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After much wrangling, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”) has been signed into law. Continuing a sad and growing habit of temporary tax legislation (previously discussed here), the Act extended a number of notable individual and corporate provisions. The legislation was also notable for the provisions that it did not address – such as the a prospective repeal of the relatively new 1099 reporting requirements (previously discussed here).
As expected, the web has been alive with commentary. A sampling:
Business Tax Provisions
Retroactive Extension of the 954(c)(6) Look-Through Rule. Code section 954(c)(6) provides that dividends, interest, rents, and royalties received by a controlled foreign corporation (“CFC”) from a related CFC are generally not treated as “Subpart F” income to the extent that the payments are attributable to income of the payor that itself is neither “Subpart F” income nor income that is effectively connected to a U.S. trade or business. This so-called “look-through” rule expired on December 31, 2009; however, the Act retroactively extends the rule for 2010 and through 2011.
Extension of Section 41 Research Credit. Like the look-through rule, the research credit of Code section 41 expired at the end of 2009. The Act retroactively extends the credit for 2010 and through 2011.
Extension of Energy-Related Tax Benefits and Renewable Energy Grants. Taxpayers that are allowed credits under Code sections 45 and 48 may elect to receive a cash grant from the Treasury rather than claiming the applicable credit. Under section 45, taxpayers receive a credit for the production of electricity from “qualified energy resources, which include wind, biomass, geothermal, certain solar, municipal solid waste, qualified hydropower, and marine and hydrokinetic energy systems. Under section 48, taxpayers receive a credit for “energy property” that is placed in service, including properties related to fuel cells, microturbines, solar, geothermal, and wind energy systems. The election to receive a grant was scheduled to expire at the end of 2010; however, the Act extends the election through 2011.
100% Expensing for Certain Business Property. In a effort to boost business investment, the Act temporarily permits the immediate expensing of “qualified business property” acquired after September 8, 2010 and before the end of 2011, so long as the property is generally placed in service before the end of 2011. This new expensing provision is in addition to the existing small-business expensing allowance and is not limited to small businesses or subject to a maximum dollar amount.
Extension of Bonus Depreciation Allowance. Lastly, the Act extends the 50% “bonus depreciation” generally for property placed in service during 2012 (although some qualifying property may be placed in service during 2013).
Individual Tax Provisions
Extension of Current Individual Tax Rates. Perhaps the most controversial part of the legislation, the Act extends all current individual income tax rates through 2011 and 2012. As a result, individual income tax rates will remain at 10%, 15%, 25%, 28%, 33% and 35%. Importantly, the Act also extended through 2012 the preferential 15% tax rate for capital gains and “qualified” dividends.
Reinstatement of the Estate Tax and Generation-Skipping Tax. After a one-year hiatus, the estate and generation-skipping taxes have returned – at least for 2011 and 2012, that is. The Act establishes rates for estate, gift, and generation-skipping taxes of 35%. The Act also provides an exemption of $5 million for individual estates, with the estate of a surviving spouse also receiving any unused portion of the exemption of a prior deceased spouse.
Temporary Payroll Tax Reduction. The act reduces by two percentage points, but only for 2011, the Social Security tax rate imposed on wages and self-employment income. Consequently, employees will pay 4.2% in Social Security taxes for 2011 (up to $106,800 of income), and self-employed individuals will pay 10.4% for 2011 (also up to $108,600 of income). The Medicare portion of payroll taxes remains unaffected, as does the employer’s share of Social Security tax.
Alternative Minimum Tax Annual Patch. Reprising an annual ritual, Congress once again “patched” the AMT, increasing the exemption amount for individuals for both the 2010 and 2011 tax years.