Pinnacle Business Solutions
Financial Review Issue #42
Dear Paul,

 

President Obama's 2010 Tax Package


Overview  

In an effort to continue to grow the economy and support the working class, President Obama signed the 2010 Unemployment Insurance Reauthorization and Job Creation Act of 2010 ("UIRJCA").  Two major bills enacting tax cuts for individuals were set to expire at the end of 2010: the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA); and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The UIRJCA extends the provisions from EGTRRA and JGTRRA for an additional two years, through 2012, and will provide important tax relief to American taxpayers.

The UIRJCA also extends a number of provisions enacted as part of EGTRRA that were modified in the American Recovery and Reinvestment Act. The following is a summary of some of the provisions of this agreement:

 

Business Tax Relief

R&D Credit

The bill reinstates for two years (through 2011) the research credit, which can be as much as 10% of the research and development expenses.

New Markets Tax Credit

Through the New Markets Tax Credit (NMTC) program, the federal government is able to leverage federal tax credits to encourage significant private investment in businesses in low-income communities. For each dollar of qualified private investment, the NMTC program provides investors with either five cents or six cents of federal tax credits (depending on the amount of time that has passed since the original investment was made). The bill extends for two years (through 2011) the new markets tax credit, permitting a maximum annual amount of qualified equity investments of $3.5 billion each year. This is effective for calendar years beginning after December 31, 2009.

Extension of enhanced charitable deduction for corporate contributions of computer equipment for educational purposes

The bill extends for two years (through 2011) the provision that encourages businesses to contribute computer equipment and software to elementary, secondary, and post-secondary schools by allowing an enhanced deduction for such contributions.

Work Opportunity Tax Credit (WOTC)

BuildingUnder current law, businesses are allowed to claim a work opportunity tax credit equal to 40 percent of the first $6,000 of wages paid to new hires of one of nine targeted groups. These groups include members of families receiving benefits under the Temporary Assistance to Needy Families (TANF) program, qualified veterans, designated community residents, and others. The WOTC program is currently set to expire August 31, 2011. The bill extends this provision through December 31, 2011 and would be effective for employees hired after date of enactment.

Exclusion of small business capital gains

Generally, non-corporate taxpayers may exclude 50 percent of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion is increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2011, the exclusion is 100 percent and the AMT preference item attributable for the sale is eliminated. Qualifying small business stock is from a C corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and who meets a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer's basis in the stock or $10 million of gain from stock in that corporation. The provision extends the 100 percent exclusion of the gain from the sale of qualifying small business stock that is acquired before January 1, 2012 and held for more than five years.

Extension of bonus depreciation

Under current law, businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule. Congress allowed businesses, beginning January 1, 2008 through December 31, 2009, to take an additional depreciation deduction allowance equal to 50 percent of the cost of the depreciable property placed in service in those years. Under the Small Business Jobs Act of 2010, this temporary increase in the depreciation deduction allowance was extended through December 31, 2010. The bill extends and temporarily increases this bonus depreciation provision for investments in new business equipment. For investments placed in service after September 8, 2010 and through December 31, 2011, the bill provides for 100 percent bonus depreciation. For investments placed in service after December 31, 2011 and through December 31, 2012, the bill provides for 50 percent bonus depreciation.

Temporarily extend increase in the maximum amount and phase-out threshold under Section 179

Under current law, a taxpayer with a sufficiently small amount of annual investment may elect to deduct the cost of certain property placed in service for the year rather than depreciate those costs over time. MountainThe 2003 tax cuts temporarily increased the maximum dollar amount that may be deducted from $25,000 to $100,000. The tax cuts also increased the phase-out amount from $200,000 to $400,000. In 2007, tax cuts temporarily increased these thresholds to $125,000 and $500,000 respectively, indexed for inflation. These amounts have been further increased and extended several times on a temporary basis, including most recently as part of the Small Business Jobs Act which increased the thresholds to $500,000 and $2,000,000 for the taxable years beginning in 2010 and 2011. This proposal extends the 2007 maximum amount and phase-out thresholds for taxable years beginning in 2012, at $125,000 and $500,000 respectively, indexed for inflation. The proposal is effective for taxable years beginning after December 31, 2011. 

Temporarily extend the expanded exclusion for employer-provided educational assistance

An employee may exclude from gross income up to $5,250 for income and employment tax purposes per year of employer-provided education assistance. Prior to 2001, this incentive was temporary and only applied to undergraduate courses. The EGTRRA expanded this provision to graduate education and extended the provision for undergraduate and graduate education to the end of 2010. The proposal extends the changes to this provision for an additional two years, through 2012.

Individual Tax Relief

Reductions in Individual Income Tax Rates

Temporarily extend the 10% bracket. Under current law, the 10% individual income tax bracket expires at the end of 2010. Upon expiration, the lowest tax rate will be 15%. This proposal extends the 10% individual income tax bracket for an additional two years, through 2012.

Temporarily extend the 25%, 28%, 33%, and 35% brackets. Under current law, the 25%, 28%, 33%, and 35% individual income tax brackets expire at the end of 2010. Upon expiration, the rates become 28%, 31%, 36%, and 39.6% respectively. This proposal extends the 25%, 28%, 33%, and 35% individual income tax brackets for an additional two years, through 2012.

Temporary reduction in employee-paid payroll taxes

Under current law employees pay a 6.2 percent Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay a 12.4 percent Social Security self-employment taxes of on all their self-employment income up to the same threshold. The bill provides a payroll/self-employment tax holiday during 2011 of two percentage points. This means employees will pay only 4.2 percent on wages and self-employment individuals will pay only 10.4 percent on self-employment income up to the threshold.

Capital Gains and Dividends

Temporarily extend the capital gains and dividend rates. Under current law, the capital gains and dividend rates for taxpayers below the 25% bracket is equal to zero percent. For those in the 25% bracket and above, the capital gains and dividend rates are currently 15%. These rates expire at the end of 2010. Upon expiration, the rates for capital gains become 10% and 20%, respectively, and dividends are subject to the ordinary income rates. This proposal extends the current capital gains and dividends rates for all taxpayers for an additional two years, through 2012.

Child Tax Credit

Temporarily extend the modified child tax credit. Generally, taxpayers with income below certain threshold amounts may claim the child tax credit to reduce federal income tax for each qualifying child under the age of 17. The EGTRRA increased the credit from $500 to $1,000. The EGTRRA also expanded refundability. The amount that may be claimed as a refund was 15% of earnings above $10,000. The American Recovery and Reinvestment Act of 2009 provided that earnings above $3,000 would count towards refundability for 2009 and 2010. This proposal extends the current child tax credit for an additional two years, through 2012.

Incentives for Families and Children

Temporarily extend the expanded dependent care credit. The dependent care credit allows a taxpayer a credit for an applicable percentage of child care expenses for children under age 13 and disabled dependents. The EGTRRA increased the amount of eligible expenses from $2,400 for one child and $4,800 for two or more children to $3,000 and $6,000, respectively. The EGTRRA also increased the applicable percentage from 30 percent to 35 percent. The proposal extends the changes to the dependent care credit made by EGTRRA for an additional two years, through 2012.

Earned Income Tax Credit (EITC)

People shaking handsTemporarily extend third-child EITC. Under current law, working families with two or more children currently qualify for an earned income tax credit equal to 40% of the family's first $12,570 of earned income. The American Recovery and Reinvestment Act increased the earned income tax credit to 45% of the family's first $12,570 of earned income for families with three or more children and increased the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children). This proposal extends for an additional two years, through 2012, the American Recovery and Reinvestment Act provisions that increased the credit for families with three or more children and increased the phase-out range for all married couples filing a joint return.

Education Incentives

Temporarily extend expanded Coverdell Accounts. Coverdell Education Savings Accounts are tax-exempt savings accounts used to pay the higher education expenses of a designated beneficiary. The EGTRRA increased the annual contribution amount from $500 to $2,000 and expanded the definition of education expenses to include elementary and secondary school expenses. The proposal extends the changes to Coverdell accounts for an additional two years, through 2012.

Temporarily extend the expanded student loan interest deduction

Certain individuals who have paid interest on qualified education loans may claim an above-the-line deduction for such interest expenses up to $2,500. Prior to 2001, this benefit was only allowed for 60 months and phased-out for taxpayers with income between $40,000 and $55,000 ($60,000 and $75,000 for joint filers). The EGTRRA eliminated the 60 month rule and increased the income phase-out to $55,000 to $70,000 ($110,000 and $140,000 for joint filers). The proposal extends the changes to this provision for an additional two years, through 2012.

Temporarily extend the American Opportunity Tax Credit

Created under the American Recovery and Reinvestment Act, the American Opportunity Tax Credit is available for up to $2,500 of the cost of tuition and related expenses paid during the taxable year. Under this tax credit, taxpayers receive a tax credit based on 100% of the first $2,000 of tuition and related expenses (including course materials) paid during the taxable year and 25% of the next $2,000 of tuition and related expenses paid during the taxable year. Forty percent of the credit is refundable. This tax credit is subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). This proposal extends the American Opportunity Tax Credit for an additional two years, through 2012.

Conclusion

In an effort to stimulate the economy and support the working class, President Obama has extended many of the tax cuts from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA); and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), for an additional two years through 2012.  As a business owner, it is in your best interest to take advantage of this extension, It could really impact your bottom line! If you would like more information on these tax planning ideas or any others please give us a call!

 
Note:  The information contained in this material represents a general overview of tax regulations and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation. 

 

Sincerely,
 

Paul J. Beckert MBA, CPA
President,
Pinnacle Business Solutions
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Key Points of Interest

 

Bonus depreciation of 100% for investments placed in service after September 8, 2010 and through December 31, 2011.

Temporary reduction in employee-paid social security taxes by 2% to 4.2% for 2011.   

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