The 2010 Tax Act: Cuts and Other Benefits Abound

President Obama signed into law, on December 17, 2010, the much-anticipated tax bill — the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”), to extend numerous tax provisions set to expire at the end of 2010. A compromise between the parties, the Act extends the Bush-era tax cuts. The Act also provides additional tax benefits, some to stir-up business investment.

Changes to the federal gift, estate, and generation-skipping transfer taxes are analyzed in our client alert, dated December 22, 2010, titled “‘Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010’ Increases Transfer Tax Exemptions and Lowers Rates”.

Discussed briefly below are the major provisions of the Act, excluding the federal gift, estate, and generation-skipping transfer tax provisions.

Individual Tax Provisions

Income Tax Rates are Extended into 2011 and 2012: The current income tax rates will remain in effect, for all individuals, through December 31, 2012.

The rates are set to go up on January 1, 2013, unless further action is taken.

Long-term Capital Gain and Dividend Tax Rates Extended: The current maximum long-term capital gain rate and the maximum dividend tax rate will remain in effect at 15% through December 31, 2012. On January 1, 2013, the long-term capital gain rate will go back up to 20% and dividends will be taxed at the ordinary income tax rate.

Alternative Minimum Tax: The Act increases the alternative minimum tax (AMT) exemption for individuals for the 2010 and 2011 tax years.

Payroll Tax Cut: For the year 2011, the Act reduced the social security tax rate on wages and self-employment income to from 6.2% (for earned income up to $106,800) to 4.2% for employees and from 12.4% to 10.4% for self-employed individuals.

Other individual tax provisions under the Act include:

• Extension of the $250 deduction for school teachers who provide books or other specified supplies used in the classroom through 2011;
• Extension of the election to deduct state and local sales taxes in lieu of state and local income taxes through 2011;
• Extension of the deadline for persons to make charitable tax-free donations from their individual retirement plans through 2011; and
• Extension of the above-the-line deduction for qualified tuition and related expenses through 2011.

Business Tax Provisions

Bonus Depreciation Extended: Businesses making qualified investments between September 9, 2010 and December 31, 2011 are eligible for 100% bonus depreciation. Businesses making qualified investments between January 1, 2012 and December 31, 2012 are eligible for 50% bonus depreciation. Taxpayers may also make an election to accelerate the alternative minimum tax credit in lieu of the bonus depreciation. Also, select property placed into service by December 31, 2012 may be eligible for temporary 100% expensing.

Expensing of Small Business Assets Extended: The dollar limitation under Section 179, the election to expense business assets, is increased for the year 2012 from $25,000 to $125,000. Similarly, the investment limitation is increased from $200,000 to $500,000 for the year 2012.

100% Exclusion of Gain on Qualified Small Business Stock Extended: The Act extends the exclusion of gain on the sale or disposition of qualified small business stock that is acquired through the year 2011 and held for more than five years.

R&D Credit: The Act extends the Section 41 research credit for 2011 and makes it retroactive for 2010.

Time Period for Renewable Energy Grants Extended: The Act extends the period for the expiring Renewable Energy Grants, under the Section 1603 grant program, through 2011. The grants are for eligible property placed in service in the years 2009-2011 and for property placed in service after 2011 but before the relevant credit termination date so long as the construction begins in the years 2009, 2010, or 2011.

Other business tax provisions under the Act include:

• Extension of the tax credit for use of biodiesel and renewable diesel as fuel through 2011;
• Allowance for facilities producing refined coal placed in service between October 22, 2004 through December 31,  2011 to be eligible for the Section 45 renewable energy tax credit; and
• A two-year extension (through end of 2011) of the New Markets Tax Credit, Section 45D.

For more information, please contact:

Bruce Booken 305/ 933-5626 :: 412/562-8839
John Warner 202/452-7948
David Kempler 202/452-7946