Many Tax Provisions Set to Expire at Year-End

December 22, 2011

Congress has reportedly broken its impasse and agreed to extend the payroll tax cut for two months, so the reduced Social Security tax rate will not expire as scheduled at midnight on Dec. 31. While Congress’ negotiations over extending the reduced payroll tax rate have garnered a lot of media attention, many other tax items are scheduled to expire at the end of the year, and it appears that any future extension of these expiring provisions will have to be retroactive.

The expiring items include a wide variety of credits, deductions and other tax incentives. Many of the items set to expire on Dec. 31 were temporarily extended, through 2011, by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312.

Individuals

While most of the expiring incentives affect businesses, many individuals’ taxes will be affected by the expirations. And the temporary extension of the 4.2% rate for the employee’s portion of the tax—if passed by Congress and signed by the president—will expire Feb. 29. Without further legislative action, the rate will then revert to the usual 6.2%.

Personal credits allowed against regular tax and AMT (Sec. 26(a)). Starting in 2012, nonrefundable credits generally cannot be used to offset alternative minimum tax (AMT). A small list of exceptions applies, including the adoption credit (Sec. 23); the child tax credit (Sec. 24); the American opportunity tax credit (Sec. 25A(i)); the retirement savings credit (Sec. 25B); the residential energy-efficient property credit (Sec. 25D); the nondepreciable property portion of the alternative motor vehicle credit (Sec. 30B); and the nondepreciable property portion of the new qualified plug-in electric drive motor vehicle credit (Sec. 30D).

Increased AMT exemption (Sec. 55(d)). The “AMT patch” amounts expire, and the AMT exemption reverts to its statutory amount: $45,000 for married individuals filing jointly, less 25% of alternative minimum taxable income exceeding $150,000; and $33,750 for unmarried individuals, less 25% of alternative minimum taxable income exceeding $112,500.

Transit pass parity with parking benefits (Sec. 132(f)). The maximum amount an employee will be able to exclude from income for employer-provided transit passes and transportation in a commuter highway vehicle for 2012 will be $125 per month, down from $230 per month in 2011.

Other expiring items affecting individuals include:

  • Deductibility of state and local sales tax instead of state income taxes on Schedule A (Sec. 164(b));
  • The expanded adoption credit (Sec. 36C) and adoption assistance program (Sec. 137) amounts;
  • The deduction of up to $250 for certain elementary and secondary school teacher expenses (Sec. 62(a)(2)(D));
  • The District of Columbia first-time homebuyer credit (Sec. 1400C);
  • Deductibility of mortgage insurance premiums as interest (Sec. 163(h));
  • The above-the-line deduction of up to $4,000 for qualified tuition and related expenses (Sec. 222);
  • The tax-free treatment of charitable distributions from IRAs (Sec. 408(d)(8)); and
  • The nonbusiness energy property credit (Sec. 25C).


The temporary 100% exclusion of gain from the sale of certain small business stock under Sec. 1202(a) also expires after Dec. 31.

Businesses

Many business tax incentives are also scheduled to expire at the end of the year. Perhaps the most significant of these are the expiration of the allowance for 100% first-year bonus depreciation (Sec. 168(k)) and the expiration of the increased deduction amounts under Sec. 179. The Sec. 179 expensing limitation is reduced to $125,000 for 2012, and the phaseout threshold amount is lowered to $500,000.

The Sec. 41 research and development credit also expires at the end of the year, as does the work opportunity tax credit (Sec. 51(c)) (but portions were extended for certain veterans by the Three Percent Withholding Repeal and Job Creation Act, P.L. 112-56).

Various other tax credits aimed at businesses also expire:

  • The credit for plug-in electric vehicles (Sec. 30);
  • The plug-in electric vehicle conversion credit (Sec. 30B(i));
  • The alternative fuel (nonhydrogen) vehicle refueling property credit (Sec. 30C);
  • The alcohol fuels income tax credit (Secs. 40(e) and (h));
  • The alcohol fuel mixture excise tax credit (Sec. 6426(b));
  • The biodiesel and renewable diesel fuel credits (Sec. 40A);
  • The biodiesel excise tax credit (Sec. 6426(c));
  • The alternative fuel and alternative fuel mixture excise tax credits (Secs. 6426(d) and (e));
  • The refined coal production facility credit (placed-in-service date) (Sec. 45(d));
  • The Indian employment tax credit (Sec. 45A);
  • The new markets tax credit (Sec. 45D);
  • The railroad track maintenance credit (Sec. 45G);
  • The new energy-efficient homes credit (Sec. 45L);
  • The energy-efficient appliances credit (Sec. 45M);
  • The mine rescue team training credit (Sec. 45N);
  • The military reservist employer wage credit (Sec. 45P); and
  • The American Samoa economic development credit (P.L. 109-432).


Expiring deductions and special depreciation rules (in addition to the expiration of 100% bonus depreciation) include:

  • 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (Sec. 168(e)(3)(E));
  • Seven-year recovery period for motorsports entertainment complexes (Sec. 168(i)(15));
  • Accelerated depreciation for certain Indian reservation property (Sec. 168(j));
  • Special rules for charitable contributions of real property for conservation purposes (Sec. 170(b));
  • Charitable deduction for food inventory contributions (Sec. 170(e)(3)(C));
  • Increased charitable deduction for contributions of book inventory to public schools (Sec. 170(e)(3)(D));
  • Increased charitable deduction for corporate contributions of computer equipment to schools (Sec. 170(e)(6));
  • The election to expense advanced mine safety equipment (Sec. 179E);
  • Special film and television production expensing rules (Sec. 181);
  • Brownfields environmental remediation expensing (Sec. 198);
  • The deduction for domestic production activities in Puerto Rico (Sec. 199(d)(8)); and
  • Suspension of 100%-of-net-income limitation on percentage depletion for oil and gas from marginal wells (Sec. 613A(c)).


Finally, a number of other special business incentives and other tax items expire, including:

  • Grants in lieu of tax credits for specified energy property (Sec. 48(d));
  • Qualified zone academy bonds (allocation of limitation) (Sec. 54E);
  • Low-income housing credit special treatment of military housing allowances (Sec. 142(d));
  • Modified tax treatment of certain payments to controlling tax-exempt organizations (Sec. 512(b));
  • Special treatment of dividends from regulated investment companies (Secs. 871 and 881);
  • Regulated investment company treatment under FIRPTA (Sec. 897(h));
  • Subpart F active financing income exceptions (Secs. 953(e) and 954(h));
  • Foreign personal holding company lookthrough rules for payments between related controlled foreign corporations (Sec. 954(c));
  • Basis adjustments for S corporation charitable contributions of property (Sec. 1367(a));
  • Reduced S corporation recognition period for built-in gains tax (Sec. 1374(d));
  • Various Empowerment Zone tax incentives (Secs. 1202, 1391, 1394, 1396, 1397A and 1397B);
  • District of Columbia investment incentives (Secs. 1400, 1400A and 1400B);
  • Definition of gross estate for regulated investment company stock owned by nonresident noncitizens (Sec. 2105(d)); and
  • Disclosure of prisoner return information to certain prison officials (Sec. 6103(k)).

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