TAX NEWS - 2010

US Tax: Extra year of bonus depreciation proposed in Senate small-business bill

Senate Democratic leaders introduced legislation June 29 that would provide for an additional year of bonus depreciation, as well as enhanced section 179 expensing rules and other incentives targeted to small businesses.

The tax incentives in the Creating Small Business Jobs Act of 2010 (H.R. 5297) would be offset primarily by information reporting and other provisions intended to close the so-called "tax gap," as well as a provision making "crude tall oil" ineligible for the cellulosic biofuel producer credit. Significantly, the bill does not include a $5 billion revenue raiser from the small-business measure that cleared the House of Representatives earlier this month that would impose new restrictions on grantor retained annuity trusts (GRATs).

Although an official revenue estimate for the Senate bill was not available at press time, the tax provisions are rumored to cost approximately $12 billion over 10 years and would be completely paid for through revenue offsets.


Bonus depreciation & other incentives

The bill would extend for one additional year the temporary 50 percent depreciation bonus first enacted in the Economic Stimulus Act of 2008 and subsequently renewed in the American Recovery and Reinvestment Act of 2009. (The provision expired at the end of last year.) Under the bonus depreciation provision, 50 percent of the basis of qualified property may be deducted in the year the property is placed in service and the remaining 50 percent recovered under otherwise applicable depreciation rules. Generally, qualified property includes:

- Property with a MACRS recovery period of 20 years or less;
- Water utility property;
- Certain computer software; and
- Qualified leasehold improvement property.

As proposed in the Senate bill, the bonus depreciation rules generally would apply to qualified property placed in service during 2010.

Small-business incentives – The bill also includes temporary incentives targeted to small businesses that would:
- Increase the section 179 expensing limitations for 2010 and 2011 and treat qualified leasehold improvement, restaurant, and retail property as section 179 property;
- Exclude 100 percent of small-business capital gains for stock acquired during certain periods of 2010;
- Extend the carryback period for eligible small-business credits to five years for 2010;
- Provide that general small-business credits are not subject to the alternative minimum tax for 2010;
- Reduce the recognition period for purposes of the tax on net recognized built-in gains of S corporations to seven years for taxable years beginning in 2009 or 2010 and to five years for taxable years beginning in 2011;
- Increase the deduction amount for start-up expenditures in 2010;
- Limit the penalty for failure to disclose reportable transactions based on the resulting tax benefits;
- Provide a deduction for health insurance costs in computing self-employment taxes in 2010.


Tax gap & tax administration provisions

On the revenue side, the bill includes a variety of information reporting and penalty provisions offered in White House budget proposals and in previous House and Senate legislation that are intended to shrink the tax gap.

Information reporting for rental property expenses – The bill generally would require recipients of real estate rental income that make payments of $600 or more to a service provider (such as a plumber or accountant) in the course of earning rental income to send an information return (generally, Form 1099-MISC) to the IRS and to the service provider.

Exceptions would apply for active-duty military personnel and employees of the intelligence community, individuals whose rental income falls below a threshold to be determined in Treasury regulations, and individuals who meet certain hardship standards (again to be determined in Treasury regulations). The provision would be effective for payments made after December 31, 2010.

Levies on payments to federal vendors or contractors – The bill would give the IRS greater levy authority over federal vendors or contractors:
- Vendors – The bill would allow the IRS to levy 100 percent of any payment due a federal vendor for the sale or lease of real or other property that is not included in the current levy authority on payments for goods and services. This provision would be effective for levies approved after the date of enactment.
- Contractors – The bill would allow the IRS to issue levies before a collection due process hearing on federal contractors who owe federal taxes, effective for levies issued after the date of enactment.

Penalty provisions – The bill also would increase the penalties for failure to file correct information returns (generally effective for returns required to be filed on or after January 1, 2011) and apply the bad check penalty to electronic payments used to satisfy tax debts (effective for payments made after the date of enactment).


Cellulosic biofuel producer credit

The bill includes a provision from the House-passed small-business legislation that would exclude certain processed fuels with an acid number exceeding 25 from the cellulosic biofuel producer credit under section 40(b)(6). Effectively, this revenue offset targets the highly corrosive fuel known as "crude tall oil," another byproduct of the paper manufacturing process from which "black liquor" is derived. (Black liquor became ineligible for the cellulosic biofuel producer credit in March when the Patient Protection and Affordable Care Act was signed into law.)

This provision would be effective for fuels sold or used on or after January 1, 2010.


Roth retirement provisions

The bill would raise additional revenue by permitting participants in government-sponsored section 457 plans to treat elective deferrals as Roth retirement account contributions, effective for taxable years beginning after December 31, 2010. It also would allow individuals to roll over amounts from a "traditional" defined contribution retirement account (such as a 401(k)) in an employer plan into a Roth account in the same employer plan. Rollover amounts would be included in gross income ratably over two years unless the taxpayer elects otherwise. The provision would apply to distributions after the date of enactment.


Corporate estimated tax payments

The bill would increase the payment factor for estimated taxes of corporations with assets of at least $1 billion by an as-yet unspecified percentage for payments due in July, August, or September of 2015, with an offsetting reduction in the following quarter.


Outlook

Debate on the measure is expected to continue through this week, but a vote on final passage is unlikely until after the Senate returns from its week-long Independence Day recess on July 12. Leaders are expecting a large number of amendments to be offered, which would take up considerable floor time; moreover, the chamber must tie up various legislative loose ends prior to leaving town, not the least of which is a potential vote on comprehensive financial regulatory reform legislation. Planned services for the late Sen. Robert Byrd, D-W.Va., who passed away June 28, also could affect the Senate schedule.

Passage of the Senate bill could be followed by contentious negotiations with the House. Although the House and Senate bills share some provisions, the House-approved legislation does not include bonus depreciation and offers a more limited package of small-business incentives. Differences over revenue offsets – most notably, the GRAT restrictions in the House bill – also could be a sticking point during conference.