The recently enacted 2012 American Taxpayer Relief Act is a sweeping tax package that includes, among many other items, permanent extension of the Bush-era tax cuts for most taxpayers, revised tax rates on ordinary and capital gain income for high-income individuals, modification of the estate tax, permanent relief from the AMT for individual taxpayers, limits on the deductions and exemptions of high-income individuals, and a host of retroactively resuscitated and extended tax breaks for individual and businesses. Here's a look at the key elements of the package:

Depreciation provisions modified and extended. For property placed in service prior to January 1, 2014, the 50% bonus depreciation provision continues to be available for qualified property.  The bonus depreciation provisions are beneficial to businesses in that half of the cost of qualified property placed in service can be written off in that tax year.

An additional relief to businesses came in the form of an increase in expensing limitations and treatment of certain real property as Section 179 property.  While businesses enjoyed significant Section 179 opportunities in 2011, these were due to be reduced prior to the enactment of the new law.  Businesses can now claim a maximum $500,000 Section 179 deduction in tax years beginning in 2012 and 2013.  The expense allowance is phased out when the business purchases more than $2,000,000 of Section 179 property in the given tax year.

Finally, certain property continues to qualify for depreciation write-off over a shorter recovery period.  Qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements are allowed for a 15-year straight line cost recovery.

Business tax breaks extended. Those businesses eligible for the research and development credit will continue to be able to claim the credit for two years through 2013.

Shareholders selling their small business stock are allowed an exclusion from tax of 100% of the gain on the sale of certain small business stock acquired before Jan. 1, 2014.  Given the increase in capital gain rates for certain taxpayers (see below), the exclusion is more valuable than before.

There were two notable provisions affecting S corporations.  First, those S corporations making charitable contributions of property in tax years beginning before Dec. 31, 2013 are required to only make stock basis adjustments to the extent of the adjusted basis in the contributed property (rather than the value of the property). Additionally, S corporations are subject to a shorter recognition period for purposes of the built-in gains tax.  The period following the S election which may be subject to the built-in gains tax is reduced from a 10-year period to a 5-year period through 2013.

Tax rates. For tax years beginning after 2012, the 10%, 15%, 25%, 28%, 33% and 35% tax brackets from the Bush tax cuts will remain in place and are made permanent. This means that, for most Americans, the tax rates will stay the same. However, there will be a new 39.6% rate which will begin at the following thresholds: $400,000 (single), $425,000 (head of household), $450,000 (joint filers and qualifying widow(er)s), and $225,000 (married filing separately). These dollar amounts will be inflation-adjusted for tax years after 2013.

Capital gains and qualified dividends rates. The new law retains the 0% tax rate on long-term capital gains and qualified dividends, modifies the 15% rate, and establishes a new 20% rate. Beginning in 2013, the rate will be 0% if income falls below the 25% tax bracket; 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate; and 20% if income falls in the 39.6% tax bracket. It should be noted that the 20% top rate does not include the new 3.8% surtax on investment income and gains for tax years beginning after 2012, which applies on investment income above $200,000 (single) and $250,000 (joint filers) in adjusted gross income. So actually, the top rate for capital gains and dividends beginning in 2013 will be 23.8% if income falls in the 39.6% tax bracket. For lower income levels, the tax will be 0%, 15%, or 18.8%.

Estate tax. The new law prevents steep increases in estate, gift and generation-skipping transfer (GST) tax that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation). However, the new law also permanently increases the top estate, gift, and GST rate from 35% to 40% It also continues the portability feature that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse. All changes are effective for individuals dying and gifts made after 2012.

We hope this information is helpful.  If you’d like to discuss the new Act and its effect on your situation, please contact Karen Snodgrass or Deanna Salo from Cray, Kaiser Ltd. (630-953-4900), a strategic partner with the Chicago Family Business Council.

Karen Snodgrass CPA

Cray, Kaiser Ltd.

1901 S. Meyers Road
Suite 230
Oakbrook Terrace, IL 60181
Phone: (630) 953-4900 x248
Fax: (630) 953-4905

Email: ksnodgrass@craykaiser.com                  

Deanna L. Salo CPA

Cray, Kaiser Ltd.

1901 S. Meyers Road
Suite 230
Oakbrook Terrace, IL 60181
Phone: (630) 953-4900 x210
Fax: (630) 953-4905

Email:  dsalo@craykaiser.com

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