Lame Duck 111th Congress Lays Golden Egg for Capital Investment

New Incentives Part Of Extension Of Bush-Era Tax Cuts and Other Pro-Business, Pro-Growth Tax Law

Capital investment was given a huge boost when the “Lame Duck” 111th Congress in its waning days enacted and President Obama signed into law The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 on Dec. 17, the most aggressive capital investment tax policy in recent memory. The legislation also extends the Bush-era tax cuts and includes a number of other pro-business, pro-growth provisions beyond the scope of this article.

Specifically, the new tax law extends current law IRC Section 168(k) 50 percent bonus depreciation (enacted in 2009 as part of the American Recovery and Reinvestment Tax Act of 2009, and extended in The Small Business Jobs and Credit Act of 2010) for two more years for equipment placed in service before Jan. 1, 2013. And under a special provision, provides 100 percent expensing for qualifying new plant and equipment acquired and placed-inservice after Sept. 8, 2010 and before Jan. 1, 2012. Qualifying property continues to include depreciable tangible personal property purchased for use in the active conduct of a trade or business including, printing, publishing and converting equipment, as well as off-the-shelf computer software.

The new tax law also extends enhanced IRC Section 179 expensing (currently set at $500,000/year with a phase-out starting at $2 million/year for tax years beginning in 2010 and 2011) through tax years beginning in 2012, but at a somewhat lower level of $125,000/year with a $500,000 phase-out. Those amounts will revert to $25,000 and $200,000 respectively in 2013. Unlike bonus depreciation, expensing applies to both new and used qualifying property, and is subject to annual dollar, investment and taxable income limits.

This so-called “second round” of bonus depreciation is once again accompanied by a refundable corporate AMT (Alternative Minimum Tax) credit provision similar to but not quite as generous (does not apply to old R&E credits) as the one employed in 2008 and 2009, but omitted in the 2010 stimulus act. Specifically, corporations will be able to utilize their AMT credits in lieu of bonus depreciation on property placed-in-service in 2011 and 2012.

This election will allow a taxpayer to “monetize” its AMT credits generated before 2006, and will equal the lesser of 20 percent of the additional first year bonus depreciation foregone, or 6 percent of the AMT credits generated before 2006 that were available for the first taxable year ending after March 31, 2008. However, in no event will the credits be allowed to exceed $30 million, and straight-line depreciation must be used for such property. There are also special rules for corporations that are part of controlled groups or partnerships.

NPES President Ralph Nappi stated that “these new and extended capital investment incentives reflect tax policy long advocated by the Association, and will be very helpful to equipment suppliers’ customers that have a need for capital purchases.” He also noted the continuing need to free up more financing, especially for smaller businesses, to enable firms to take advantage of these investment incentives. To that end, NPES continues to work to provide its members with information about sources of capital investment financing.

For a Tax Calculator incorporating the new incentive see: www.npes.org/tax_calculator10.asp. Along with a Tax Calculator, it is important to note, however, that the effect of federal law varies from state to state.

NPES cautions that its tax calculator and this article are solely informational and do not constitute legal or other advice from NPES. In that regard, readers are advised to seek professional counsel from their own financial, accounting and legal advisors to apply these new incentives and other tax laws to their particular circumstances. For more information contact NPES Government Affairs Director Mark J. Nuzzaco at phone: 703/264-7235 or e-mail: mnuzzaco@npes.org.

Acknowledgements: Staying in place: Congress extends the Bush tax cuts, December 2010, Tax Policy Group of Deloitte Tax LLP in Washington, D.C.