"Temporary ‘Fiscal Cliff’ Solution Yields Important Tax Changes"

by Skadden, Arps, Slate, Meagher & Flom LLP
Contact

On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 (the TRA of 2012), which permanently extends certain federal income tax rate reductions first enacted in 2001 that were scheduled to expire at the end of 2012, and extends and modifies certain other provisions relating to tax incentives for research and investments in renewable energy property. Because this legislation does not include an increase in the federal debt ceiling, and because the legislation postpones for two months the effects of the budget sequester provisions enacted in the Budget Control Act of 2010, it is likely that more significant tax legislation will be considered by the 113th Congress in the coming months.

Permanent Rate Changes for Individual Taxpayers

The TRA of 2012 permanently extends many of the tax rate reductions adopted during the administration of President George W. Bush, including:

  • permanently extending the 10 percent individual income tax bracket (which otherwise would have increased to 15 percent for 2013);
  • permanently extending the 25, 28 and 33 percent individual income tax brackets (which otherwise would have increased to 28, 31 and 36 percent for 2013);
  • permanently extending the reduced tax rates applicable to dividend and capital gain income for individuals with income of $400,000 or less (or $450,000 or less for married taxpayers filing jointly). For taxpayers with income greater than those thresholds, the tax rate on dividend and capital gain income increases to 20 percent. In both cases, however, the additional 3.8 percent surtax enacted in the Patient Protection and Affordable Care Act of 2010 will result in a further tax burden on dividend and capital gain income; and
  • permanently increasing the exemption amounts for the individual alternative minimum tax (AMT) to $50,600 for individual taxpayers and $78,750 for married taxpayers filing joint returns. In addition, those exemption amounts will be indexed for inflation, thereby avoiding uncertainty regarding application of the AMT on a going-forward basis.

Not all of the so-called “Bush tax cuts” were extended, however. For example:

  • the 35 percent individual income tax bracket was not extended. Accordingly, for individuals with income of more than $400,000 (or $450,000 for married taxpayers filing joint returns), the top income tax bracket reverts to 39.6 percent for 2013; and
  • the phaseouts of the personal exemptions (PEP) and the limitation on itemized deductions (Pease) are reinstated for individuals with income of more than $250,000 (or $300,000 for married taxpayers filing joint returns).

Three other noteworthy changes affecting individual taxpayers are:

  • the extension of estate, gift and generation-skipping transfer tax relief through a permanent extension of the $5 million per person unified exemption amount, which will be indexed annually for inflation. However, the top tax rate is now set at 40 percent (increased from 35 percent) for estates of decedents dying after 2012;
  • the legislation makes permanent the portability of the unified exemption amount, which allows the executor of a decedent’s estate to transfer any unused exemption amount to the decedent’s surviving spouse; and
  • taxpayers participating in Section 401(k) or similar deferred retirement income plans can convert any amounts in such plans to designated “Roth” accounts within such plans. Although such conversions will be fully taxable at the current (increased) rates, all future distributions of principal and earnings will be tax free when distributed.

Extension of Bonus Depreciation and Research Credit

The TRA of 2012 extends for one year the “bonus” depreciation rule allowing the expensing of 50 percent of the cost of qualified property acquired and placed in service by the taxpayer before January 1, 2014 (or January 1, 2015, in the case of certain property eligible for a one-year extension of the placed-in-service date).

The legislation also extends for two years the research and experimentation credit, which had expired at the end of 2011. The credit is 20 percent of the amount by which a taxpayer’s qualified research expenditures exceed its base amount for the year, or 14 percent lower than the simplified credit rules.

Key Energy Tax Incentives Extended

The TRA of 2012 extends certain noteworthy energy tax incentives that expired at the end of 2011 or were scheduled to expire at the end of 2012, including:

Extension of the Production Tax Credit (PTC) for Wind Facilities. Prior to the TRA of 2012, with respect to wind facilities, the PTC only applied if the facility was placed in service before January 1, 2013. As a result of the TRA of 2012, the PTC now applies if the taxpayer begins construction of the wind facility before January 1, 2014, which effectively extends the PTC for facilities placed in service beyond the end of this year. The legislation does not provide guidance as to when construction begins; presumably rules similar to those applied for the recent Section 1603 grant program will apply in this context.

  • Extension of the PTC for Certain Other Renewable Energy Facilities. The TRA of 2012 also extends the PTC for certain qualified facilities, the construction of which begins before January 1, 2014, that are closed-loop or open-loop biomass facilities, landfill gas facilities, trash facilities, qualified hydropower facilities, and marine and hydrokinetic renewable energy facilities.
  • Deferral of Gain on Qualifying Electric Transmission Transactions. Under prior law, gain realized before January 1, 2012, by certain electric utilities from the sale of certain property used for providing electric transmission services could be realized ratably over an eight-year period. The TRA of 2012 extends this rule to apply to sales occurring after December 31, 2011, and before January 1, 2014.

The TRA of 2012 also includes two important technical corrections to previously enacted energy tax provisions. Specifically:
 

  • Election of Energy Credit Over PTC Only Applies to New Property. The TRA of 2012 clarifies that elections under Section 48(a)(5) of the IRC to claim the Energy Credit in lieu of the PTC for certain property only applies if the property is constructed, reconstructed, erected or acquired by the taxpayer and the original use of such property commences with the taxpayer. 
  • New Property Clarification Also Applies to the Section 1603 Grant Program. The TRA of 2012 also modifies Section 1603 of Division B of the American Recovery and Reinvestment Act of 2009 to clarify that the Section 1603 grant program only applies to property originally placed in service by the grant applicant.

Observations

The TRA of 2012 provides important tax relief for many individual taxpayers. However, with the nation’s fiscal crisis left largely unaddressed, it is likely that the Obama administration will pursue further tax increases on more affluent taxpayers when negotiations get underway for the next phase of the “fiscal cliff.” Possible changes that may be part of that debate include a further limitation or cap on itemized deductions, adoption of the so-called “Buffett rule” for individuals earning more than $1 million, and changes to the tax treatment of “carried interests” in investment and real estate partnerships.

Even more significant changes may be in store for corporate taxpayers. With the exception of the extension of bonus depreciation and the energy tax provisions discussed above, the TRA of 2012 did little for corporate taxpayers. But with both the Obama administration and Congressional Republicans in support of significant corporate tax reform, and the President’s recent statements that future agreements will require additional revenue, it is reasonable to expect that the debate might include renewed examination of proposals to reduce the corporate income tax rate in exchange for elimination of numerous tax deductions and credits, and to replace the existing “subpart F” regime for foreign income with a territorial system. Although these and other proposals designed to encourage corporate taxpayers to increase their domestic income activities have been the subject of numerous hearings in the Congressional tax-writing committees over the past few years, until negotiations in the next phase of the “fiscal cliff,” it is uncertain which direction the President and Congressional leadership will take. Most observers agree that a long-term solution to the federal government’s fiscal crisis will require additional revenue and/or spending cuts.

Download PDF

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Skadden, Arps, Slate, Meagher & Flom LLP | Attorney Advertising

Written by:

Skadden, Arps, Slate, Meagher & Flom LLP
Contact
more
less

Skadden, Arps, Slate, Meagher & Flom LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.