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New Tax Law Provides Greater Certainty in Business Tax Planning

Until the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Tax Relief Act of 2010”) became law on December 17, 2010, the fate of a number of existing tax relief provisions were unclear.

In the waning days of December 2010, it was widely believed that current tax provisions would be extended in light of continuing economic strain, but, at the same time, many provisions were set to expire automatically and revert to previous, less favorable provisions if new law had not been enacted before the end of the year. This uncertainty made business tax planning difficult. Fortunately, whatever one may think of the underlying tax policy, the Tax Relief Act of 2010 eases this uncertainty and makes business tax planning a bit easier, at least until the end of 2012, when it, too, is set to expire.

Here, in summary, are some of the provisions of interest to businesses and their owners.

Capital gains and dividend rates have not increased for 2011 and 2012: The individual capital gains and dividend rates remain at 15% through 2012, rather than increasing to 20%. (The law also provides taxpayers in the lowest tax brackets with relief by maintaining the capital gains and dividend rates at 0%).

100% bonus depreciation for 2011 and 50% bonus depreciation for 2012: For 2011, 100% of the cost of certain new business property placed in service during the year can be deducted in 2011. For 2012, 50% of the cost of the same type of property placed in service during the year is deductible in that year.

Section 179 deductions for tangible business property continue for 2011 and 2012: For 2011, up to a maximum of $500,000 in cost of new or used tangible property or off-the-shelf software used in business and placed in service during the year can be deducted as an expense in 2011, subject to reduction of the $500,000 maximum to the extent that the cost of tangible business property placed in service in 2011 exceeds $2 million. For 2012, up to a maximum of $125,000 in cost of the same type of property placed in service during the year can be deducted as an expense in that year, subject to reduction of the $125,000 maximum to the extent that the cost of tangible business property placed in service in 2012 exceeds $500,000.

The R&D credit is reinstated for 2011: The tax credit for certain research and development expenses, which expired at the end of 2009, was reinstated for 2010 and 2011.

Individual tax brackets are not increased for 2011 and 2012: Individual tax brackets remain at 2010 levels through 2012. Without this extension the 10%, 25%, 28%, 33%, and 38% individual tax rates would have been increased to 15%, 28%, 31%, 36%, and 39.6%, respectively.

For more information please contact Jeremy T. Garner at (410) 583-2400 or garner@bowie-jensen.com.

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