Business Tax Changes in the 2010 Tax Relief Act

Several generous business tax cuts were contained in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (TRA), enacted on December 17, 2010.  Those of particular note are:

• Bonus Depreciation.  Under the Small Business Jobs Act of 2010 (SBJA), the old 50% bonus depreciation that had expired after 2009 was extended to qualifying property placed in service through 2010.  The TRA increases the percentage to 100% of the cost of qualifying assets placed in service from September 9, 2010 through December 31, 2011.  The TRA also extends the 50% bonus depreciation to assets placed in service during 2012.  No bonus depreciation applies after 2012 (except for certain long-term production-period property).  Unlike the Section 179 expensing election, bonus depreciation applies to all sizes of businesses and can create a net operating loss that can be carried back to refund taxes paid in prior tax years.  However, bonus depreciation only applies to "new" property, whose original use starts with the taxpayer.  As an additional benefit, property for which bonus depreciation is claimed is not subject to the alternative minimum tax depreciation adjustment.  Qualifying property typically consists of machinery, equipment, other tangible personal property, most computer software, and certain leasehold improvements.  A taxpayer may elect not to claim bonus depreciation in those cases where it might not prove beneficial.  Note that bonus depreciation is determined upon the placed in service date whereas Section 179 expensing is determined upon taxable years.
• Section 179 Expensing.  Under the SBJA, the amount of qualifying property that could be expensed was raised to $500,000 for assets placed in service during tax years beginning in 2010 and 2011.  The $500,000 is reduced dollar for dollar as the amount of total qualifying property exceeds $2 million in the taxable year.  Qualifying property typically consists of new or used personal property and software; but for tax years beginning in 2010 and 2011, a special rule permits certain purchases of qualified real property to be included, up to $250,000 of the $500,000 limit.  The TRA retains these amounts for tax years beginning in 2010 and 2011 and changes (with inflation adjustments) the expensing limit to $125,000 and the start of the phase-out to $500,000 for tax years beginning in 2012.  However, the TRA did not extend the special qualified real property expensing provision past 2011.  For tax years beginning after the 2012, the limitations will be $25,000 and $200,000 respectively.  With 100% bonus depreciation available for assets placed in service through 2011, Section 179 expensing will not prove as useful except for "used" property for which bonus depreciation is not available.
• Research and Experimental Tax Credit.  The TRA retroactively extends the research tax credit that had expired at the end of 2009 until the end of 2011 for amounts paid or accrued.  For eligible small businesses, important changes were made by the SBJA such that, for tax years beginning in 2010, the research tax credit is not limited to the excess of regular tax over AMT and any unused 2010 research credit may be carried back five tax years instead of one.  An eligible small business is (1) a corporation the stock of which is not publicly traded, (2) a partnership, or (3) a sole proprietorship, if the average annual gross receipts of the business for the three-tax-year period preceding the 2010 tax year does not exceed $50 million.
• 15-Year Depreciation of Qualifying Leasehold Improvements.  The special 15-year (instead of 39-year), straightline depreciation method available for qualifying leasehold improvements, qualified restaurant property, and qualified retail improvements, was extended to such property placed in service through 2011.  In addition, this property may also be eligible for the special Section 179 expensing provisions for qualified real property (discussed above).