Blog

What are Tax Extenders?

The tax code contains temporary business tax provisions  to incentivize and help businesses from being over-taxed. Each time these provisions expire at the end of a tax year, legislation is introduced by Congress to extend the provisions. Proposals submitted on behalf of Congressional members to extend the expiration of given tax provisions have been coined “tax extenders.”

A Look Forward: Business Tax Provisions Ending This Year

Many business tax extenders are set to expire this year. Although Congress had extended several provisions in 2012, there are several that were not permanently extended beyond this tax year.   Provisions that were not initially extended permanently by the American Taxpayer Relief Act of 2012 are now up for expiration. The Tax Policy Center explains all of the extensions and provisions originally announced in the American Taxpayer Relief Act of 2012 (ATRA).

Below are some of the provisions about to expire.

Expiring Business Tax Provisions

Research Tax Credit 

• The Code Sec. 41 is a research credit that applies for increases in business-related research expenses, increases in payments to universities and other qualified institutions for research. ATRA extended it through 2013.

Increased Expensing for Code Sec. 179 Property

• *According to 179.org, ATRA extended through 2013 enhanced Code Sec. 179 g. The Code Sec. 179 small business expensing provisions, sets the dollar limit for tax years 2012 and 2013 at $500,000 with a $2 million investment limit. What does this mean?  Businesses is entitled to take a deduction for any expenses up to $500,000, until the cost of the property is above $2 million. At that point, the $500,000 deduction no longer applies.

* Bills have been introduced to extend and/or enhance Code Sec. 179 expensing

 15-year Recovery for Qualified Lessee, Retail. and Restaurant Improvements

• The 15-year recovery period for qualified lessee improvements, qualified retail improvements and qualified restaurant property. There has been legislation introduced l (Sen 746) and if it is passed by Congress, it will permanently extend the 15-yr. recovery period for this property group.

Additional First-year “Bonus” Depreciation

• This provision allows businesses to take an additional depreciation deduction for the cost of qualified property placed in service in the applicable year in addition to the property’s original depreciation allowance. The amount of this bonus depreciation has changed from 100 % for qualified property acquired between September 8, 2010, and January 1, 2012. After January 1, 2012, the amount dipped an additional 50%. ATRA has extended this 50% bonus depreciation through the end of 2013. There is no other information regarding an extension beyond 2013.

Work Opportunity Tax Credit (WOTC)

• The WOTC is extended through 2013. This credit rewards employers who hire employees from targeted typically under-served groups. Employers hiring a person within this category will then be eligible for a credit generally equal to 40% of first-year salary up to $6,000, for some qualified veterans the credit may be higher.

*Finance Committee Chair Max Baucus, D-Mont., has proposed Sen. Bill 140, which calls for a permanent extension of the WOTC bill as well as an expansion of the credit to incentivize employers to hire recently discharged and unemployed veterans.

Reduced Recognition Period for S corp Built-In Gains Tax

• Since an S corp shareholder is not subject to tax on corporate distributions, if a C corporation converts to an S corp ultimately liquidating the corporation, the built-in-gains tax provisions under Code Sec. 1374  prevent the C corp. from avoiding corporate-level tax  payments on its distributions made during the five year “recognition period.”  ATRA has extended the five-year recognition period until the end of 2013.

Look-Through Rule for CFCs

• At International Tax Blog, The Code Sec. 954(c)(6) you can see a detailed explanation of the “Look-Through Rule,” which excludes from its verbiage “foreign personal holding company income” taxable under Subpart F,  interest and dividends, rents, and royalties received by one CFC to another CFC.

According to the CSR Report for Congress, below is a partial list which includes more expiring incentives. For the full list, consult the website.

• Tax Credit for Research and Experimentation Expenses
• Temporary Increase in Limit on Cover Over of Rum Excise Tax Revenues
• to Puerto Rico and the Virgin Islands
• Work Opportunity Tax Credit
• Indian Employment Tax Credit
• Accelerated Depreciation for Business Property on Indian Reservations
• Exceptions under Subpart F for Active Financing Income

Congressional debates over the expansion, revision or extension of tax provisions  weighs many factors, but the biggest weight rests on this equation: the cost of these extenders versus how they benefit business. Is it worth for the government and how does it benefit big and small business? As we get closer to the end of 2013, it should be more evident which tax extenders were permanently extended or at least temporarily extended for  a few more years.