Posts Tagged ‘Bush-era tax deal’

Bonus Depreciation and farm buildings

Monday, February 14th, 2011 by Joe Kristan

A victim satisfied attendee of the new tax law webinar we did a few weeks ago asks:

Could you go through the 2011 depreciation scenario for a steel ag building being used for machinery, hay or livestock storing including bonus depreciation, if any?

Certainly! Bonus depreciation applies to new property “which has a recovery period of 20 years or less” (Sec. 168(k)(A)(I)(i)). The tax law depreciates farm buildings over a 20-year life. See Rev. Proc. 87-56. That means new farm buildings qualify for the current 100% bonus depreciation — fully deductible when placed in service if “acquired” after September 8, 2010, if in service by the end of this year.
20110214-1.jpg
Flickr image courtesy SteelMaster Buildings under Creative Commons license
So Mr. Farmer decides he needs a new tractor shed. He signs the deal today and the shed is up and in service on August 1, 2011. He pays $200,000 for it. His taxable income is otherwise $125,000 for this year. After the bonus depreciation, he has a $75,000 or so net operating loss that he can carry back to get a refund of prior-year taxes (farmers qualify for a special five-year carryback provision).
What if the shed was under construction on September 8, 2010 and finished on September 30, 2010?
As long as the property was not built under a contract binding as of January 1, 2008, it should qualify for 100% bonus depreciation if placed in service after September 8, 2010 and before the end of 2011.
What if I bought land from my neighbor that had a shed on it?
Sorry, then it is not “new” property and no bonus depreciation is permitted.

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Picking and choosing bonus depreciation deductions

Friday, January 21st, 2011 by Joe Kristan

Sometimes taxpayers want to take bonus depreciation on some assets, but not others. You have to do it by “asset class,” as Paul Neiffer explains.

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Covering all of the Basis

Friday, January 14th, 2011 by Joe Kristan

Estate attorney Joel Schoenmeyer explains how the basis rules of the new estate tax law work:

One of the few benefits of the federal estate tax system (from the taxpayer’s POV) is that it is accompanied by a step-up in basis. In plain language, that the value of the decedent’s property as of the date of his or her death becomes its basis. Basis is no longer the cost the decedent paid for it. An example:

Mary Smith bought shares in ABC Company over 50 years, paying a total of $50,000 for the stock. At the time of her death in 2009, the shares were worth $1,000,000. At Mrs. Smith’s death, the basis for the stock became $1,000,000.

Basis is then used to compute capital gain when the property is sold. (If the ABC Company shares are sold after her death for $1,500,000, then there’s a taxable gain of $500,000 at sale. If the shares were sold by Mrs. Smith during life for $1,500,000, then the taxable gain would have been a whopping $1,450,000.)

It’s part of his series on the new estate tax rules at Death and Taxes.

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Out of death comes life

Wednesday, January 12th, 2011 by Joe Kristan

The estate tax changes enacted last month have stirred the Death and Taxes blog to life with “25 Things You Need To Know About The New Estate Tax Laws.” Here’s Thing 6:

6. The exemption amount for decedents dying in 2011 or 2012 is $5 million. So, to take an example:

John Smith is a widower with two kids, Sam and Dave. Sam and Dave are John’s only beneficiaries under his Will. John leaves an estate worth $5 million when he dies on January 18, 2011. No federal estate tax will be due at John’s death. If John’s estate was instead worth $7 million given the above facts, an estate tax would be due on $2 million (the amount by which John’s estate exceeded the exemption amount for 2011).

Read the whole, er, things.

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Depreciation questions from yesterday’s class on the new tax law, or, no, you can’t convert that big SUV to personal use after taking 100% bonus depreciation

Thursday, January 6th, 2011 by Joe Kristan

Roger McEowen and I yesterday presented a seminar-webcast through the Iowa Bar Association on the new tax law extending the Bush-era tax cuts. I had never presented a webcast before, and it was a bit strange. We had an in-room audience of 6 or 7, and over 300 over the wire. I think it went all right, and we got some great questions that are worth repeating.
If a taxpayer enters into a contract to build a new machine shed prior ot September 8th, but it is not completed or placed into service until after September 8th, does the 50% Bonus or the 100% Bonus apply? Does it make any difference if there is a down payment made when the contact was signed?
This is sort of a trick question. Assuming the property is qualifying property — that is, with a life up to 20 years, rather than 39-year real estate — if construction is under way by 9/8, or it was under contract, it only qualifies for 50% bonus. That could possibly be the case with an agricultural structure, but probably not otherwise. A down payment should make no difference. Correction: as noted in the comments, the Joint Committee on Taxation says that property placed in service after 9/8/2010 qualifies for 100% bonus depreciation as long as there was no binding contract in place at 1/1/2008.
Can 50% bonus depreciation be elected after 9/8/10 in lieu of 100% bonus?
The law as written doesn’t provide a choice of 50% depreciation for assets qualifying for 100% depreciation.
Perhaps the most interesting question:
Does 100% bonus depreciation get recaptured if a piece of property is converted to personal use after the first year?
This question arose after I had explained that there appears to be nothing that keeps you from taking 100% bonus depreciation on the cost of a “large” sport-utility vehicle, one big enough (>6,000 lbs) to not be subject to the limits on deductions for passenger automobiles. The unstated thought: buy a big SUV, use it for business one year, deduct the whole thing, and take it home on January 1 next year.
Interestingly, the general rule of the tax law is that there is no recapture of bonus depreciation. Old temporary regulation Sec. 1.168(k)-1T(f)(6)(iv) covers that issue. The regular depreciation rules normally work the same way (old Reg. Sec. 1.168(i)-4(c)).
BUT!
While the big sport-utes aren’t subject to the Sec. 280F depreciation limits for passenger cars, they are still “listed property” under Sec. 280F(d)(4):

(A) In general. Except as provided in subparagraph (B) , the term

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That’s not what I meant

Thursday, December 30th, 2010 by Joe Kristan

Villanova tax prof blogger Jim Maule ponders the Yale law profs who have set up a web site “Give it Back for Jobs” for “the rich” to give their savings from the recent Bush-era tax rate extension to charity:

Several commentators have suggested that those who wish to decline the tax cut they otherwise would receive should return it to the United States Treasury. Joe Kristan, over at Tax Update Blog, in You First, Buddy notes, “They are all worthy charities, but they do nothing for the entity most harmed by the tax cuts: the government.”

I sure didn’t mean to say that anyone should give extra cash to the government. While you should pay all of the taxes you owe, the idea of throwing a penny more than required into the federal fiscal cesspit is absurd — so absurd that the Yale profs didn’t even suggest it. The implied conclusion is that money that goes to the government won’t be as well-spent as money given to charity. And as much as the founders of “Give it back for Jobs” may regret it, their implied conclusion is correct.
UPDATE: David Henderson at Econlog:

So what are Jacob Hacker et al telling us? That they think those four charities will spend the money more wisely than the government would. I agree. I think it’s much better to give to the Salvation Army, for example, than to keep the troops in Iraq an extra day. That argues for more choice and lower taxes, not for higher taxes.

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It’s not too early to think about 2011 CPE

Wednesday, December 29th, 2010 by Joe Kristan

Did you just finish up that last self-study course to get your 40 CPE hours for 2010? Don’t let it go down to the wire next year! Sign up today for the webinar/seminar January 5 where Roger McEowen and I will go over the new tax law extending the Bush-era rates.
This seminar, co-sponsored by the Iowa Bar Association and the ISU Center for Agricultural Law and Taxation, is a bargain at $50 — and only $25 for those who attended a 2010 CALT Farm Tax School. That’s a mere trifle to get a Tax Update take on the big new law!

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One man’s cholocate is another man’s scorpion

Wednesday, December 22nd, 2010 by Joe Kristan

On Monday I made the unfortunate analogy of the new tax law to a Christmas stocking with lots of goodies and a few scorpions. Depending on who’s stocking it is, it could be either.
The Blog that Hates Me has a new post about a tasty treat for Goldman Sachs in the bill that stings the rest of it: the “Liberty Bond Program.” Originally designed to help rebuild downtown Manhattan after 9/11, it has become a semi-permanent subsidy to Manhattan developers:

The Liberty Bond program was supposed to be temporary when Congress created it in 2002. It authorized up to $8 billion in special tax-exempt bonds for a designated neighborhood south of Canal Street on the tip of Manhattan. Nearly all the financing has been used to build high-end commercial and residential projects. For instance, one-bedroom apartments in one bond-financed building

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More fun than a bowl game!

Wednesday, December 22nd, 2010 by Joe Kristan

Now there’s something to look forward to after your year-end college football marathon! Your Tax Update commenter will be webcasting on the newly-passed tax law with Roger McEowen of the Iowa State University Center for Agricultural Law and Taxation January 5. The Iowa Bar Association will co-sponsor the event with CALT, even though I’m not an actual lawyer. It will run from Noon CST to 1:30. Watch for details at the Tax Update or the CALT site.
CLARIFICATION: I say “watch for details” because the details aren’t yet available — not even to me, and I’m on the program. I’ll post when registration is open. Sorry for the confusion.
UPDATE: Registration now open.

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Digging to the bottom of the stocking

Monday, December 20th, 2010 by Joe Kristan

Mom knitted us all giant Christmas stockings — so big it seemed like we could always find another piece of chocolate down there somewhere.
The new tax law signed last week is sort of like that. We’ll be finding goodies for weeks, probably. Unfortunately, it’s like a stocking with a few scorpions in the bottom too.
For payroll providers, the first challenge will be dealing with the 2011 2 percentage-point reduction in employee (but not employer!) FICA. The IRS has issued guidance (IR-2010-124), including an option for employers who can’t get their systems updated in time for their first 2011 payrolls to withhold at the old rates and refund the overpayment during the first quarter.
Meanwhile, the tax blog world is digging down into the stockings:
Roger McEowen summarizes the thing, as does Robert D. Flach.
Peter Pappas covers the payroll tax relief provisions.
Roni Deutch compares the FICA tax break to the now-defunct “making work pay” credit.
Kay Bell explains the choices available to people who die this year — well, to their executors.
Linda Beale calls for death to the fascist insect who preys on the life of the working people.
Andrew Mitchel reminds us that the rule that allows controlled foreign corporations to not treat interests, dividends, rents and royaltes received from another CFC as foreign personal holding company income.
You can find our discussion here.

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Bush-rate extension passes; what it means

Friday, December 17th, 2010 by Joe Kristan

After a day of posturing, the extension of the Bush-era tax cuts ended up passing easily last night, 277-148. The vote was held up to enable people to say how upset they were that they had to pass it, and for a vote to replace the bill’s 35% estate tax and a $5 million exemption with a 45% tax and a $3.5 million exemption (which failed). The President is expected to sign the bill (UPDATE: Signed @3:17 pm Central. Thanks to Going Concern for the live link.).
So what does it do?
The Bush-era rates are extended through 2012. That means 35% top rates on ordinary income and 15% rates on dividends and capital gains.
The bill allows “bonus depreciation” of 100% of the costs of new business depreciable assets. Unlike “Section 179″ depreciation, “bonus depreciation” only applies to new property — not used machinery. The 100% bonus depreciation applies to new assets acquired after September 8, 2010 and placed in service starting September 9, 2010 through 2011 — so it applies to many assets already placed in service. 50% bonus depreciation will again apply in 2012; then bonus depreciation is scheduled to go away.
And to answer the inevitable question: the maximum deduction for a new car will be limited to $11,060, as the bill doesn’t change the maximum deduction for “luxury autos.” Any remaining cost will be recovered under the usual limits of Code Sec. 280F in subsequent years.
- The bill has a $125,000 (inflation-adjusted) Section 179 deduction for otherwise-depreciable assets placed in service in 2012. Current law would reduce Section 179 to $25,000 in 2012; the limit is $500,000 for 2010 and 2011. Unlike bonus depreciation, the Sec. 179 deduction is also available for used assets.
The bill reimposes the estate tax with a 35% rate and a $5 million lifetime exclusion, retroactive to January 1 2010. The bill re-enacts the rule that resets the basis of inherited assets at their date-of-death value. It lets estates of 2010 decedents elect to use the rules that had been in place in 2010, with no estate tax but a limited step up in the basis of inherited assets.
The $5 million lifetime exclusion also applies now to gift tax, at least for 2011 and 2012. For a number of years, the gift tax lifetime exclusion was lower. It remains $1 million for 2010 gifts.
The $5 million estate tax exemption is also “portable.” That means if a spouse dies after 2010 without using all of the $5 million exemption, the unused portion is added to the lifetime exemption of the surviving spouse. This would greatly simplify many estate plans, except all of these estate and gift tax rules are enacted only through 2012.
UPDATE: Estate planning attorney Wayne Reames e-mails:

As we think about it, portability is going to create more work, not less. First, portability only applies if the first-to-die files an estate tax return. Thus, we

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House to vote on Bush-era rate extension today (UPDATE: it passed)

Thursday, December 16th, 2010 by Joe Kristan

Update, 12/17/2010: It passed the house unchanged, 277-148.
The House of Representatives is to open session at 9:00 Central Time to work on the big “Framework” bill to extend the current tax rates through 2012. Tax Analysts reports ($link) that the House will first vote on a provision to change the bill’s estate tax provisions. The bill passed by the Senate reimposes the estate tax at a 35% rate with a $5 million lifetime exemption. The House will vote to replace this with the 2009 rules — a 45% rate with a $3.5 million exemption.
It’s a fascinating scenario. If the House votes for the amendment, it will force a conference with the Senate to try to reconcile the bills. The Democratic majority in the lame-duck session would prefer the higher rates, but they may not be willing to threaten the whole deal, knowing that they will have less bargaining power in January. We will update this post as the day proceeds.
Other coverage:
Politics Daily, Showdown Over Estate Tax Threatens Tax-Cut Compromise
The Blog that Hates My LInks, Resurrecting the Estate Tax as a Shadow of Its Former Self
Complete Tax Update Coverage
UPDATE, 2:15 CST: The bill has been pulled for now. From the Hill:

Rep. Jim McGovern (D-Mass.), a Rules Committee member and floor manager for the tax bill told reporters that Democrats are “just trying to work out some kinks.”
He characterized the decision to pull the procedural measure off the floor as

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Bush-era rate extension bill clears Senate, 81-19.

Wednesday, December 15th, 2010 by Joe Kristan

The Senate this afternoon passed HR 4853, the train-wreck year-end tax bill, 81-19.
The bill extends the Bush-era top income tax rates at all levels, including the 35% rate for ordianry income and the 15% top rate for capital gains and dividends. It revives the estate tax at a 35% top rate with a $5 million lifetime exclusion. It also “patches” the AMT for 2010 and 2011 and extends dozens of special-interest tax breaks through next year, including the research credit and biofuel subsidies.
Iowa’s Senators split on the final bill. Senator Grassley voted for the bill, as expected, but Senator Harkin, who had voted yes on a key procedural vote on the bill, voted against final passage.
The Hill reports that a House vote is expected tomorrow.
UPDATE: Kay Bell has more.
Link:
BIll Text
Senate Roll Call
Prior Tax Update coverage:
True confession
2010 100% bonus depreciation, Extenders, $5 million portable gift-estate tax exemption in ‘Framework’ text

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Senate takes up Bush-era rate extension today (update – it has more than 60 votes)

Monday, December 13th, 2010 by Joe Kristan

UPDATE, 4:10 Voting remains open, but latest count is 79-10 in favor of passage, per C-Span.com. That bodes well for house passage, I think.
The proposed extension of the Bush-era tax rates faces a procedural vote in the Senate at 2 p.m. today, with a final Senate vote expected later this week. The Wall Street Journal reports:

Three Senate aides said the tax package appeared likely to attract at least 65 to 70 supporters Monday in a procedural vote in the Senate to test whether there is support to block a potential filibuster. Sixty votes are needed for the bill to cross that hurdle. A vote on final passage is expected a day or two later.

Supporters of the bill, which also includes an “AMT Patch” and an extension of dozens of perenially-expiring tax breaks, are trying to run up the score in the Senate:

House aides said Democrats’ strategy in that chamber would be affected by the margin of the Senate vote.
“If you have 70 people in a bipartisan vote, I don’t see a situation where we really play that game of chicken and change [the bill],” said a senior aide to a House Democrat supporting the legislation.

We will update this post after the Senate vote.
Other blog coverage:
TaxGrrrl
Kay Bell
Tax Policy Blog
The Blog that Shuns Tax Update Links
Jim Maule
Linda Beale
Prior Tax Update Coverage:
True confession
2010 100% bonus depreciation, Extenders, $5 million portable gift-estate tax exemption in ‘Framework’ text

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True confession

Saturday, December 11th, 2010 by Joe Kristan

Chuck Grassley Press Release:

I fought tooth and nail to secure the inclusion of both the ethanol and biodiesel provisions in the new legislative proposal. There were efforts by some congressional majority Democrats and the White House to weaken the tax policy for these alternative fuels. In fact, the current congressional majority allowed the blenders

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2010 100% bonus depreciation, Extenders, $5 million portable gift-estate tax exemption in ‘Framework’ text

Friday, December 10th, 2010 by Joe Kristan

The Senate yesterday released legislative language for the ‘Framework’ to extend the 2010 tax rates for two years, answering some questions that have lingered since the deal was announced. As it turns out, the “Framework” is a great big grab bag solving just about all of the unanswered tax legislation problems that have been outstanding.
Some of the answers:
The bill makes clear that the “100% expensing” of business depreciable assets in the bill uses the existing “bonus depreciation” rules, so it only applies to new property — not used machinery. In a surprise, the 100% bonus depreciation applies to new assets acquired and placed in service starting September 9, 2010 through 2011. 50% bonus depreciation will again apply in 2012.
- The bill has a $125,000 (inflation-adjusted) Section 179 deduction for otherwise-depreciable assets returns in 2012. Current law would reduce Section 179 to $25,000 in 2012; the limit is $500,000 for 2010 and 2011. Unlike bonus depreciation, the Sec. 179 deduction is also available for used assets.
The bill has some surprising estate tax provisions:
- The estate tax proposal allows estates of 2010 decedents to choose whether to use the rules that were in place for 2010 — no estate tax, but only a limited step-up in asset basis — or the 35% tax with the $5 million exemption that applies in 2011 and 2012, with full fair market value basis for inherited assets.
- The $5 million lifetime exemption for the bill will apply not only to estates but also for gift tax purposes. The $5 million exemption becomes available for gifts starting next year. Pre-2010 law allowed a $3.5 million lifetime exemption for estates, but only $1 million for gifts.
- The estate tax exemption will be portable; if one spouse dies with less than $5 million in assets, the unused exemption will be available to the estate of the surviving spouse.
- Estate tax returns for which taxpayers elect to be subject to the estate tax in 2010 will be due 9 months after the bill is enacted.
The 2-percentage point reduction in the employee FICA tax for 2011 will also apply to self-employment tax.
An “AMT Patch” in the bill increases the AMT exemption amount through 2011. The 2010 exemption will e $47,450 for individuals and $72,450 for joint filers.
The bill solves the “expiring provisions” problem by extending them mostly through the end of 2011. Provisions extended include the ethanol subsidy (and the protective 54-cent tariff) and the biodiesel subsidies. A few of the other extended items:
- R&D Credit
- 15 year depreciation for qualified leasehold improvements, restaurant improvements and retail improvements.
- Increased deduction limits for conservation easements.
- Work opportunity tax credits
- The economically-indispensable seven-year depreciation period for motorsports entertainment complexes.
The full list of extenders is here.
This is a surprisingly sweeping bill. It’s not a done deal, as House Democrats are unhappy with it — especially the estate tax provisions. Given the choice of humiliating a president of their own party and swallowing the bill, though, they are likely to swallow.
The TaxProf has more.
Related: The tax compromise: what do we know?
UPDATE, 3/31/2011: IRS release solves ‘second year zero’ problem for auto depreciation

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WSJ reports that 2010 estates will be allowed to choose 2010 or 2011 rules

Thursday, December 9th, 2010 by Joe Kristan

The Wall Street Journal, citing “an aide close to the discussions,” says Congressional taxwriters working on the “framework” for the Obama-Congress tax compromise will not make the 35% estate tax in the plan retroactive to 2010. They will instead allow estates of those dying this year to choose between the 2011 system with the 35% top rate and the $5 million exemption and the 2010 rates.
This choice would be useful for estates between $1.3 million and $5 million. The 2010 system, with no estate tax, only allows estates to step up their basis by $1.3 million; the 2011 system, in contrast, requires taxpayers to adjust the basis of inherited assets to date of death value. If the assets are worth more than they cost to the decedent, this reduces the income tax gain on a later sale of the assets.
Very little news has trickled out on the details since the framework was announced. We will keep you posted, and we will keep updating our “framework” post from Tuesday.
Hat Tip: TaxProf Blog

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More on the tax deal

Wednesday, December 8th, 2010 by Joe Kristan

There’s been a lot more commentary emerging on the deal to extend Bush-era tax rates than details on the deal itself. This from the Tax Policy Blog was eye-opening:

One of the key components of the agreement between the President and members of Congress announced yesterday is a 13 month extension of federal extended unemployment insurance programs. This extension does not affect the duration of benefits, which remain capped at 99 weeks.

Other commentary:
Roger McEowen
Scott Hodge
Kay Bell
Howard Gleckman (from TaxVox, which hates my links)
Paul Neiffer
The TaxProf has an updated roundup.
Related: Tax Update details on the tax package

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The tax compromise: what do we know?

Tuesday, December 7th, 2010 by Joe Kristan

Update, 12/17: The bill has passed and is on its way to the President. Details here.
Update, 12/10: The Senate has released legislative language that clears up the questions below. Details here.
The White House has struck a deal with Congressional taxwriters to avoid the tax law train wreck scheduled for January 1. So far we have no firm language on the deal, or even a detailed official listing of the contents. Here’s what I think we know so far:
The Bush-era rates will be extended through 2012. That means 35% top rates on ordinary income and 15% rates on dividends and capital gain
There is a two-year deal on the estate tax with a $5 million lifetime exemption and a 35% top rate. This is excellent news, considering that the estate tax is slated to return January 1 with a 55% rate and a $1 million exemption. It’s not clear whether the two-years are 2010 and 2011 or 2011 and 2012, but I’m guessing 2011-2012 . There is no word on whether estates of 2010 decedents will be allowed to “opt in” to 2011 or 2009 law to avoid the messy basis rules that would otherwise apply to 2010 estates. (*Update: CCH has posted an article saying the 35% estate tax is retroactive to 1/1/2010. I’m skeptical; Tax Analysts says that’s unclear.)
UPDATE, 12/9: Wall Street Journal reports that estate tax isn’t retroactive to 2010, but that 2010 estates will have option to choose 2011 rules.
The package includes unlimited expensing of otherwise depreciable assets in 2011 only. Based on a prior White House explanation, this appears to be a twist on the current bonus depreciation, rather than an unlimited Section 179 allowance. While Section 179 allows full write-off of the cost of all assets newly placed-in-service, this proposal will only apply to “new” assets. Purchases of “used” property won’t qualify. We also don’t know whether the the allowance will apply to qualified leasehold improvements like the prior bonus depreciation.
(UPDATE: WSJ says there will 50% bonus depreciation for 2012.)
The extenders get extended. Tax Analysts reports ($link):

“Traditional” tax extenders — including the research credit — would be extended for two years retroactively to 2010 and through the end of 2011 under the compromise…

It is also likely to include continued ethanol subsidies, but that isn’t confirmed (UPDATE, 10:24 am: Grassley tells The Des Moines Register that ethanol and biodiesel pork tax credits are restored through 2011; biodiesel subsidy is restored retroactively. That means lots of lobbyist love just in time for 2012 fundraising).
UPDATE, 2:54 pm: Wall Street Journal ($link?) reports:

The framework doesn’t address several popular “extenders” that will expire this year, but White House officials said they were included in the agreement. Among them: transfers of IRA assets to charities by those over age 70

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