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Business Tax Provisions of ATRA 2012
An extension of targeted incentives, but needed
corporate tax reform must wait…
When have budgetary
and tax machinations
in Washington
generated so fertile a
phrase, one so conducive to corny
metaphor and other colorful figures
of speech? I pledge in writing this
article to avoid the use of the phrase
“fiscal cliff.” Oops, I just did. Well,
never again…
The purpose of this article is to discuss
those provisions of the American
Taxpayer Relief Act of 2012 1 (the
Act) of particular interest to business.
The Act extends a variety of
tax incentives for business, including
15-year depreciation and bonus
depreciation on certain property
and Section 179 expensing (essentially
100 percent depreciation on
certain assets up to $500,000, subject
to certain limitations). In addition,
two very interesting corporate incentives
were made retroactively
applicable to 2012 and extended
through the end of 2013. These are
described and discussed in the first
two sections below. The final section
explores proposals for the corporate
tax reform which are being
seriously discussed in Washington,
but which were not addressed in
the Act.
Qualified Small Business
Stock
In the June 2011 edition of CC
Lawyer, this author reported on an
economic stimulus provision relating
to small business stock. See
“Gains from Investments in Small
Business Stock Acquired During
2011 May Be Tax Free” [CC Lawyer
June 2011]. Section 1202 of the
tax code generally provides a 50
percent exclusion of gain from the
sale of “qualified small business
stock.” Measures enacted in 2009
and 2010 increased the exclusion to
100 percent temporarily and thus
allowed an investor to effectively
pay zero percent tax on gains from
QSBS purchased prior to the end of
2011 and held for at least five years
before sale. QSBS is defined in Section
1202 as stock in a C corporation
that: (1) has no more than $50 million
in gross assets, and (2) engages
in the active conduct of a qualified
trade or business. 2 For a detailed description
of the other qualifications
and limitations of Section 1202, see
“Gains.” California adopted the analogue
of Section 1202 in 1993, allowing
a 50 percent exclusion of gain
for QSBS, but restricted eligibility to
California businesses. California did
not follow the federal lead in offering
a temporary 100 percent exclusion.
The Act extends the effective zero
percent tax rate on capital gains
from the sale of QSBS through the
end of 2013. It provides a 100 percent
exclusion of eligible gain received
by an individual taxpayer
from the sale of QSBS acquired after
September 7, 2010, and before January
1, 2014, and held for more than
five years. In addition, gain from
QSBS is excluded for alternative
minimum tax purposes. Note that
the Act has retroactive application
to 2012. The exclusion had expired
at the end of 2011. The Act both extends
the exclusion through the end
of the 2013 but also retroactively applies
it to QSBS acquired in 2012. Absent
another extension, beginning
by George Cabot
January 1, 2014, QSBS will again be
eligible for only a 50 percent exclusion
and the excluded gain will be
a tax preference item for alternative
minimum tax purposes.
That is the good news. The bad
news is that California’s 50 percent
exclusion has recently been found
to be unconstitutional by the Court
of Appeals in Cutler v. Franchise
Tax Board, (2012) 208 Cal. App. 4th
1247, which held that the provision
violates the U.S. Constitution by
discriminating in favor of California
businesses. That means that QSBS
qualifying for partial or full exclusion
for federal income tax purposes
will still be subject to California income
tax at rates up to 13.3 percent
(capital gains are not eligible for
preferential tax rates in California).
Taxpayers who relied upon this exclusion
in prior tax periods that are
not closed by the statute of limitations
are required to amend their
returns and recompute their taxable
income without the exclusion.
From a planning perspective, the
temporary 100 percent exclusion
for QSBS makes the C corporation
an interesting alternative to passthrough
entities (LLCs and S corporations)
for start-ups. In addition,
CONTRA COSTA COUNTY BAR ASSOCIATION CONTRA COSTA LAWYER 15