Whats in play? What happens now that some of the Bush tax cuts for businesses expire at the end of 2012?
Note: This article is part one of a two-part series.
The Bush tax cuts that were largely extended under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 are set to expire Dec. 31, 2012. What does that mean to your Hispanic business and to you, as a business owner? For tax specialists, it is a looming nightmare as we try to do planning for you.
Congress could not simply extend them again, even if they wanted to. The Budget Control Act of 2011 requires mandatory reductions in federal spending that will be enforced. Politicians have called this tax law sunset a fiscal cliff. It requires a delicate balancing act that in an election year could result in chaos. What is needed is tax reform: REAL, comprehensive tax reform.
A significant business tax benefit that is expiring involves the sale of small business stock. Since 1993, stock issued by a C Corporation that invests 80 percent of its assets in the active conduct of a trade or business and that has assets of $50 million or less when the stock is issued is considered a qualifying small business. Non-corporate investors who sell their qualifying stock after holding it a minimum of five years can exclude a portion of the gain on the sale of the stock. Since 1993, a 50 percent exclusion applied. That was increased to 75 percent for stock acquired after Feb. 17, 2009, and on or before Sept. 27, 2010. For stock acquired after Sept. 27, 2010, and before Jan. 1, 2012, there is a 100 percent exclusion.
The issue of the excluded gain always created a tax preference problem with the alternative minimum tax. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) stated that only 7 percent of the excluded gain was a tax preference item for alternative minimum tax purposes for tax years beginning before Jan. 1, 2011. When the Tax Relief Act of 2010 was passed, not only was the alternative minimum tax exclusion extended on the sale of small business stock, but the exclusion was increased to 100 percent! This provided significant tax savings to those selling their small business stock. However, like many other provisions, this will sunset Dec. 31, 2012. Therefore, you would be wise to consider selling that stock prior to the end of the year, unless Congress takes action on sustaining the benefit.
Speaking of Capital Gains, the maximum tax rate on personal long-term capital gains and qualifying dividends of 15 percent will also sunset on Dec. 31, 2012. You really need to consider accelerating your gains into 2012. If Congress does nothing, the rate reverts after 2012 to 20 percent (10 percent for taxpayers in the 15 percent bracket) for assets held one year or more. However, then the old JGTRRA rules are revived. Those rules allowed for a lower long-term capital gain rate of 18 percent (8 percent for taxpayers in the 15 percent bracket) on property held more than five years and that was purchased in 2001 and later and sold AFTER Dec. 31, 2012. The actual law adds more complexities, but I am giving you the general view.
About the author
Sandra Napoleon-Hudson is the managing member of Sandra Napoleon-Hudson CPA LLC, based in Atlanta. Her expertise includes multi-state taxation for corporations, partnerships and individuals, business consulting, sports and entertainment taxation and IRS representation. As a former partner of a New York firm, she appeared frequently on television and in print media.Website