PLANNING FOR BUSINESSES [Part 6/7]
15-Year Recovery For Leasehold/Retail Improvements, Restaurant Property
ATRA extended through 2013 the 15-year recovery period for qualified leasehold improvements, qualified retail improvements and qualified restaurant property. To qualify for this accelerated recovery period, the qualifying property must be placed in service before January 1, 2014.
Qualified restaurant property is any Code Sec. 1250 property that is a building or an improvement to a building. More than 50 percent of the building’s square footage must be devoted to preparation of meals and seating for on-premise consumption of prepared meals.
Qualified leasehold improvement property is any improvement made by the lessor or lessee under or pursuant to the terms of a lease to an interior part of a building that is nonresidential real property that is more than three years old.
Qualified retail improvement property is any improvement to an interior portion of nonresidential real property that has been in service for more than three years. The improved interior portion must be open to the general public and used in the retail trade or business of selling tangible personal property.
Work Opportunity Tax Credit
Eligibility for the Work Opportunity Tax Credit (WOTC) ends on December 31, 2013. Among other requirements, an employer must hire members of certain targeted groups and have those individuals start work before January 1, 2014.
Targeted groups. Targeted groups include qualified individuals in families receiving certain government benefits, individuals who receive supplemental Social Security Income or long-term family assistance, and veterans.
Amount. The credit is generally equal to 40 percent of the qualified worker’s first-year wages up to $6,000 ($3,000 for summer youths and $12,000, $14,000, or $24,000 for certain qualified veterans). For long-term family aid recipients, the credit is equal to 40 percent of the first $10,000 in qualified first year wages and 50 percent of the first $10,000 of qualified second-year wages.
Advanced certification required. On or before the day the employee begins work, the employer must receive a written certificate from the designated local agency (DLA) indicating that the employee is a member of a specific targeted group. Employers can use Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to obtain the certification.
Research Tax Credit
ATRA extended the Code Sec. 41 research tax credit through 2013. The research credit may be claimed for increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research. The credit applies to excess of qualified research expenditures for the tax year over the average annual qualified research expenditures measured over the four preceding years.
Although the research tax credit enjoys significant bipartisan support in Congress, the Obama Administration, and the business community, its estimated $14.3 billion 10-year revenue cost for making it permanent will likely persuade Congress once again to enact a one- or two-year extension of the credit, and perhaps waiting to do so retroactively sometime in 2014.
Small Business Stock
To encourage investment in small businesses and specialized small business investment companies (SSBICs), Code Sec. 1202(a) allows a noncorporate taxpayer to exclude from gross income a specified percent of the gain realized from the sale or exchange of qualified small business stock held for more than five years. As extended by ATRA, a full 100-percent exclusion applies to qualified small business stock that is acquired after September 27, 2010, and before January 1, 2014, and held for more than five years. Under current law, the percentage that is excluded reverts to 50-percent (60-percent for empowerment zone stock) for qualifying stock acquired after December 31, 2013.
Eligible gain from the disposition of qualified stock of any single issuer is subject to a cumulative limit for any given tax year is equal to the greater of: (1) $10 million ($5 million for married taxpayers filing separately), reduced by the total amount of eligible gain taken in prior tax years; or (2) 10 times the taxpayer’s adjusted basis in all qualified stock of a corporation disposed of during the tax year.
Year-end planning for 2013 that takes advantage of the sunsetting 100 percent exclusion requires attention to two dates: (1) The Code Sec. 1202 stock must be acquired before January 1, 2014, which in turns requires steps taken by the corporation under state law or otherwise to issue such stock; and (2) taxpayers who hold such shares need to wait five-years before disposition; even being a single day short of the five-year period – measured from the acquisition date – eliminates any benefit, with no proration allowed. Certain exchanges of similar stock before the five year period however are permitted.
Recognition Period for S Built-in Gains
A corporate-level tax, at the highest marginal rate applicable to corporations, is imposed on an S corporation’s net recognized built-in gain (for example, gain that arose prior to the conversion of a C corporation to an S corporation that is recognized by the S corporation during the recognition period). That recognition period, specified under Code Sec. 1374, is generally the 10-year period beginning with the first day of the first taxable year for which the corporation becomes an S corporation. ATRA extended a reduced recognition period of five years through 2013.
The disposition of property with built-in gain before the end of 2013 should be considered for property already held for five years, or more. After December 31, 2013, that property must be held for 10 years unless Congress again changes the rule.
Other Provisions Sunsetting at Year End
Many more valuable business tax extenders are scheduled to expire after 2013. These tax benefits include:
- New Markets Tax Credit;
- Employer wage credit for activated military reservists;
- Subpart F exceptions for active financing income;
- Look through rule for related controlled foreign corporation payments;
- Enhanced deduction for charitable contributions of food inventory;
- Tax incentives for empowerment zones;
- Indian employment credit;
- Low-income tax credits for non-federally subsidized new buildings;
- Low-income housing tax credit treatment of military housing allowances;
- Treatment of dividends of regulated investment companies (RICs);
- Treatment of RICs as qualified investment entities; and
- Adjusted-basis reduction of stock after S corp. charitable donation of property.
Some extenders were not extended by ATRA and have thus expired:
Their supporters are likely to fight for renewal in 2014. These include brownfields remediation expensing and tax incentives for the District of Columbia.
Energy tax incentives should be considered within a taxpayer’s overall year-end tax strategy. ATRA extended a number of energy tax incentives, primarily business-related credits, but also some consumer oriented benefits. With sunset looming, taxpayers should weigh the value of these incentives, and take appropriate action before year-end.
Code Sec. 25C Nonbusiness Energy Property Credit:
ATRA extended the Code Sec. 25C nonbusiness energy property credit through December 31, 2013. This nonrefundable credit is available for qualified energy efficiency improvements (building envelope components such as energy efficient doors and windows), and residential energy property expenditures (such as energy efficient heat pumps, furnaces, central air conditioning systems and water heaters). The lifetime aggregate amount of the credit that may be claimed by a taxpayer cannot exceed certain maximum amounts. Among them is an overall $500 lifetime limit for the credit, as well as a $200 cap for exterior windows and doors.
Proof that installation has occurred on or before January 1, 2014, is essential due to this credit’s sunset date. In addition, the qualified energy efficiency improvements and qualified energy property must be installed in or on a United States dwelling unit owned by the taxpayer and used as his or her principal residence. The property must originally be placed in service by the taxpayer, and there must be a reasonable expectation that the qualified energy efficiency improvements will remain in use for at least five years.
The Code Sec. 25D residential energy efficient property credit, by contrast, is not scheduled to expire after 2013. The Code Sec. 25D credit rewards taxpayers who make energy efficient improvements, such as installing small wind turbines and other qualified property before 2017.
Plug-in Elective Drive Motor Vehicle Credit
Code Sec. 30D provides a credit for Qualified Plug-in Electric Drive Motor Vehicles, including passenger vehicles and light trucks. The total amount of the credit allowed for a vehicle is limited to $7,500. For qualified 2- or 3-wheeled plug-in electric drive vehicles, the cap is the lesser of $2,500 or 10 percent of its cost.
The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009). Eligible vehicles include the 2012-2014 Ford Focus Electric; the 2013 Ford Fusion Energi, the 2013 Ford C-MAXEnergi, and the 2011-2012 Nissan LEAF.
To be entitled to the credit, original use must start with the taxpayer. For a 2013 credit, the vehicle must be acquired by the taxpayer by year-end 2013. The credit for qualified 2- or 3-wheeled vehicles ends after 2013; the four-wheel vehicle credit continues until manufacturer sales exceed the 200,000 threshold.
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