Tax Law and Business Organization Strategy

Highlights of Tax Changes Becoming Effective in 2013

There are many important tax changes taking effect in 2013, as well as some that took effect late last year and thus are “new.” They are the result of tax legislation enacted in prior years, or are triggered by effective dates in regs, rulings and other guidance, or will occur by default in 2013 absent Congressional action. The following is a list derived from Checkpoint of the key non-inflation-indexed tax changes, categorized by those affecting businesses and individuals. In addition, a list of provisions that expired at the end of last year is provided.

Business and retirement plan changes taking effect in 2012 and late 2011. Business changes effective in 2012 (or went into effect in December of 2011 and are thus “new”), include the following:

  • New guidance on deduction vs. capitalization of tangible property costs. IRS has issued temporary regs, generally effective in tax years beginning after 2011, on the application of Code Sec. 162(a) and Code Sec. 263(a) to amounts paid to acquire, produce, or improve tangible property. Among other things, these new regs clarify and expand the standards in the current regs; provide certain new bright-line tests for applying these standards; provide guidance under Code Sec. 168 regarding the accounting for, and dispositions of, property subject to that section; and amend the general asset account regs. 
  • Basis reporting requirements. The complex stock basis and character reporting rules under Code Sec. 6045(g) apply to shares in a regulated investment company (RIC, i.e., a mutual fund), or stock acquired in connection with a dividend reinvestment plan (DRP), if acquired after 2011.
  • Estimated taxes for large corporations. For a corporation with assets of at least $1,000,000,000 (determined as of the end of the previous tax year), the amount of any required installment of corporate estimated tax which is otherwise due in July, Aug. or Sept. of 2012 is 100.5% of that amount, and the amount of the next required installment after the installment due in July, Aug. or Sept. of 2012 is appropriately reduced to reflect the amount of the 0.5% increase.
  • Use of smartcards or other electronic media to provide qualified transportation fringes. Beginning in 2012, after numerous postponements, the rules under which employers can provide their employees with qualified mass transit fringe benefits through the use of employer-provided credit cards, debit cards, smartcards, or other electronic media officially go into effect (although employers could rely on the guidance before 2012).
  • Lump-sum payouts from defined benefit plans. Some defined benefit plans offer participants the option of receiving a lump-sum distribution (e.g., at age 65) instead of an annuity. For plan years beginning after 2007, the Pension Protection Act of 2006 (PPA, P.L. 109-280) amended Code Sec. 417(e)(3) to require defined benefit plans to compute the minimum lump-sum value of an annuity using blended corporate bond rates instead of 30-year Treasury bond rates, which were the benchmark under prior law. Because corporate bond rates generally are higher than long-term Treasury bond rates, the change had the overall effect of reducing lump-sum distributions. Under Code Sec. 417(e)(3), this new rule was phased in over 2008 through 2011 and will be fully in effect for plan years beginning after 2011. 
  • Hybrid defined benefit plan regs. Regs that set forth the exclusive list of interest crediting rates and combinations of interest crediting rates that satisfy the market rate of return requirement for hybrid plans, apply to plan years that begin on or after Jan. 1, 2012. For plan years that begin before Jan. 1, 2012, statutory hybrid plans could use a rate that is permissible under the final regs, or the 2010 proposed regs.
  • “Readily tradable” employer securities. For purposes of meeting Code Sec. 401(a)(35)'s diversification requirements for defined benefit contribution plans, generally effective for plan years beginning on or after Jan. 1, 2012, employer securities that are “readily tradable on an established securities market” and “readily tradable on an established market” mean employer securities that are readily tradable on an established securities market under Reg. § 1.401(a)(35)-1(f)(5).
  • Community health needs assessment mandatory. To qualify as tax-exempt, for tax years after Mar. 23, 2012, under Code Sec. 501(r)(3), charitable hospital organizations will need to (i) conduct a community health needs assessment during the tax year or in either of the two tax years immediately preceding the tax year, and (ii) adopt an implementation strategy to meet the community health needs identified therein.
  • Work opportunity tax credit (WOTC) not available except for hiring qualified veterans. The WOTC under Code Sec. 51 generally can't be claimed for an individual who begins work for the employer after Dec. 31, 2011. However, the WOTC continues to be available for employers that hire qualified veterans who began work for the employer before Jan. 1, 2013.
  • Disregarded entities included in rules for conduit financing arrangements. Effective for payments made after Dec. 8, 2011, transactions that a disregarded entity enters into are taken into account in determining whether a financing arrangement exists and should be recharacterized under Code Sec. 7701(l) and Reg. § 1.881-3.
  • Longer writeoff period for certain property. For specialized realty assets (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) placed in service after 2011, a 39-year (up from 15-year) writeoff period generally applies.
  • Reduced bonus depreciation allowance for qualified property. For qualified property acquired and placed in service after 2011 and before 2013 (after 2012 and before 2014 for aircraft and certain long-production period property), a 50% (down from 100%) bonus first-year depreciation allowance applies under Code Sec. 168(k). 
  • Reduced expensing. For a tax year beginning in 2012, the Code Sec. 179 expensing election is reduced to $139,000, with a $560,000 investment-based ceiling (down from $500,000/$2 million). For tax years beginning after 2012, it will be further reduced to $25,000 with a $200,000 investment-based ceiling. Additionally for a tax year beginning after 2011, expensing can no longer be claimed for qualified real property.

Individual changes taking effect in 2012. Individual changes that apply in 2012 include the following. Note that Congress may retroactively amend one or more of these rules:

  • Reduced alternative minimum tax (AMT) exemption amounts. Absent another AMT “patch,” the AMT exemption amounts for tax years beginning after 2011 revert to the significantly lower “permanent” amounts of $33,750 for unmarried taxpayers, $45,000 for joint filers, and $22,500 for marrieds filing separately.
  • Reduced adoption credit. For 2012, the total expenses that may be taken as a credit for all tax years with respect to the adoption of a child by the taxpayer will be limited to $12,650 (down from $13,360 for 2011), and the credit for the adoption of a special-needs child will also be $12,650 (down from $13,360 for 2011). Furthermore, the adoption credit will no longer be refundable.
  • No parity for exclusion from income for employer-provided mass transit and parking benefits. For 2012, unless Congress changes the rules, the exclusion for qualified parking rises from $230 to $240 due to an inflation adjustment, but falls from $230 to $125 for employer-provided transit and vanpooling benefits.
  • Protective claims for estate tax refunds. For estates of decedents dying after 2011, a Code Sec. 2053 protective claim for refund of estate tax must be filed by either: (i) attaching one or more completed Schedules PC to the estate's Form 706 at the time the return is filed; or (ii) filing a Form 843 with the IRS office where the Form 706 for the decedent's estate was previously filed, with the notation “Protective Claim for Refund under Section 2053” entered across the top of page 1 of the Form 843.
  • Reporting foreign assets. Beginning in 2012, U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding $50,000 must report those assets to IRS on Form 8938, Statement of Specified Foreign Financial Assets, with their tax return.

Provisions that expired on Dec. 31, 2011. The following business and individual provisions expired at the end of last year. Note that Congress may retroactively reinstate some or all of these rules:

  • 7-year straight line cost recovery period for motorsports entertainment complexes under Code Sec. 168(i)(15)(D)
  • Accelerated depreciation for qualified Indian reservation property under Code Sec. 168(j)
  • Election to expense 50% of the cost of advanced mine safety equipment under Code Sec. 179E(g)
  • Election to expense production costs of qualified film and television products in the U.S. under Code Sec. 181(f)
  • Election to expense environmental remediation costs under Code Sec. 198(h)
  • Research credit under Code Sec. 41(h)(1)(B)
  • Income tax credits for biodiesel and renewable diesel under Code Sec. 40A
  • Alternative fuel and fuel mixture tax credits under Code Sec. 6426(d)(5) and Code Sec. 6426(e)(3)
  • Indian employment credit under Code Sec. 45A(f)
  • New markets tax credit under Code Sec. 45D
  • Railroad track maintenance credit under Code Sec. 45G(f)
  • Credit for construction of new energy efficient homes under Code Sec. 45L
  • Energy efficient appliance credit under Code Sec. 45M)
  • Mine rescue team training credit under Code Sec. 45N(e)
  • Enhanced charitable deduction for contributions of food inventory under Code Sec. 170(e)(3)(C)
  • Enhanced charitable deduction for contributions of book inventories to public schools under Code Sec. 170(e)(3)(D)
  • Enhanced deduction for corporate contributions of computer equipment for educational purposes under Code Sec. 170(e)(6)(G)
  • Empowerment Zone tax breaks under Code Sec. 1391, Code Sec. 1394, Code Sec. 1396, Code Sec. 179, and Code Sec. 1397B
  • District of Columbia Enterprise Zone (DC Zone) tax breaks under Code Sec. 1400(f), Code Sec. 1400A(b), and Code Sec. 1400B(b)(2)(A)(i)
  • The inclusion of Puerto Rico as “within the U.S.” for purposes of determining a taxpayer's domestic production gross receipts (DPGR) under Code Sec. 199(d)(8)(C)
  • The election to defer gain on sales of qualifying electric transmission property under Code Sec. 451(i)
  • The exclusion from a tax-exempt organization's unrelated business taxable income (UBTI) of interest, rent, royalties, and annuities paid to it from a controlled entity under Code Sec. 512(b)(13)(E)(iv)
  • The suspension of income limitations on percentage depletion for marginal wells under Code Sec. 613A(c)(6)(H)(ii)
  • The ability of a RIC to designate all or a portion of a dividend as an “interest-related dividend” under Code Sec. 871(k)(1)(C) and Code Sec. 871(k)(2)(C)
  • Inclusion of a RIC in the definition of a “qualified investment entity” under Code Sec. 897(h)(4)
  • Lower shareholder basis adjustments for charitable contributions by S corporations under Code Sec. 1367(a)
  • Reduced S corporation recognition period for built-in gains tax under Code Sec. 1374(d)(7)
  • Exception under subpart F for certain income from the active conduct of a banking or similar business under Code Sec. 953(e)(10) and Code Sec. 954(h)(9)
  • Look-through treatment for payments between related controlled foreign corporations (CFCs) under the foreign personal holding company rules under Code Sec. 954(c)(6)
  • The increased limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands under Code Sec. 7652(f)
  • Election for itemizers to deduct State and local general sales taxes under Code Sec. 164(b)(5) in lieu of a state and local income taxes
  • Above-the-line deduction for qualified tuition and related expenses under Code Sec. 222
  • Treatment of mortgage insurance premiums as qualified residence interest under Code Sec. 163(h)(3)(E)
  • Above-the-line deduction for up to $250 of certain expenses of elementary and secondary school teachers under Code Sec. 62
  • Nonbusiness energy property credit under Code Sec. 25C
  • Tax credit for first-time District of Columbia homebuyers under Code Sec. 1400C(i)
  • Adoption assistance programs under Code Sec. 137
  • Allowance of personal tax credits against regular tax and AMT under Code Sec. 26(a)(2)
  • Exclusion of 100% of gain on certain small business stock under Code Sec. 1202(a)(4)
  • Tax-free distributions (up to $100,000 annually for taxpayers 70- 1/2 and older) from individual retirement plans for charitable purposes under Code Sec. 408(d)(8)
  • Special rules to encourage contributions of capital gain real property for conservation purposes under Code Sec. 170(b)(1)(E) and Code Sec. 170(b)(2)(B)
  • Look-through treatment of certain RIC stock in determining nonresidents' gross estates under Code Sec. 2105(d)
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