Many business tax law changes go into effect in 2010

Many important tax changes go into effect in 2010 apart from the numerous indexing changes that were covered in September 2009 (see Federal Taxes Weekly 09/24/2009). These non-indexing changes result from various laws that were enacted and regs and other guidance issued over the past few years. This Practice Alert reviews the non-indexing tax law changes for 2010 for businesses.

Deduction for domestic production activities increases.

For tax years beginning after 2009, the Code Sec. 199 deduction for domestic production activities increases. Taxpayers will be able to claim a deduction generally equal to 9% (up from 6% for tax years beginning in 2007-2009) of the lesser of: (1) the taxpayer's “qualified production activities income” (QPAI) for the tax year or (2) taxable income (modified adjusted gross income, for individual taxpayers) without regard to this deduction, for the tax year. The deduction is further limited to 50% of the W-2 wages of the employer for the tax year.

Reduced domestic production activities deduction for oil-related activities.

For tax years beginning after 2009, the otherwise allowable Code Sec. 199 deduction of a taxpayer with oil-related QPAI is reduced by 3% of the least of (1) oil-related QPAI for the tax year; (2) QPAI for the tax year; or (3) taxable income (or for individuals, AGI), determined without regard to the domestic production activities deduction.

Smaller employers may establish combined plans.

For plan years beginning after 2009, employers with 500 or fewer employees may establish a combined defined benefit-401(k) plan (a “DB(k) plan”). In general, the defined benefit rules apply to the defined benefit portion of the plan and the defined contribution rules apply to the defined contribution portion of the plan. The 401(k) component must have automatic enrollment and must meet minimum matching contribution requirements.

Nonspouse beneficiary rollover option mandatory for qualified plans.

Under Sec. 108(f) of the Worker, Retiree, and Employer Recovery Act of 2008, qualified retirement plans must offer nonspouse beneficiaries the opportunity to roll over an inherited plan account balance to an IRA set up to receive the rollover on the nonspouse beneficiary's behalf, effective for plan years beginning after Dec. 31, 2009. For earlier plan years, could, but were not required to, offer nonspouse beneficiaries this rollover option.

New limitation on deduction of farm losses.

For tax years beginning after 2009, the farming loss of a taxpayer, other than a C corporation, is limited for any tax year in which any applicable subsidies are received. The loss is limited to the greater of (a) $300,000 ($150,000 for a married person filing separately), or (b) the taxpayer's total net farm income for the prior five tax years. Applicable subsidies are (1) any direct or counter-cyclical payments under title I of the Food, Conservation, and Energy Act of 2008 (or any payment elected in lieu of any such payment), or (2) any Commodity Credit Corporation (CCC) loan.  For partnerships and S corporations, the limit is applied at the partner or shareholder level.  Total net farm income is an aggregation of all income and loss from farming businesses for the prior five tax years. Any loss that is disallowed under this rule in a particular year is carried forward to the next tax year and treated as a deduction attributable to farming businesses in that year. Farming losses due to fire, storm, or other casualty, or disease or drought, are disregarded for purposes of calculating the limitation.

Increased penalty for failure to file partnership or S corporation returns.

Civil penalties apply for failure to file a partnership and S corporation returns. The penalty is a statutory dollar amount times the number of partners or shareholders for each month (or fraction of a month) that the failure continues, up to a maximum of 12 months. The base amount on which a penalty is computed for a failure with respect to filing either a partnership or S corporation return for a tax year beginning after Dec. 31, 2009, increases from $89 to $195 per partner or shareholder.

Electronic filing changes go into effect.

Beginning in 2010, IRS will allow the electronic filing of Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, using the Employment Tax e-file System. Schedule R is a new form that must be completed by consolidated Form 941 filers, beginning with the first quarter 2010 Form 941. Form 2678, Employer/Payer Appointment of Agent, must be mailed to the applicable address listed on the instructions for the agent to be eligible to file Schedule R. After receiving IRS approval, the agent must file one Form 941 return for each tax period, using the agent's own employer identification number (EIN), regardless of the number of employers for whom the agent acts. The agent must maintain records that will disclose the full wages paid for each of his or her clients, as reported on the Schedule R.

Standard mileage rate changes.

The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 50¢ per mile for business travel after 2009 (5¢ less than the 55¢ allowance for business mileage during 2009). For 2010, the depreciation component of the mileage rate is 23¢ per mile (up from 21¢ per mile for 2009 and 2008).

Employers that require employees to supply their own autos may reimburse them at a rate that doesn't exceed 50¢ per mile for employment-connected business mileage during 2010 (down from 55¢ per mile for 2009), whether the autos are owned or leased. The reimbursement is treated as a tax-free accountable-plan reimbursement if the employee substantiates the time, place, business purpose, and mileage of each trip. Additionally, an employee's personal use of lower-priced company autos during 2010 may be valued at 50¢ per mile if the conditions specified in Reg. § 1.61-21(e)(1) are met.

Many business tax breaks expired at the end of 2009.

Unless Congress acts to retroactively revive them, all of the following business tax breaks won't be available this year because they expired at the end of 2009.

[Note:  The tax breaks that would be extended by the “Tax Extenders Act” as passed by the House of Representatives in December of 2009 (see Federal Taxes Weekly Alert 12/17/2009) are indicated with an asterisk (*) below.]

• Additional first-year 50% bonus depreciation for qualified property under Code Sec. 168(k)(2) (but note that certain aircraft and long-production-period property continues to be eligible if placed in service in 2010). In addition, the $8,000 increase in the first-year depreciation limit for passenger automobiles that are qualified property also expired at the end of 2009.
• For tax years beginning in 2010, (a) the maximum amount that may be expensed under Code Sec. 179 is $134,000 (down from $250,000 for tax years beginning in 2008 or 2009); and (b) the maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of Code Sec. 179 property placed in service during the tax year in excess of $530,000 (down from $800,000 for tax years beginning in 2008 or 2009).
• Election to accelerate AMT and research credits in lieu of additional first-year depreciation under Code Sec. 168(k)(4).
• Credit for construction of new energy efficient homes under Code Sec. 45L.
• Suspension on the taxable income limit for purposes of claiming depletion deductions on a marginal oil or gas well. (Code Sec. 613(c)(6))
• * Incremental research credit under Code Sec. 41.
• * Five-year depreciation for farming business machinery and equipment under Code Sec. 168(e)(3)(B)(vii).
• * Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements under Code Sec. 168(e)(3)(E)(iv), Code Sec. 168(e)(3)(E)(v), and Code Sec. 168(e)(3)(E)(ix).
• * Deduction allowable for income attributable to domestic production activities in Puerto Rico under Code Sec. 199.
• * Expensing of “brownfields” environmental remediation costs under Code Sec. 198(h).
• * Encouragement of contributions of capital gain real property made for conservation purposes under Code Sec. 170(b)(1)(E) and Code Sec. 170(b)(2)(B). 
• * Enhanced charitable deduction for contributions of food inventory under Code Sec. 170(e)(3)(C).
• * Enhanced charitable deduction for contributions of book inventories to public schools under Code Sec. 170(e)(3)(D).
• * Enhanced deduction for corporate contributions of computer equipment for educational purposes under Code Sec. 170(e)(6)(G).
• * The active financing exception from Subpart F of the Code. (Code Sec. 953, Code Sec. 954)
• * The look-through treatment of payments between related controlled foreign corporations. (Code Sec. 954(c))
• * Seven-year straight line cost recovery period for property used for land improvement and support facilities at motorsports entertainment complexes. (Code Sec. 168(i)(15))
• * Accelerated depreciation for business property on an Indian reservation. (Code Sec. 168(j))
• * The railroad track maintenance credit. (Code Sec. 45G)
• * Film and television producers' election to expense the first $15 million of production costs incurred in the U.S. ($20 million if the costs are incurred in economically depressed areas in the U.S.). (Code Sec. 181)
• * The credit for training mine rescue team members. (Code Sec. 45N)
• * Election to expense 50% of the cost of qualified underground mine safety equipment. (Code Sec. 179E)
• * The credit for eligible small business employers equal to 20% of the sum of differential wage payments to activated military reservists. (Code Sec. 45P)
• * The tax treatment of interest-related dividends, short-term capital gain dividends, and other special rules applicable to foreign shareholders that invest in regulated investment companies (RICs). (Code Sec. 871(k))
• * The new markets tax credit. (Code Sec. 45(f)(1))