There are a number of tax breaks that were extended by the American Taxpayer Relief Act of 2012 (ATRA) that are set to expire at the end of 2013 unless Congress acts to extend them, which seems unlikely at this time. Here are the details:
- Section 179 and Bonus Depreciation
As discussed in our previous article, these tax advantaged provisions are set to be either dramatically reduced in the case of Section 179, or to expire altogether for most taxpayers with regard to bonus depreciation. Moreover, since the Section 179 maximum amount is set to drop to $25,000 in 2014, it may take several years to recoup any 2013 carryforwards. It is, therefore, imperative to plan your capital acquisitions within the context of these parameters.
- Shorter Recovery Period for Certain Leasehold Improvements, Restaurant Buildings and Improvements, and Qualified Retail Improvements
Special provisions that are set to expire at the end of 2013, allow qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property to be depreciated over a more favorable 15-year recovery period rather than the normal 39-year recovery period used for nonresidential real property. A 2013 in service date for these classes of property is necessary to take advantage of the expiring 15-year recovery period.
- Special S Corporation Basis Rules for Charitable Contributions of Property
For 2013, charitable contributions of business property of an S corporation are valued at the pro rata share of its adjusted basis for purposes of decreasing an S shareholder’s stock basis, but at the pro rata share of its fair market value for purposes of determining each shareholder’s pass-through charitable deduction. This favorable rule benefits S corporations that donate appreciated or fully depreciated assets since it results in a lower stock basis reduction than if fair market value were to be used. Beginning in 2014, both the basis reduction and charitable deduction will be equal to the fair market value of the contributed property.
- Reduced Recognition Period for S Corporation Built-in Gains
If a C corporation converts to an S corporation, the conversion is not a taxable event. However, subsequent to the conversion, an S corporation must hold its assets for a ten year recognition period in order to avoid a tax on any built-in gains that existed at the time of the conversion (i.e. assets with values that exceed their tax bases on the date of conversion). However, for tax years beginning in 2012 or 2013, the recognition period was reduced from ten to a more favorable five years. After 2013, the recognition period reverts to ten years which means that in order to escape the recognition of built-in gains, you will have to hold the property for more than 10 years.
Therefore, to take advantage of this expiring provision, any S corporation with an S election conversion effective date of on or before January 1, 2008, should consider disposing of such assets in 2013 to take full advantage of the five-year reduced recognition period.
- Exclusion of Gain from Sale or Exchange of Qualified Small Business Stock (QSBS)
In general, non-corporate taxpayers can exclude 50% of the gain from the sale or exchange of QSBS of a C corporation held more than five years up to certain threshold amounts. However, ATRA increased the gain exclusion to 100% for QSBS that is acquired after September 27, 2010, and before January 1, 2014 for both regular and alternative minimum tax purposes (AMT). For purchases of QSBS subsequent to December 31, 2013, the exclusion percentage reverts to 50% and will be a tax preference item for AMT purposes. Any gain in excess of the threshold amounts is subject to capital gain tax as well as the 3.8% Medicare tax.
- Work Opportunity Credit
For 2013, a business is eligible for a credit equal to 40 percent of the qualified first-year wages of members of a targeted group of employees who worked 400 or more hours during the year for the employer. Targeted groups include veterans, qualified individuals in families that receive certain government benefits and individuals who receive supplemental Social Security Income or long-term family assistance. The credit is reduced to 25 percent of the qualified first-year wages for employees who worked between 120 and 400 hours for the employer. No credit is available for the qualified first-year wages for employees who worked less than 120 hours. This credit is not available after 2013.