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Tax Relief Act of 2010: Agricultural Businesses
On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “2010 Act”), which extended the so-called “Bush Tax Cuts” through 2012, thereby maintaining the current federal income tax rates, capital gain rates and dividend rates through 2012. In addition, the 2010 Act contained the following provisions which may be of interest to businesses in the agricultural community.
1. Transfer Tax Provisions. The 2010 Act provides much anticipated, albeit temporary, relief and opportunities in the areas of federal gift, estate and generation-skipping transfer taxes. The 2010 Act provides for a combined $5 million exemption from gift tax and estate tax, and provides a $5 million exemption that can be allocated to generation-skipping transfers. Additionally, the 2010 Act reduces the tax rate applicable to transfers in excess of the $5 million exemption to a flat rate of 35%. Keep in mind, however, that these increased exemptions and reduced tax rates only apply for 2011 and 2012.
In addition to raising the exemptions and reducing the tax rates, the 2010 Act also introduces a new concept referred to as “Portability.” Portability allows the personal representative of a deceased spouse’s estate to make an election on a timely filed federal estate tax return to transfer the deceased spouse’s unused estate tax exemption to the surviving spouse. The surviving spouse can then use the unused exemption of the deceased spouse to make additional gifts during life or at death that are exempt from gift or estate tax. Note, however, that the deceased spouse’s generation-skipping transfer tax exemption is not portable and that portability is only available for 2011 and 2012.
Without further action by Congress, the 2010 Act will sunset and the exemptions and rates in effect prior to the 2001 Bush Tax Cuts will again become effective on January 1, 2013. This means that the gift and estate tax exemptions will revert to only $1 million, the generation-skipping transfer tax exemption will decrease to $1 million, but will be indexed for inflation since 1997, and the maximum tax rates will increase to 55%.
Considering the temporary nature of the federal gift, estate and generation-skipping transfer tax relief provided by the 2010 Act, families and businesses in the agricultural community should seriously consider taking advantage of the increased exemptions and reduced rates applicable to transfers in 2011 and 2012. A properly structured estate and business plan that takes advantage of the 2010 Act can achieve the transfer of family agricultural businesses having a very significant value to subsequent generations with little, if any, estate, gift or generation-skipping transfer tax.
2. Bonus Depreciation. Under the 2010 Act, bonus depreciation was increased from 50% to 100% for qualifying property placed in service between September 9, 2010 and December 31, 2011. Qualifying property generally includes property eligible for depreciation with an applicable recovery period of 20 years of less, computer software covered by Section 197, and qualified leasehold improvement property. For qualifying property placed in service during 2012, the 50% depreciation rules will again apply.
3. Energy Incentive Credits. The 2010 Act extended a number of energy incentive credits for businesses, including credits for biodiesel and renewable diesel fuel, credits for refined coal facilities, new energy efficient home credit, excise tax credits/outlay payments for alternative fuel and fuel mixtures, and grants for certain energy property in lieu of tax credits.
4. Payroll Tax Holiday. In 2011, individuals would have been required to pay a social security tax of 6.2% on their wages up to $106,800. The employer is required to pay a matching amount. The Medicare rate is 1.45% for employers and employees on an unlimited amount of taxable earnings. Under the 2010 Act, the employee (not employer) portion of the Social Security tax is temporarily reduced from 6.2% to 4.2% for 2011 only. Individuals subject to the self-employment tax will also receive the 2% tax reduction (rate will be a combined 13.3% instead of 15.3%).
Please note that the tax changes in the 2010 Act are in addition to those enacted in the Small Business Jobs Act of 2010, which was signed into law on September 27, 2010 (the “2010 Small Business Act”). The 2010 Small Business Act contained the following provision, which was modified by the 2010 Act as discussed below.
5. Increase of Section 179 Expensing and Expansion to Certain Real Property. Under the 2010 Small Business Act, for taxable years beginning in 2010 and 2011, taxpayers may write off up to $500,000 of capital expenditures, subject to a phase-out once these expenditures exceed $2 million. Additionally, taxpayers may expense up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The 2010 Act raises the Section 179 expensing limit to $500,000, still subject to the $2 million phase-out. In 2012, the limits will be a $125,000 deduction with a $500,000 phase-out, and in 2013 the limits will revert back to $25,000 deduction with a phase-out at $200,000.
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