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Business Tax Breaks Retroactively Reinstated and Extended by the 2010 Tax Relief Act

posted Dec 29, 2010, 12:15 AM by NPROSS Administrator

Research Credit Reinstated and Extended Through 2011

The research credit equals the sum of: (1) 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount, (unless the taxpayer elected an alternative simplified research credit); (2) the university basic research credit (i.e., 20% of the basic research payments); (3) 20% of the taxpayer's expenditures on qualified energy research undertaken by an energy research consortium. Under pre-Act law, the research credit didn't apply for amounts paid or accrued after Dec. 31, 2009.

New law. The 2010 Tax Relief Act retroactively extends the research credit two years so that it applies for amounts paid or accrued before Jan. 1, 2012. ( Code Sec. 41(h)(1) , as amended by Act Sec. 731)

Indian Employment Credit Reinstated and Extended

The Indian employment credit is 20% of the excess, if any, of the sum of qualified wages and qualified employee health insurance costs (not in excess of $20,000 per employee) paid or incurred (other than paid under salary reduction arrangements) to qualified employees (enrolled Indian tribe members and their spouses who meet certain requirements) during the tax year, over the sum of these same costs paid or incurred in calendar year '93. Under pre-Act law, the credit didn't apply for any tax year beginning after Dec. 31, 2009.

New law. The 2010 Tax Relief Act retroactively extends the Indian employment credit for two years to tax years beginning before Jan. 1, 2012. ( Code Sec. 45A(f) , as amended by Act Sec. 732)

New Market Tax Credit Reinstated and Extended Through 2011

A new markets tax credit applies for qualified equity investments to acquire stock in a community development entity (CDE). The credit is: (1) 5% for the year in which the equity interest is purchased from the CDE and for the first two anniversary dates after the purchase (for a total credit of 15%), plus (2) 6% on each anniversary date thereafter for the following four years (for a total of 24%). Under pre-Act law, there was a $5 billion cap on the maximum annual amount of qualifying equity investments for 2009; a carryover was allowed where the credit limitation for a calendar year exceeded the aggregate amount allocated for the year, but no amount could be carried over to any calendar year after 2014.

New law. The 2010 Tax Relief Act retroactively extends the new markets tax credit two years through 2011. It provides a $3.5 billion cap applies for 2010 and 2011, but no amount can be carried over to any calendar year after 2016. (Code Sec. 45D(f), as amended by Act Sec. 733)

Differential Wage Payment Credit for Employers Reinstated and Extended Through 2011

Eligible small business employers that pay differential wages—payments to employees for periods that they are called to active duty with the U.S. uniformed services (for more than 30 days) that represent all or part of the wages that they would otherwise received from the employer—can claim a credit equal to 20% of up to $20,000 of differential pay made to an employee during the tax year. An eligible small business employer is one that: (1) employed on average less than 50 employees on business days during the tax year; and (2) under a written plan, provides eligible differential wage payments to each of its qualified employees. A qualified employee is one who has been an employee for the 91-day period immediately preceding the period for which any differential wage payment is made. Under pre-Act law, the credit was not available for differential wages paid after Dec. 31 2009.

New law. The 2010 Tax Relief Act retroactively extends the credit for two years through 2011. (Code Sec. 45P(f), as amended by Act Sec. 736)

15-Year Writeoff for Qualified Leasehold and Retail Improvements and Restaurant Property Reinstated and Extended for Two Years

Under pre-Act law, qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property that was placed in service before 2010 was included in the 15-year MACRS class for depreciation purpose—that is, it was depreciated over 15 years under MACRS.

New law. The 2010 Tax Relief Act retroactively extends the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year MACRS class for two years through 2011. (Code Sec. 168(e)(3)(E), and Code Sec. 168(e)(8)(E), as amended by Act Sec. 737)

Enhanced Deduction for Food Inventory Reinstated and Extended

A C corporation may claim an enhanced charitable contribution deduction equal to the lesser of (a) basis plus half of the property's appreciation, or (b) twice the property's basis, for contributions of food inventory that was apparently wholesome food, i.e., meant for human consumption and meeting certain quality and labeling standards. The enhanced contribution is also available for a taxpayer other than a C corporation, but the aggregate amount of contributions of apparently wholesome food that may be taken into account for the tax year can't exceed 10% of the taxpayer's aggregate net income for that tax year from all trades or businesses from which those contributions were made for that tax year. Under pre-Act law, this enhanced deduction didn't apply for contributions after Dec. 31, 2009.

New law. The 2010 Tax Relief Act retroactively extends the apparently wholesome food contribution rules for two years to contributions made in 2010 and 2011. (Code Sec. 170(e)(3)(C)(iv), as amended by Act Sec. 740)

Enhanced Deductions for Corporate Contributions of Books Reinstated and Extended

A C corporation may claim an enhanced charitable contribution deduction equal to the lesser of (a) basis plus half of the property's appreciation, or (b) twice the property's basis, for qualified contributions of book inventory to certain public schools if donee certification requirements are met. Under pre-Act law, the special rules for book contributions did not apply to contributions made after Dec. 31, 2009.

New law. The 2010 Tax Relief Act retroactively extends the book inventory contribution rules for two years to contributions made in 2010 and 2011. (Code Sec. 170(e)(3)(D)(iv), as amended by Act Sec. 741)

Enhanced Deductions for Corporate Contributions of Computer Equipment Reinstated and Extended

A C corporation may claim an enhanced charitable contribution deduction equal to the lesser of (a) basis plus half of the property's appreciation, or (b) twice the property's basis, for certain contributions of computer technology or equipment (software, computer or peripheral equipment, and fiber optic cable) to schools or libraries for use in the U.S. for educational purposes that are related to the donee's purpose or function.

New law. The 2010 Tax Relief Act retroactively extends the enhanced computer contribution rules for two years to contributions made in tax years beginning before Jan. 1, 2012. (Code Sec. 170(e)(6)(G), as amended by Act Sec. 742)

7-Year Writeoff for Motorsport Racing Track Facilities Extended

A short 7-year cost recovery period applies to property used for land improvement and support facilities at motorsports entertainment complexes. Under pre-Act law, the short writeoff period only applies for property placed in service before Jan. 1, 2010.

New law. The 2010 Tax Relief Act retroactively extends the 7-year straight line cost recovery period for motorsports entertainment complexes for two years through 2011. (Code Sec. 168(i)(15)(D), as amended by Act Sec. 738)

Expensing Election for Costs of Film and TV Production Extended Through 2010

Taxpayers could elect to expense production costs of qualified film and television (TV) productions in the U.S. Expensing didn't apply to the part of the cost of any qualifying film or TV production that exceeded $15 million for each qualifying production. The limit was $20 million if production expenses were “significantly incurred” in certain low-income communities or isolated areas of distress. Under pre-Act law, the provision applied for qualified film and TV productions beginning before Jan. 1, 2010.

New law. The 2010 Tax Relief Act retroactively extends the expensing provision for two years through 2011. (Code Sec. 181(f), as modified by Act Sec. 744)

Expensing of Environmental Remediation Costs Reinstated and Extended Through 2010

Taxpayers could elect to treat qualified environmental remediation expenses that would otherwise be chargeable to a capital account as deductible in the year paid or incurred. To be deductible currently, such expense had to be paid or incurred in connection with the abatement or control of hazardous substances (including petroleum products) at a qualified contaminated site. Under pre-Act law, the expensing was available for expenses paid or incurred before Jan. 1, 2010.

New law. The 2010 Tax Relief Act retroactively extends the expensing provision for two year through 2011. (Code Sec. 198(h), as amended by Act Sec. 745)

Domestic Production Activities Deduction Available for Puerto Rico for Two More Years

The Code Sec. 199 domestic production activities deduction is available only if, among other conditions, the taxpayer has domestic production gross receipts (DPGR) from: (1) any sale, exchange or other disposition, or any lease, rental or license, of qualifying production property manufactured, produced, grown or extracted by the taxpayer in whole or in significant part within the U.S.; (2) any sale, exchange, etc., of qualified films produced by the taxpayer; (3) any sale, exchange or other disposition of electricity, natural gas, or potable water produced by the taxpayer in the U.S.; (4) construction activities performed in the U.S.; or (5) engineering or architectural services performed in the U.S. for construction projects located in the U.S. Under pre-Act law, for a taxpayer's first four tax years beginning after 2005 and before 2010, Puerto Rico was included in the term “U.S.” in determining DPGR, but only if all of the taxpayer's Puerto Rico-sourced gross receipts were taxable under the federal income tax for individuals or corporations.

New law. The 2010 Tax Relief Act retroactively extends the special domestic production activities rules for Puerto Rico for two years through 2011. Under the Act, the special domestic production activities rules for Puerto Rico apply for the first six tax years of a taxpayer beginning after Dec. 31, 2005 and before Jan. 1, 2012. (Code Sec. 199(d)(8)(C), as amended by Act Sec. 746)

Work Opportunity Tax Credit Extended Through 2011

The work opportunity tax credit (WOTC) allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($12,000 for qualified veterans; and $3,000 for qualified summer youth employees). Where the employee is a long-term family assistance (LTFA) recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages; it's 25% for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. For LTFA recipients, it includes an additional 50% of qualified second-year wages. Under pre-Act law, wages for purposes of the credit doesn't include any amount paid or incurred for an individual who began work after Aug. 31, 2011.

New law. The 2010 Tax Relief Act extends the WOTC four month to include individual who began work before Jan. 1, 2012. (Code Sec. 51(c)(4)(B), as amended by Act Sec. 757)

Two Year Extension for Subpart F Exception for Active Financing Income

Under pre-Act law, certain income from the active conduct of a banking, financing or similar business, or from the conduct of an insurance business (collectively referred to as “active financing income”), was temporarily excluded from the definition of Subpart F income, but only for tax years of foreign corporations beginning after Dec. 31, '98 and before Jan. 1, 2010, and for tax years of U.S. shareholders with or within which any such tax year of the foreign corporation ended.

New law. The 2010 Tax Relief Act extends the exclusions for active financing income for two years. Thus, this rule applies to tax years of a foreign corporation beginning before Jan. 1, 2012, and tax years of U.S. shareholders with or within which such tax years of foreign corporations end. (Code Sec. 953(e)(10) and Code Sec. 954(h)(9), as amended by Act Sec. 750)

Look-Through Rule for Payments Between Related CFCs under Foreign Personal Holding Company Income Rules Extended Two Years

Under pre-Act law, for tax years beginning before Jan. 1, 2010, dividends, interest, rents, and royalties received by one controlled foreign corporation (CFC) from a related CFC were not treated as foreign personal holding company income (FPHCI) to the extent attributable or properly allocable to non-subpart-F income, or income that was not effectively connected with the conduct of a U.S. trade or business of the payor (look-through treatment).

New law. The 2010 Tax Relief Act retroactively extends look-through treatment for related CFCs for two year. Thus, the above rule applies to tax years of a foreign corporation before Jan. 1, 2012, and tax years of U.S. shareholders with or within which such tax years of foreign corporations end. (Code Sec. 954(c)(6)(C), as amended by Act Sec. 751)

Two-Year Extension for Rule Providing That S Corporation Contributions Result in Lower Shareholder Basis Adjustments

Before the Pension Protection Act of 2006 (PPA), if an S corporation contributed money or other property to a charity, each shareholder took into account his pro rata share of the fair market value of the contributed property in determining his own income tax liability. The shareholder reduced his basis in his S stock by the amount of the charitable contribution that flowed through to him. The PPA amended this rule to provide that the amount of a shareholder's basis reduction in S stock by reason of a charitable contribution made by the corporation is equal to his pro rata share of the adjusted basis of the contributed property. Under pre-Act law, the PPA rule did not apply for contributions made in tax years beginning after Dec. 31, 2009.

New law. The 2010 Tax Relief Act retroactively extends the PPA rule for two years so that it applies for contributions made in tax years beginning before Jan. 1, 2012. (Code Sec. 1367(a)(2), as amended by Act Sec. 752)

Special Rule for Payments to a Charity From a Controlled Entity Reinstated and Extended

For 2006–2009, interest, rent, royalties, and annuities paid to a tax-exempt organization from a controlled entity were excluded from the unrelated business taxable income (UBTI) of the tax exempt organization. Under pre-Act law, this exclusion didn't apply to payments received or accrued after Dec. 31, 2009, and such payments were to be treated as UBTI to the extent that the payments reduce the “net unrelated income” of the controlled entity.

New law. The 2010 Tax Relief Act retroactively extends the special rule for two years to that it applies for payments received or accrued by a tax-exempt organization from Dec. 31, 2009 through Dec. 31, 2011. (Code Sec. 512(b)(13)(E)(iv), as amended by Act Sec. 747)

Qualified Zone Academy Bond Limitation Extended, and Refundable Credit Repealed

Qualified zone academy bonds are qualified tax credit bonds designed to allow low-income populations to save on interest costs associated with public financing school renovations, repairs, and teacher training. For 2010, the national bond volume limitation on qualified zone academy bonds was $1.4 billion. Under pre-Act law, except for carryovers of unused issuance limitations, the limit for years after 2010 was zero.

New law. The 2010 Tax Relief Act provides a $400 million national bond volume limitation for 2011. The Act also repealed the provision in Code Sec. 6341(f) allowing a bond issuer to elect to claim a payment in lieu of any tax credit otherwise allowed to the bondholder as it pertained to qualified zone academy bonds issued in 2011. (Code Sec. 54E(c)(1) and Code Sec. 6431(f)(3)(A)(iii), as amended by Act Sec. 758)

Empowerment Zone Tax Breaks Extended for Two Years

The 2010 Tax Relief Act extends for two years, through Dec. 31, 2011, the period for which the designation of an empowerment zone is in effect. (Code Sec. 1391(d) and Code Sec. 1391(h), as amended by Act Sec. 753. Thus, the Act extends for two years the empowerment zone tax incentives, including: the 20% wage credit under Code Sec. 1396; liberalized Code Sec. 179 expensing rules ($35,000 extra expensing and the break allowing only 50% of expensing eligible property to be counted for purposes of the investment based phaseout of expensing); tax-exempt bond financing under Code Sec. 1394 ; and deferral under Code Sec. 1397B of capital gains tax on sale of qualified assets sold and replaced.

For a designation of an empowerment zone, the nomination for which included a termination date which is Dec. 31, 2009, termination shall not apply with respect to that designation if the entity which made such nomination amends the nomination to provide for a new termination date in such manner as IRS may provide. (Act Sec. 753(c))

The Act also extends for two years, through Dec. 31, 2016, the period for which the percentage exclusion for qualified small business stock (of a corporation which is a qualified business entity) acquired on or before Feb. 17, 2009 is 60%. (Code Sec. 1202(a)(2), as amended by Act Sec. 753(b)) Gain attributable to periods after Dec. 31, 2016 for qualified small business stock acquired on or before Feb. 17, 2009 or after Dec. 31, 2011 is subject to the general rule which provides for a 50% exclusion. (Committee Report)

Two-Year Extension for District of Columbia Tax Breaks

The 2010 Tax Relief Act retroactively reinstates and extends the designation of the District of Columbia Enterprise Zone (DC Zone) under Code Sec. 1400(f) to apply for two years (through Dec. 31, 2011). ( Code Sec. 1400(f) , as amended by Act Sec. 754(a)) Under pre-Act law, the designation of the DC Zone ended on Dec. 31, 2009. Thus, the Act extends for two years: (1) the additional $35,000 of Code Sec. 179 expensing allowed to DC Zone businesses under Code Sec. 1397(a) (and the break allowing only 50% of expensing eligible property to be counted for purposes of the investment based phaseout of expensing); and (2) the 20% wage credit under Code Sec. 1396 for eligible DC Zone employers.

The Act also:

·         Extends DC tax-exempt financing authority under Code Sec. 1400A(a) through 2011 (Code Sec. 1400A(b), as amended by Act Sec. 754(b)) Under pre-Act law, the ability to issue such financing ended on Dec. 31, 2009. The Act also extends for two years, through December 31, 2011, the special $15 million per-user bond limitation and the relief from resident and employee requirements for certain tax-exempt bonds issued in the DC Zone. (Committee Report)

·         Extends for two years (through 2016) the zero percent capital gains rate applicable under Code Sec. 1400B to capital gains from the sale of certain qualified DC Zone assets acquired or substantially improved before Jan. 1, 2012 and held for more than five years (Code Sec. 1400B(b), as amended by Act Sec.754(c)) Under pre-Act law, the zero percent rate didn't apply to periods after Dec. 31, 2014.

·         Retroactively reinstates and extends the first-time homebuyer credit for the District of Columbia (DC) under Code Sec. 1400C so that it is available for eligible property purchased before Jan. 1, 2012 (Code Sec. 1400C(i), as amended by Act Sec. 754(c)). Under pre-Act law, the credit was not available for property purchased after Dec. 31, 2009.

Exemption for RIC Interest-Related Dividends and Short-Term Capital Gains Dividends Extended Two Years

Under pre-Act law, a regulated investment company (RIC) could designate and pay (1) interest-related dividends out of interest that would generally not be taxable when received directly by a nonresident alien individual or foreign corporations and (2) short-term capital gains dividends out of short-term capital gains. RIC dividends designated as interest-related dividends and short-term capital gains dividends were generally not taxable when received by a nonresident alien individual or foreign corporation and weren't subject to the withholding tax imposed on nonresident alien individuals and foreign corporations. These provisions didn't apply to dividends with respect to any tax year of a RIC beginning after Dec. 31, 2009.

New law. The 2010 Tax Relief Act extends for two years the rules exempting from gross basis tax and withholding tax the interest-related dividends and short term capital gain dividends received from a RIC, for dividends with respect to tax years of a RIC beginning before Jan. 1, 2012. (Code Sec. 871(k), as amended by Act Sec. 748)

Treatment of RIC As Qualified Investment Entity Reinstated and Extended for Two Years

Gain from the disposition of a U.S. real property interest (USRPI) by a foreign person is treated as income effectively connected with a U.S. trade or business and subject to tax and to Code Sec. 1445 withholding under Foreign Investment in Real Property Tax Act (FIRPTA) provisions. A USRPI does not include an interest in a domestically controlled “qualified investment entity.” Under pre-Act law, a RIC that met certain requirement could be treated as a “qualified investment entity” before Dec. 31, 2009.

New law. The 2010 Tax Relief Act extends the inclusion of a RIC within the definition of a “qualified investment entity” for two years, through 2011. (Code Sec. 897(h)(4)(A), as amended by Act Sec. 749(a)) The Act doesn't impose a withholding requirement under Code Sec. 1445 for any payment made before the enactment date, but a RIC that withheld and remitted tax under Code Sec. 1445 on distributions made after Dec. 31, 2009 and before the enactment date isn't liable to the distributee for such withheld and remitted amounts. (Act Sec. 749(b))

Miscellaneous Other Provisions Extended

The 2010 Tax Relief Act retroactively extends

  • the railroad track maintenance credit for two years through 2011. (Code Sec. 45G(f), as amended by Act Sec. 734)
  • the mine rescue team training credit for two years through 2011. (Code Sec. 45N(e), as amended by Act Sec. 735)
  • accelerated depreciation for qualified Indian reservation property for two years for property placed in service through 2011. (Code Sec. 168(j), as amended by Act Sec. 739) 
  • the election to expense 50% of the cost of advanced mine safety equipment for two years through 2011. (Code Sec. 179E(g), as amended by Act Sec. 743)
  • the increase in the limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands for two years through 2011. (Code Sec. 7652(f), as amended by Act Sec. 755)
  • the American Samoa economic development credit. (Sec. 119 of P.L. 109-432, as amended by Act Sec. 756)

Source:  Federal Tax Updates on Checkpoint Newsstand tab 12/17/2010 

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