had expired a year earlier.
The Act included many important and long-supported tax provisions of value to SMACNA contractors. These tax incentives and changes will impact new and retrofit construction and HVAC efficiency and are significant to small and large construction industry enterprises in all business sectors. Since the Taxpayer Relief Act contains hundreds of revised, extended, and new tax sections, consult your accountant to take advantage of each. For more information or specific provisions in the Act, go to the Govtrack Web page.
The Act’s main tax features include:
Business Tax Extenders
The act also extended many business tax credits and other provisions. Notably, it extended through 2013:
- The increased expensing amounts under Sec. 179 are extended through 2013. Section 179 provisions allow taxpayers to deduct the cost of certain depreciable property for the year in which the property is placed in service. It generally allows businesses to immediately deduct the cost of depreciable property. To qualify for the Section 179 deduction, the equipment listed below must be purchased and put into use between Jan. 1, 2013 and Dec. 31, 2013.
- Equipment and machines, etc., purchased for business use.
- Tangible personal property used in business.
- Business vehicles with a gross vehicle weight in excess of 6,000 pounds.
- Computers and “off-the-shelf” software.
- Office furniture and office equipment.
- Property attached to your building that is not a structural component of the building (i.e., a metal press, large manufacturing tools, equipment).
- Partial Business Use (equipment purchased for business use and personal use. Generally, your deduction will be based on the percentage of time you use the equipment for business purposes.)
- To ensure that the provision targets small businesses, the Section 179 allowance is limited to a dollar amount. For example, absent the changes included in the Act, for tax years beginning in 2012, the threshold would have been limited to $125,000, with a $500,000 investment limit. For years subsequent to 2012, the amounts would have reverted to $25,000, with a $200,000 investment limitation.
- The Act extends through 2013 small business expensing under Section 179 to the levels in effect in 2010 and 2011. For 2012 and 2013, the limitation is raised to $500,000 and would be reduced if the cost of Section 179 property placed in service exceeds $2 million. Within those thresholds, the Act allows a taxpayer to expense up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.
- The availability of an additional 50 percent first-year bonus depreciation [Sec. 168(k)] was also extended for one year by the Act. It now generally applies to property placed in service before Jan. 1, 2014 (Jan. 1, 2015, for certain property with longer production periods). Bonus depreciation is generally 50 percent of the adjusted basis of qualified property, but for some qualified property acquired during specified periods, 100 percent bonus depreciation was made available as additional stimulus. Although 100 percent bonus depreciation is generally no longer available, the Act extends 50 percent bonus depreciation for certain qualifying property.
- Employer wage credit for employees who are active duty members of the uniformed services (Sec. 45P).
- Fifteen-year straight-line cost recovery for [Sec. 168(e)] property, such as qualified leasehold improvements, qualified restaurant buildings, and qualified retail improvements, qualify as 15-year property, which allows for the accelerated recovery of costs. The American Jobs Creation Act of 2004 added qualified leasehold improvement property and qualified restaurant property as 15-year property under Section 168.
- A third type of property--qualified retail improvement property--was added to the list of tax extenders as part of the Alternative Minimum Tax Relief Act of 2008. The accelerated recovery period of 15 years for these types of property was introduced as a stimulus measure.
- Temporary exclusion of 100 percent of gain on certain Sec. 1202 Qualified Small Business Stock (QSBS); For QSBS acquired after Sept. 27, 2010 and before Jan. 1, 2012 that exclusion was 100 percent--no tax on the gain up to $10 million or 10 times the taxpayer’s original cost (whichever is greater). The dates for acquisition have been extended to include stock that was acquired before Jan. 1, 2014. Thus, under this provision, 100 percent of gain from the sale of QSBS acquired in 2012 and 2013 can be excluded for qualifying taxpayers.
- Reduction in Recognition Period for S Corporation Built-In Gains Tax [Sec. 1374(d)]. Generally, the recognition period for the built-in gains tax is 10 years; however, for assets sold in taxable years beginning in 2009 or 2010, the recognition period was reduced to seven taxable years. For taxable years beginning in 2011, the recognition period was further shortened to five calendar years. The Act extends the five-year recognition period for assets sold by an S corporation in taxable years beginning in 2012 or 2013. Thus, if an S corporation sold its assets in 2012 and believed it would be subject to the built-in gains tax, it may have a pleasant surprise in store.
- Empowerment zone tax incentives (Sec. 1391).
Energy Tax Extenders
The act also extends through 2013, and in some cases modifies, a number of energy credits and provisions that expired at the end of 2011. The legislation essentially turns back the clock to 2011, when the last efficiency credits were placed in law. The ATRA erased the old expiration date on those credits and set a new deadline of Dec. 31, 2013.
- Credit for energy-efficient existing homes (Sec. 25C). The efficiency incentive program has a cap of $500 in total credits. That limit goes all the way back to 2006, when the very first credits became available. That means those property owners that already claimed $500 in credits for energy-efficiency improvements, would not be eligible for additional credits.
Specifically, these credits are available for:
- 10 percent of the cost of insulation materials and systems, not including installation.
- 10 percent of the cost of metal and asphalt roofs specially designed to keep builders cooler, not including installation.
- $50 for a furnace fan called a main air-circulating fan.
- $150 for a natural gas, propane, or oil furnace or hot water boiler with an annual fuel utilization efficiency rate (AFUE) of 95 percent or greater.
- $300 for a highly efficient electric heat pump.
- $300 for a highly efficient central air conditioner.
- The improvements must be made to the taxpayer’s principal residence and must be placed in service by the end of 2013. In addition to the tax credit, some states and utility companies offer rebates on high-efficiency equipment that can be used in conjunction with the 25C tax credit. The Database of State Incentives for Renewables and Efficiency (DSIRE) website, contains available rebates in each state.
- Credits with respect to facilities producing energy from certain renewable resources [Sec. 45(d)], as modified.
- Credit for energy-efficient new homes (Sec. 45L).
- Credit for energy-efficient appliances (Sec. 45M).
Capital Gains, Dividends and Estate Taxes
A 20 percent rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15 percent rate is retained for taxpayers in the middle brackets. The zero tax rate is retained for taxpayers in the 10 percent and 15 percent brackets. It also permanently extends special exemption for the Alternative Minimum Tax (AMT).
- The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012). The top tax rate increases from 35 percent to 40 percent on Jan. 1, 2013.
- The Act increases the highest gift, estate, and GST tax rate to 40 percent, which is an increase from the 35 percent rate effective in 2012, but far less than the 55 percent rate that would have been in place had the “Bush tax cuts” been allowed to expire.
- The Act also retains the deduction for state death taxes, thereby avoiding what would have been an increase in aggregate state and federal death taxes in many states.
- The exclusion for employer-provided educational assistance (Sec. 127).
- The employer-provided child care credit (Sec. 45F).
- Special treatment of tax-exempt bonds for schools, education facilities [Sec 142(a)(13)].
- Special rates for accumulated earnings tax and personal holding company tax (Secs. 531 and 541).
Extensions Through 2013—a number of temporary individual tax provisions, most of which expired at the end of 2011:
- Parity for exclusion from income for employer-provided mass transit and parking benefits [Sec. 132(f)].
- Deduction of state and local general sales taxes [Sec. 164(b)].
Individual Income and Payroll Taxes
The Act keeps income tax rates at their current levels for all but high-income taxpayers beginning in 2013. Those rates return to those in effect during the Clinton era:
- Those in the highest-income categories see their tax rates rise to 39.6 percent for ordinary income over $450,000 taxable income for married taxpayers filing jointly and over $400,000 taxable income for single taxpayers.
- The 2 percent payroll tax holiday was not extended for 2013, so the Social Security taxes revert to 12.4 percent (6.2 percent on the employee and 6.2 percent on the employer).