2011 Expired Tax Provisions

January 17, 2012

The primary focus when Congress resumes debate will be over the two-percent reduction in the 6.2 percent employee payroll tax, along with extensions of expanded federal unemployment benefits and Medicare physician pay rates. After going back-and-forth in December, Congress eventually agreed on a two-month extension bill, which President Barack Obama signed into law on Dec. 23, 2011. Unless Congress takes further action, individuals will only have the benefit of the reduced payroll tax reduction through Feb. 29. A House and Senate conference committee was appointed to resolve disagreements on these issues.

Aside from extending the employee payroll tax reduction for two months, the House and Senate still have to deal with the so-called tax extenders, a list—most of which expired on Dec. 31—that currently includes the research and expiramentation (R&E) credit–also commonly referred to as the research and development {R&D} credit–and other breaks for small business and manufacturing.

Some specific business tax provisions that expired at the end of 2011 include the 100 percent bonus depreciation that was allowed for the purchase of new equipment placed in service in 2011. For 2012, bonus depreciation reverts to 50 percent of the purchase price of newly acquired equipment, and after 2012 bonus depreciation goes away entirely. The expanded section 179 expensing deduction limit of $500,00 that could be taken on newly acquired equipment (both brand new and used) expired and in 2012, the dollar limit for section 179 expensing will be $125,000. For 2013 and later years, the dollar limit will revert to $25,000.

Two separate provisions impacting the alternative minimum tax (AMT) expired at the end of 2011. First, 2011 was the last year when personal tax credits were allowed to offset both the regular tax and the AMT. For 2012 and future years, tax credits will offset the regular income tax, but not the AMT. Second, the temporarily patched exemptions for the AMT ended in 2011. For 2012 and future years, the AMT exemption amounts will revert to a lower statutory amounts ranging from $22,500 to $45,000. This will result in more taxpayers being subject to the AMT, and will increase the adjustments for taxpayers already subject to the AMT. Because the overwhelming majority of small-business owners are pass-through entities and therefore pay their business taxes via their personal income taxes, the AMT is a huge issue for small business.

In addition to the specific provisions mentioned, numerous other business tax provisions expired on Dec. 31, 2011, including: the 15-year straight-line cost recovery for qualified leasehold improvements; qualified restaurant buildings and improvements; qualified retail improvements; the work opportunity tax credit; the new markets tax credit; the reduction in S corporation recognition period for built-in gains; and several energy tax credits.

Historically, lawmakers have attached an extenders package to an existing tax bill, making a deal to extend the payroll tax cut a likely avenue for getting this accomplished. However, given the fierce back-and-forth late last year, some believe that lawmakers will have enough on their hands in hammering out a year-long extension of the payroll tax cut — without having to discuss the tax extenders and, presumably, how to offset their cost.

In addition to the payroll tax cut, the conference committee will likely also try to deal with unemployment benefits and the Medicare reimbursement rate for doctors. That, in turn, could push the fate of the extenders even deeper into the 2012 calendar — possibly even past this year’s election, when lawmakers will have to deal with other hot-button issues.