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2010 100% bonus depreciation, Extenders, $5 million portable gift-estate tax exemption in 'Framework' text

December 10, 2010

The Senate yesterday released legislative language for the 'Framework' to extend the 2010 tax rates for two years, answering some questions that have lingered since the deal was announced. As it turns out, the "Framework" is a great big grab bag solving just about all of the unanswered tax legislation problems that have been outstanding.

Some of the answers:

The bill makes clear that the "100% expensing" of business depreciable assets in the bill uses the existing "bonus depreciation" rules, so it only applies to new property -- not used machinery. In a surprise, the 100% bonus depreciation applies to new assets acquired and placed in service starting September 9, 2010 through 2011. 50% bonus depreciation will again apply in 2012.

- The bill has a $125,000 (inflation-adjusted) Section 179 deduction for otherwise-depreciable assets returns in 2012. Current law would reduce Section 179 to $25,000 in 2012; the limit is $500,000 for 2010 and 2011. Unlike bonus depreciation, the Sec. 179 deduction is also available for used assets.

The bill has some surprising estate tax provisions:

- The estate tax proposal allows estates of 2010 decedents to choose whether to use the rules that were in place for 2010 -- no estate tax, but only a limited step-up in asset basis -- or the 35% tax with the $5 million exemption that applies in 2011 and 2012, with full fair market value basis for inherited assets.

- The $5 million lifetime exemption for the bill will apply not only to estates but also for gift tax purposes. The $5 million exemption becomes available for gifts starting next year. Pre-2010 law allowed a $3.5 million lifetime exemption for estates, but only $1 million for gifts.

- The estate tax exemption will be portable; if one spouse dies with less than $5 million in assets, the unused exemption will be available to the estate of the surviving spouse.

- Estate tax returns for which taxpayers elect to be subject to the estate tax in 2010 will be due 9 months after the bill is enacted.

The 2-percentage point reduction in the employee FICA tax for 2011 will also apply to self-employment tax.

An "AMT Patch" in the bill increases the AMT exemption amount through 2011. The 2010 exemption will e $47,450 for individuals and $72,450 for joint filers.

The bill solves the "expiring provisions" problem by extending them mostly through the end of 2011. Provisions extended include the ethanol subsidy (and the protective 54-cent tariff) and the biodiesel subsidies. A few of the other extended items:

- R&D Credit
- 15 year depreciation for qualified leasehold improvements, restaurant improvements and retail improvements.
- Increased deduction limits for conservation easements.
- Work opportunity tax credits
- The economically-indispensable seven-year depreciation period for motorsports entertainment complexes.

The full list of extenders is here.

This is a surprisingly sweeping bill. It's not a done deal, as House Democrats are unhappy with it -- especially the estate tax provisions. Given the choice of humiliating a president of their own party and swallowing the bill, though, they are likely to swallow.

The TaxProf has more.

Related: The tax compromise: what do we know?

UPDATE, 3/31/2011: IRS release solves 'second year zero' problem for auto depreciation

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Comments

Lamar Alexander on NPR, challenged by Melissa Block to defend "25% of tax benefits going to top 1% of incomes," Alexander gabbling about small businesses and jobs.

Here's what he should have said:

Well, Melissa, as you and your listeners should know, that figure comes from Citizens for Tax Justice, which is hardly an impartial observer.

But assuming for the sake of argument that figure is valid, the amount of all federal income tax paid by that 1% was somewhere between 36% and 40% according to the IRS' own figures for 2007, the latest available. So if we were to apportion the benefits equitably according to the amount of income taxes paid, that 25% actually should be higher.

Does luxury auto limitation rules apply to 100% bonus as it did with 50%?

Yes, the same dollar cap.

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