Numerous provisions expire at year end

Taxpayers and practitioners breathed a sigh of relief in January when Congress passed the American Taxpayer Relief Act of 2012 (ATRA), P.L. 112-240, at the last minute, bringing some certainty to a host of provisions that had been uncertain.

Many expired and expiring provisions were extended by ATRA, including the lower marginal tax rates for individuals that had been introduced in 2001 by the Economic Growth and Tax Relief Reconciliation Act, P.L. 107-16, and the higher $5 million estate and gift tax exclusion amount. The alternative minimum tax (AMT) was permanently “patched” by indexing the exemption amount for inflation.

But while many major items were extended permanently, a large number were extended only temporarily—some for only one year. Practitioners should be aware that dozens of credits and other tax incentives are expiring Dec. 31, and should prepare their clients accordingly.

The list of expiring provisions, while shorter than in years past, is still extensive and includes credits and deductions for both individuals and businesses.

Practitioners should also monitor whether any of these provisions are extended—either at the last minute or retroactively. As of this writing, Congress has done nothing to address the expiring provisions, but in recent years it has often addressed expiring provisions in December (or January).

Individuals

The good news for individual taxpayers is that not a large number of expiring provisions affect them because ATRA fixed many ongoing problems with individual tax provisions. However, the provisions that are expiring affect a broad spectrum of taxpayers.

Expiring credits

The nonbusiness energy property credit: A credit of 10% of qualified improvements and expenditures, subject to a lifetime maximum (Sec. 25C).

The credit for health insurance costs of eligible individuals: A credit equal to 72.5% of the amount paid by the taxpayer for qualified health insurance coverage of the taxpayer and qualifying family members for eligible coverage months (Sec. 35).

Expiring deductions

The deduction for certain elementary and secondary school teacher expenses: Allows teachers to deduct up to $250 they spend to buy books, supplies, computer equipment, and other materials for use in their classrooms (Sec. 62(a)(2)(D)).

Premiums for mortgage insurance deductible as qualified residence interest: Permits taxpayers whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer’s principal residence (Sec. 163(h)(3)).

Deduction for state and local general sales taxes: Allows individuals to deduct state and local general sales taxes paid instead of state and local income taxes (Sec. 164(b)(5)).

The special rules for contributions of capital gain real property made for conservation purposes: Permits qualified conservation contributions to be deducted up to 50% of a taxpayer’s contribution base (100% for qualified farmers and ranchers) (Sec. 170(b)).

The deduction for qualified tuition and related expenses: Provides an above-the-line deduction for qualified expenses, up to a limit of $4,000, for taxpayers with adjusted gross income (AGI) of no more than $65,000 (single) or $130,000 (married filing jointly). Deduction is limited to $2,000 for taxpayers with AGI above those amounts and up to $80,000 (single) or $160,000 (married filing jointly) (Sec. 222).

Expiring exclusions and other provisions

The exclusion for discharge-of-indebtedness income on principal residence: Excludes from gross income discharge-of-indebtedness income from the discharge of qualified principal residence indebtedness (Sec. 108(a)(1)(E)).

Parity between the exclusion from income for employer-provided mass transit and parking benefits: Equalizes the limit for the monthly tax exclusion for employer-provided transit pass and vanpool with the limit for employer-provided parking benefits. For 2013, this amount is $245 (Sec. 132(f)).

Tax-free distributions from IRAs for charitable purposes: Allows taxpayers to distribute up to $100,000 in qualified charitable distributions from an individual retirement plan without including the distribution in income (Sec. 408(d)(8)).

General business provisions

Many of the expiring provisions are applicable to businesses in general, including small businesses.

Expiring credits

The research and development credit: A credit of 20% of research expenses over a base amount. This credit has expired and been renewed many times in the past (Sec. 41).

The new markets tax credit: A credit for investments in businesses or real estate in low-income communities. (Sec. 45D(f)(1)).

The activated military reservists employer wage credit: A credit for small business employers for up to 20% of the eligible differential wage payments paid while an eligible employee is serving on active duty in the uniformed services (Sec. 45P).

The work opportunity tax credit: A credit equal to 40% of the qualified first-year wages of employees who are members of a targeted group (Sec. 51).

The election to accelerate certain credits in lieu of bonus first-year depreciation: Allows corporations to elect not to claim bonus depreciation but instead increase their AMT credit limit under Sec. 53(c) (Sec. 168(k)(4)).

Expiring deductions and depreciation

Bonus 50% first-year depreciation: Provides a depreciation deduction equal to 50% of the adjusted basis of qualifying property in the first year the property is placed in service (Sec. 168(k)).

The $500,000 expensing limit and $2,000,000 phaseout threshold and expanded definition of Sec. 179 property: Expensing limit will be reduced to $25,000; phaseout threshold will drop to $200,000; and qualified real property will no longer be eligible for the Sec. 170 deduction (Sec. 179).

Fifteen-year straight-line cost recovery for certain improvements: Allows taxpayers to use 15-year straight-line recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (Secs. 168(e)(3)(E) and 168(e)(7)(A)).

Expiring exclusions and other provisions

The 100% exclusion for gains from qualified small business stock: Exclusion amount reverts to 50% (Sec. 1202(a)(4)).

The basis adjustments for S corporation charitable contributions of property: Decreases each S corporation shareholder’s stock basis for charitable contributions of property by the shareholder’s pro rata adjusted basis in the property (Sec. 1367(a)(2)).

The reduced S corporation recognition period for built-in gains tax: The reduced five-year recognition period reverts to 10 years (Sec. 1374(d)(7)).

Specialized business provisions

Certain expiring provisions apply to businesses in certain industries or that engage in certain activities.

Expiring credits

Determination of low-income housing credit rate for credit allocations with respect to nonfederally subsidized buildings: This provision allows a 9% minimum low-income housing credit rate for nonfederally subsidized new buildings (Sec. 42(b)(2)).

The Indian employment tax credit: A credit for employers of enrolled members of Indian tribes (or their spouses) who work on and live on or near an Indian reservation (Sec. 45A).

The railroad track maintenance credit: A credit equal to 50% of the qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer (Sec. 45G(f)).

The mine rescue team training credit: A credit for a portion of training costs for qualified mine rescue team employees (Sec. 45N).

Treatment of military basic housing allowances under the low-income housing credit: Treats buildings located in counties with qualified military installations as qualified buildings for purposes of the low-income housing credit (Sec. 142(d)).

The American Samoa economic development credit (P.L. 109-432 as amended by P.L. 111-312).

Expiring deductions and depreciation

Three-year depreciation for racehorses 2 years old or younger (Sec. 168(e)(3)(A)).

The seven-year recovery period for motorsports entertainment complexes (Secs. 168(i)(15) and 168(e)(3)(C)(ii)).

Accelerated depreciation for business property on an Indian reservation: Provides owners of qualifying property used predominantly in the active conduct of a trade or business within an Indian reservation with accelerated recovery periods (Sec. 168(j)).

The increased charitable deduction for contributions of food inventory: Allows businesses to make contributions of “apparently wholesome food” to charities that will use it for the care of the ill, the needy, or infants and to take an above-basis deduction (Sec. 170(e)(3)(C)).

The election to expense advanced mine safety equipment: Permits taxpayers to elect to treat 50% of the cost of any qualified advanced mine safety equipment as an expense that is not chargeable to capital account but instead as a deduction in the year the property is placed in service (Sec. 179E).

Special film and television production expensing rules: Allows taxpayers to treat costs of any qualified film or television production as an expense that is not chargeable to capital account but instead as a deduction (Sec. 181).

The deduction for domestic production activities in Puerto Rico: Treats Puerto Rico as part of the United States for purposes of the domestic production activities deduction (Sec. 199(d)(8)).

Expiring exclusions and other provisions

Qualified zone academy bonds: Allows qualified schools to issue bonds for renovations (but not new construction), equipment purchases, teacher training, or developing course materials when they partner with private businesses (Sec. 54E).

The modification of tax treatment of certain payments to controlling exempt organizations: Provides that certain specified payments paid to a controlling tax-exempt organization by a controlled entity are not included in unrelated business taxable income (Sec. 512(b)(13)(E)).

The special treatment of dividends from regulated investment companies: Exempts interest-related dividends and short-term capital gain dividends from a regulated investment company from tax (Secs. 871(k)(1) and (k)(2)).

Regulated investment company treatment under Foreign Investment in Real Property Tax Act (FIRPTA): Provides that qualified investment entity includes any regulated investment company that is a U.S. real property holding corporation (Sec. 897(h)(4)).

Subpart F active financing income exceptions: Exempts certain insurance income and net gains from sale of property that produces qualified banking or financing income from income that is treated as subpart F income (Secs. 953(e)(10) and 954(h)(9)).

The foreign personal holding company lookthrough rules for payments between related controlled foreign corporations: Treats dividends, interest, rents, and royalties received or accrued from a controlled foreign corporation that is a related person as not foreign personal holding company income to the extent they are attributable or properly allocable to income of the related person that is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States  (Sec. 954(c)(6)).

Various empowerment zone tax incentives: Includes the designation of empowerment zones, tax-exempt enterprise zone facility bonds, the empowerment zone employment credit, increased expensing under Sec. 179 for enterprise zone businesses, nonrecognition of gain on rollover of empowerment zone investments, and increased exclusion of gain for small business stock of empowerment zone businesses (Secs. 1202, 1391, 1394, 1396, 1397A, and 1397B).

The temporary increase in limit on cover over of rum excise tax revenues: Increases the limit on cover over of rum excise taxes from $10.50 to $13.25 per proof gallon to Puerto Rico and the Virgin Islands (Sec. 7652(f)).

Energy-related provisions

Various energy-related tax provisions are expiring. Many promote energy efficiency or alternative fuels.

Expiring credits

The alternative fuel (non-hydrogen) vehicle refueling property credit: A credit of 30% of the cost of any qualified alternative fuel vehicle refueling property placed in service by the taxpayer during the tax year (Sec. 30C).

The credit for two- or three-wheeled plug-in electric vehicles: A credit of up to $7,500, based on battery capacity, for each new qualified plug-in electric drive motor vehicle placed in service by the taxpayer during the tax year (Sec. 30D).

The second-generation biofuel producer credit (cellulosic biofuel producer credit): A credit for each gallon of qualified second generation biofuel production (Sec. 40(b)(6)).

The biodiesel and renewable diesel fuel credits: Includes the biodiesel mixture credit, the biodiesel credit, and the small agri-biodiesel producer credit (Sec. 40A).

The biodiesel and renewable diesel fuel excise tax credits and outlay payments: A credit based on the number of gallons of biodiesel used by the taxpayer in producing any biodiesel mixture for sale or use in the taxpayer’s trade or business. As an alternative, a taxpayer may receive a payment in the amount of the credit (Secs. 6426(c) and 6427(e)(6)(B)).

Beginning-of-construction date for renewable power facilities eligible to claim the electricity production credit or investment credit in lieu of the production credit: A credit is allowed for the production of electricity by a renewable power facility, or in the alternative, an energy credit for the cost of the construction of the facility, if construction of the facility began before 2014. These credits apply to wind, closed-loop biomass, open-loop biomass, geothermal or solar, small irrigation power, trash, refined coal production, qualified hydropower, Indian coal production, and marine and hydrokinetic renewable energy facilities (Secs. 45(d) and 48(a)(5)).

The Indian coal production credit: Provides an increased credit for each ton of Indian coal produced by the taxpayer (Sec. 45(e)(10)(A)(i)).

New energy-efficient homes credit: A credit for each qualified new energy-efficient home constructed by an eligible contractor and acquired by a person from the eligible contractor for use as a residence during the tax year (Sec. 45L(g)).

Energy-efficient appliances credit: A credit for qualified energy-efficient appliances produced by the taxpayer (Sec. 45M).

The excise tax credits for alternative fuel mixtures: A credit of 50 cents per gallon of alternative fuel used in producing an alternative fuel mixture for sale or use in a trade or business (Sec. 6426(e)).

Expiring deductions and depreciation

The special depreciation allowance for second-generation biofuel plant property: Provides a depreciation allowance equal to 50% of the adjusted basis of qualified second-generation biofuel plant property (Sec. 168(l)).

The placed-in-service date for partial expensing of certain refinery property: Allows taxpayers to treat 50% of the cost of any qualified refinery property as an expense that is not chargeable to capital account but instead as a deduction in the year the property is placed in service (Sec. 179C).

The energy-efficient commercial buildings deduction: Permits businesses to deduct the cost of energy-efficient commercial building property placed in service during the year, up to a limit of $1.80 per square foot and limited by prior Sec. 179D deductions on the building (Sec. 179D).

Expiring exclusions and other provisions

The special rule for sales or dispositions to implement Federal Energy Regulatory Commission (FERC) or state electric restructuring policy: Allows taxpayers to elect to defer the recognition of qualified gain from a qualifying electric transmission transaction (Sec. 451(i)).

—Alistair Nevius (anevius@aicpa.org) is JofA editor-in-chief, tax.