Most of the discussion on the American Taxpayer Relief Act of 2012 has been related to the effects on individual tax rates and deductions. However, the act also extended certain tax-related credits and tax methods that affect U.S. construction and real estate companies. Further, issues that threaten to negatively affect U.S. construction and real estate were not addressed in the new law.
The act makes permanent the Bush-era individual income tax rates for individuals with taxable income less than $400,000 ($450,000 for married filing jointly). Further, itemized deductions and personal/dependency exemptions phase out for individuals with adjusted gross income above $250,000 ($300,000 for married joint filers). Corporate tax rates did not change.
Impact on Construction and Real Estate: Large, publicly traded corporations will be paying lower tax rates than some small and midsize privately owned companies (LLCs and S corporations), putting the smaller companies at a competitive disadvantage.
The act extends the enhanced Code Section 179 expensing election, 50 percent “bonus” depreciation and a 15-year recovery period for qualified leasehold improvements, qualified retail improvements and qualified restaurant property through 2013. The act provides that, for those assets placed in service after December 31, 2012, and before January 1, 2014, for purposes of determining percentage of completion under Code Section 460, cost allocated to the contract will be computed as if bonus depreciation had not been elected on those assets.
Impact on Construction and Real Estate: This extension provides taxpayers with an incentive to invest in new property and equipment, which is good for U.S. construction and real estate in 2013. It is noteworthy that the economic stimulus hoped for in 2012 through accelerated tax depreciation was diluted. This was because the fear of rising tax rates provided a disincentive to invest in equipment and accelerate depreciation deductions into 2012 if tax rates were expected to rise in subsequent years.
Research & Experimentation Credit
The act extends the Research and Experimentation Tax Credit through 2013.
Impact on Construction and Real Estate: The extension of this credit was expected, as it has bipartisan support in Congress despite its 10-year, $14.3 billion price tag. In effect, the credit is a government incentive for taxpayers to invest in new technology, processes and products. With tax rates rising on LLCs and S corps, the credit becomes even more valuable. However, the IRS sees the credit as an area ripe with abuse and vehemently pursues adjustments to taxpayer credits.
Alternative Fuel Credit
The alternative fuel credit has been extended through 2013. This credit is commonly applicable to companies using propane or liquefied petroleum gas to fuel vehicles not required to be registered for highway use, e.g., forklifts. The credit is generally 50 cents per gallon of gas used.
Impact on Construction and Real Estate: The extension of the propane fuel credit is a nice tax benefit available to all companies using propane-powered forklifts or other off-highway vehicles.
Work Opportunity Tax Credit (WOTC) & Empowerment Zone (EZ) Credit
The act extends the WOTC through 2013. The WOTC is a tax credit that rewards employers who hire certain groups of hard-to-employ workers. The act also extends the EZ credit through 2013. The EZ credit provides tax incentives for companies hiring workers residing in distressed urban and rural communities.
Impact on Construction and Real Estate: The extension of the WOTC and EZ credits preserves an often significant tax benefit for companies who hire qualified individuals. As with other tax credits, the credit becomes more valuable as tax rates rise.
New Markets Tax Credit
The act extended the New Markets Tax Credit for 2012 and 2013. The New Markets Tax Credit program provides incentives to investors who provide capital to certified low-income and rural communities.
Impact on Construction and Real Estate: The extension of this program was important to businesses and communities that rely on it to survive. Many of the beneficiary companies include those engaged in U.S. construction and real estate.
Reduced Recognition Period for Built-In Gains (BIG) Tax
The act generally reduces the recognition period for S corps facing BIG tax to a five-year period for tax years beginning in 2012 and 2013.
Impact on Construction and Real Estate: The reduction in the recognition period provides an opportunity for companies facing potential BIG tax liabilities to dispose of the underlying equipment in tax years that currently fall outside of the recognition period. This is important because the reduced recognition period is not permanent; assets that could be sold now BIG tax-free could be subject to BIG taxes in a future tax year.
For more information on the effects of tax law changes on your organization, contact your BKD advisor.