Written by Helena Lynch | 11 January 2012

There are many important tax changes taking effect in 2012, as well as some that took effect late last year and thus are "new." They are the result of tax legislation enacted in prior years, or are triggered by effective dates in regulations, rulings and other guidance, or will occur by default in 2012 in the absence of Congressional action. This article will be the first of three in a series regarding 2012 tax changes as follows: 2012 business tax changes, 2012 individual tax changes and 2011 expiring tax provisions.

Business and retirement plan changes taking effect in 2012 and late 2011:

• New guidance on deduction vs. capitalization of tangible property costs. The IRS has issued temporary regulations, generally effective in tax years beginning after 2011, on the treatment of amounts paid to acquire, produce, or improve tangible property. The new regulations clarify and expand the standards in the current regulations; provide certain new bright-line tests for applying these standards; provide guidance regarding the accounting for, and dispositions of, property.
• Estimated taxes for large corporations. For a corporation with assets of at least $1 billion (determined as of the end of the previous tax year), the amount of any required installment of corporate estimated tax which is otherwise due in July, Aug. or Sept. of 2012 is 100.5 percent of that amount, and the amount of the next required installment after the installment due in July, Aug. or Sept. of 2012 is appropriately reduced to reflect the amount of the 0.5 percent increase.
• Use of smartcards or other electronic media to provide qualified transportation fringes. Beginning in 2012, the rules under which employers can provide their employees with qualified mass transit fringe benefits through the use of employer-provided credit cards, debit cards, smartcards, or other electronic media officially go into effect (although employers could rely on the guidance before 2012).
• Lump-sum payouts from defined benefit plans. Some defined benefit plans offer participants the option of receiving a lump-sum distribution (e.g., at age 65) instead of an annuity. For plan years beginning after 2007, the Pension Protection Act of 2006 requires defined benefit plans to compute the minimum lump-sum value of an annuity using blended corporate bond rates instead of 30-year Treasury bond rates. Because corporate bond rates generally are higher than long-term Treasury bond rates, the change had the overall effect of reducing lump-sum distributions. This new rule was phased in over 2008 through 2011 and will be fully in effect for plan years beginning after 2011.
• "Readily tradable" employer securities. For purposes of meeting diversification requirements for defined benefit contribution plans, generally effective for plan years beginning on or after Jan. 1, 2012, employer securities that are "readily tradable on an established securities market" and "readily tradable on an established market" mean employer securities that are readily tradable on an established securities market.
• Work opportunity tax credit (WOTC) not available except for hiring qualified veterans. The WOTC generally can't be claimed for an individual who begins work for the employer after Dec. 31, 2011. However, the WOTC continues to be available for employers that hire qualified veterans who began work for the employer before Jan. 1, 2013.
• Longer write-off period for certain property. For specialized realty assets (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) placed in service after 2011, a 39-year (up from 15-year) write-off period generally applies.
• Reduced bonus depreciation allowance for qualified property. For qualified property acquired and placed in service after 2011 and before 2013 (after 2012 and before 2014 for aircraft and certain long-production period property), a 50 percent (down from 100 percent) bonus first-year depreciation allowance applies.
• Reduced expensing. For a tax year beginning in 2012, the IRC Section 179 expensing election is reduced to $139,000, with a $560,000 investment-based ceiling (down from $500,000/$2 million). For tax years beginning after 2012, it will be further reduced to $25,000 with a $200,000 investment-based ceiling. Additionally for a tax year beginning after 2011, expensing can no longer be claimed for qualified real property.

I hope this information is helpful. If you would like more details about the 2012 tax changes or any other aspect of the new law, please do not hesitate to call me at 973-439-7200.