AMERICAN TAXPAYER RELIEF ACT & SPRING LEGISLATIVE UPDATE

AMERICAN TAXPAYER RELIEF ACT & SPRING LEGISLATIVE UPDATE

American Taxpayer Relief Act & Spring Legislative Update Materials Developed and Edited by Steven C. Dilley, Ph.D., J.D., C.P.A. and Adapted from Research Institute of America's CheckPoint Services 2013 Federal Tax Workshops, Inc. All Rights Reserved dilleyftw@sbcglobal.net www.dilleyftw.com @DilleyFTW

This manual and the related lecture are designed to provide accurate and authoritative information about complex areas of tax law. The information contained in this manual may change as a result of new tax legislation, Treasury Department regulations, Internal Revenue Service interpretations, or judicial interpretations of existing tax law. This manual is not intended to provide legal, accounting, or other professional services, and is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. This manual and related lecture should not be used as a substitute for professional advice. If legal advice or other expert assistance is required, the services of a competent tax advisor should be sought. From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.

2013 SPRING TAX UPDATE TABLE OF CONTENTS CHAPTER 1: TAX LEGISLATION UPDATE RIA Special Study: 2012 Taxpayer Relief Act Protects Key Individual Tax Breaks... 1-1 RIA Special Study: Individual Tax Breaks Retroactively Reinstated and Extended by the 2012 Taxpayer Relief Act... 1-9 RIA Special Study: Business Tax Breaks Retroactively Reinstated and Extended by the 2012 Taxpayer Relief Act... 1-11 RIA Special Study: Energy-Related Tax Provisions Extended by the 2012 Taxpayer Relief Act..... 1-21 Blue Book Explains 2012 Taxpayer Relief Act & Other Recent Legislation... 1-26 RIA Special Study: Estate And Gift Tax Relief In The 2012 Taxpayer Relief Act..... 1-28 Social Security Wage Base Increases To $113,700 For 2013... 1-31 Many Retirement Plan Dollar Limits Are Changed For 2013... 1-32 Sole Shareholder's Goodwill Wasn't Corporate Asset Taken Into Account On Sale Of Business... 1-34 CHAPTER 2: INDIVIDUAL TAX UPDATE Proposed Reliance Regs Clarify Post-2012 3.8% Surtax On Investment Income & Gains-Part I... 2-1 Proposed Reliance Regs Clarify Post-2012 3.8% Surtax On Investment Income & Gains-Part 11... 2-4 Proposed Reliance Regs Clarify Post-2012 3.8% Surtax On Investment Income & Gains-Part 111... 2-8 Proposed Reliance Regs Clarify Post-2012 3.8% Surtax On Investment Income & Gains-Part IV... 2-11 Proposed Reliance Regs Clarify Post-2012 3.8% Surtax On Investment Income & Gains-Part V... 2-15 Proposed Reliance Regs Clarify Post-2012 3.8% Surtax On Investment Income & Gains-Part VI... 2-17 Hotel Unit And Residential Unit Treated As A Single Building For Depreciation Purposes... 2-20 Final And Temporary Capitalization Regs Are To Apply To Tax Years Beginning After 2013... 2-22 The IRS Releases Official Inflation-Adjusted Items For 2013... 2-23 Noncustodial Parent Denied Exemption Despite Attaching Court Order To His Return... 2-24 Ex-Spouse's Failure To Meet Divorce Terms Didn't Render Release Of Child Exemption Invalid... 2-26 Family Support Payments To Separated Spouse Were Deductible Alimony... 2-28 Proposed Reliance Regs Create New Truncated Taxpayer Identification Number... 2-29 Taxpayer Fails To Qualify As A Real Estate Professional Under PAL Rules... 2-30 Final FATCA Regs Issued By The IRS-Part I... 2-32 Safe Harbor Provides Simplified Option For Claiming Home Office Deduction... 2-35 The IRS Extends Safe Harbor For Governmental Homeowner Assistance Payments... 2-37 Guidance On Tax Treatment Of Participants In HUD's Home Affordable Modification Program... 2-38 Homeowners Entitled To Theft Loss Deduction For Funds Diverted By Contractor... 2-41 New Law Loosens Restrictions To Encourage Plan Rollovers To Roth Accounts... 2-43 CA-7 Rejects Former UBS Clients' Suit To Recover Penalties For Undisclosed Foreign Accounts... 2-45 Form 5471 (Information Return Of U.S. Persons With Respect To Certain Foreign Corporations): Dispelling Seven Common Myths... 2-46 International Flight Attendant's Wages Not Fully Excludable... 2-48 Pro Golfer's Endorsement Income Reallocated As 65% Royalty, 35% Personal Services... 2-50 CHAPTER 3: BUSINESS TAX UPDATE The IRS Temporarily Eases Requirements For Misclassified Worker Settlement Program... 3-1 The IRS Releases Revised Form 8952 To Apply For Misclassified Worker Settlement Program... 3-2 Implementation Of Guidance On Tips And Service Charges Delayed To 2014... 3-7 Construction Workers Hired On Project-By-Project Basis Were Employees... 3-8 Court Disallows $1 Billion In Deductions From Abusive Tax Shelters... 3-11 The IRS Defers Start Date For Foreign Financial Asset Reporting By Specified Domestic Entities... 3-14 The IRS Releases Statistics On Taxpayers Filing Uncertain Tax Positions... 3-15 Updated FAQs Detail 6050W Information Return Requirements... 3-17 Overview Of Recent Changes To The Research Tax Credit... 3-19 The IRS Resolves Buyer's And Seller's Inconsistent Treatment In Transfer Of Patents... 3-21 Changes To Buy-Sell Agreement Don't Subject It To Tougher Tax Rules... 3-24 Sole Shareholder And CFO's Compensation Was Largely Unreasonable... 3-25

ii 2013 Spring Tax Update CHAPTER 4: S CORPORATIONS & PARTNERSHIPS UPDATE The IRS Issues Final Regs On Noncompensatory Partnership Options... 4-1 Prop Regs Expand Scenerios When Noncompensatory Option Holder Can Be Treated As Partner... 4-4 The IRS Issues 2013 Covered Compensation Tables... 4-5 The IRS Retroactively Removes De Minimis Rule For Testing Partnership Allocations....4-9 Avoiding Traps When Electing S Corporation Status For An LLC... 4-1 0 Electronic Health Record Incentive Was Income To Recipients And Reportable To The IRS... 4-14 No Duplicate Information Reporting For Partnership Of Broker Corporations... 4-16 Retained Rights Don't Prevent Guarantor From Being At-Risk But Co-Guarantors Do... 4-18 Unused Basis From The Past Couldn't Be Restored To Deduct Current Passthrough Losses... 4-20 CHAPTER 5: DEPRECIATION AND LIKE-KIND EXCHANGES UPDATE Depreciation Dollar Limits Released For 2013 Business Autos, Light Trucks And Vans... 5-1 Standard Mileage Rates For Business, Medical & Moving Increase 1 Per Mile For 2013... 5-2 Temp Regs On Capitalization Of Tangible Property Costs Revised To Reflect Deferred Effective Date... 5-4 Customer Presence For "On-Site Sale" Clarified For Exception To Capitalization... 5-5 Bank Must Capitalize Costs Associated With Foreclosed Property Held For Sale... 5-6 HVAC Units Installed Outside Of Or On A Building Aren't Qualified Leasehold Improvement Property... 5-9 Penalty Appropriate For Continuing To Claim Fast Writeoffs For Open-Air Parking Structure... 5-10 Receipt Of Sale Proceeds In Deferred Like-Kind Exchange Costs Tax-Free Treatment... 5-14 The IRS Updates LB&I Directive On Repair Vs. Capitalization Issues... 5-17 CHAPTER 6: HEALTH CARE REFORM UPDATE Proposed Reliance Regs Clarify Health Care Law's Employer Mandate-Part I... 6-1 Proposed Reliance Regs Clarify Health Care Law's Employer Mandate, Part II... 6-~ Proposed Reliance Regs Clarify Health Care Law's Employer Mandate-Part III... 6-6 The IRS Issues Proposed Regs On Health Reform Law's Shared Responsibility Payment... 6-9 Proposed Regs Provide Guidance On Health Insurance Providers' Annual Fee... 6-13 Timeline Of 2013-2018 Tax Changes In Health Care Reform Legislation... 6-15 Reminder For Large Employers: Health Insurance Coverage Information Reporting Due In Jan., 2013... 6-19 Specialized Health Coverage Assistance May Drop When Health Reform Provisions Go Into Effect... 6-20 CHAPTER 7: TAX RETURN PREPARER DEVELOPMENTS The IRS Finalizes Regs On Disclosure Or Use Of Information By Return Preparers... 7-1 Return Preparer Regs Held Invalid; The IRS Suspends Registration, Testing, And Continued Education... 7-2 DC Circuit Denies Stay; IRS Return Preparer Requirements Remain Suspended... 7-5 The IRS Updates Requirements For Taxpayers' Consent To Disclose Or Use Tax Return Information... 7-6 The IRS Extends Deadline For Return Preparers To Use New Language In Taxpayer Consents... 7-7 Taxpayer's Reasonable Reliance On CPA Protected Him From Penalties... 7-8 Accountants Hit With Trust Fund Penalty Tax For Failure To Remit Client's Payroll Taxes... 7-10 APPENDIX A: 2012 INDIVIDUAL & BUSINESS TAX FORMS... A-1 STU, Revised May 2013

CHAPTER 1 TAX LEGISLATION UPDATE RIA Special Study: 2012 Taxpayer Relief Act Protects Key Individual Tax Breaks A. On Jan. 1, 2013, Congress passed the American Taxpayer Relief Act (2012 Taxpayer Relief Act), which the President quickly signed into law on Jan. 2, 2013. 1. The 2012 Taxpayer Relief Act will prevent many of the tax hikes that were scheduled to go into effect this year and retain many favorable tax breaks that were scheduled to expire, but will also increase income taxes for some high-income individuals and slightly increase transfer tax rates from 2012 levels. 2. Further, it extends a host of expired and expiring tax breaks for businesses and individuals, and adds a number of new provisions as well. 3. This Special Study explains the key individual tax breaks, including a continuation of the Bush-era tax rates for most taxpayers and a permanent AMT "patch," that are provided in the 2012 Taxpayer Relief Act. a. It also covers a number of personal credits and a new provision on Roth IRAs. B. Elimination of EGTRRA Sunset 1. The provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16), other than those made permanent or extended by subsequent legislation, were set to sunset and no longer apply to tax or limitation years beginning after 2010. (Sec. 901 of EGTRRA) a. However, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act, P.L. 111-312) extended the EGTRRA provisions for two additional years. 2. Under pre-2012 Taxpayer Relief Act law (pre-act law), beginning in 2013, the EGTRRA sunset (as extended) would have wiped out a host of favorable tax rules, such as: favorable income tax rate structure for individuals; marriage penalty relief; and liberal education-related deduction rules. 3. New law. The 2012 Taxpayer Relief Act eliminates the provision in EGTRRA that calls for its provisions to sunset. a. Accordingly, the provisions in EGTRRA, except as modified by other provisions in the new law, are made permanent and no longer automatically sunset in future years. [Sec. 901 of EGTRRA, as amended by Act Sec. 101 (a)(1)] C. Reduced Individual Tax Rates Except for Higher-Income Taxpayers 1. Under EGTRRA, the income tax rates for individuals were 10%, 15%, 25%, 28%, 33% and 35% for tax years beginning in 2010. a. In addition, the size of the 15% tax bracket for joint filers and qualified surviving spouses was 200% of the 15% tax bracket for individual filers (in the so-called marriage penalty relief). b. The 2010 Tax Relief Act extended the lower tax rate schedules for individuals so that they remained at 10%, 15%, 25%, 28%, 33% and 35% for two additional years, through 2012. c. In addition, the size of the 15% tax bracket for joint filers and qualified surviving spouses remained at 200% of the 15% tax bracket for individual filers through 2012. 2. Under pre-act law, for tax years beginning after Dec. 31, 2012, the rates were scheduled to rise to 15%, 28%, 31 %, 36% and 39.6%; and the 15% tax bracket for joint filers and qualified surviving spouses was scheduled to drop to 167% of the 15% tax bracket for individual filers. 3. New law. For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the income tax rates for most individuals will stay at 10%,15%,25%,28%,33% and 35% (instead of moving to 15%,28%,31%,36% and 39.6% as would have occurred under the EGTRRA sunset).

1-2 2013 Tax Season Update a. However, a 39.6% rate will apply to taxable income above a certain threshold (specifically, taxable income in excess of the "applicable threshold" over the dollar amount at which the 35% bracket begins). b. The applicable threshold is $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. c. These dollar amounts are inflation-adjusted for tax years after 2013. [ 1 (i)(2) and 1 (i)(3), as amended by Act Sec.101(b)(1)] 4. In addition, with the elimination of the EGTRRA sunset, the size of the 15% tax bracket for joint filers and qualified surviving spouses remains at 200% of the 15% tax bracket for individual filers. ( 1 (i)(1)) P rojec t e d 2013 T ax R ae t S c h e d u I es FOR MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES, THE 2013 RATE BRACKETS ARE: If taxable income is: Not over $17,850 The tax is: 10% of taxable income Over $17,850 but not over $72,500 $1,785.00 plus 15% of the excess over $17,850 Over $72,500 but not over $146,400 $9,982.50 plus 25% of the excess over $72,500 Over $146,400 but not over $223,050 $28,457.50 plus 28% of the excess over $146,400 Over $223,050 but not over $398,350 $49,919.50 plus 33% of the excess over $223,050 Over $398,350 but not over $450,000 $107,768.50 plus 35% of the excess over $398,350 Over $450,000 $125,846.00 plus 39.6% of the excess over $450,000 FOR SINGLE INDIVIDUALS (OTHER THAN HEADS OF HOUSEHOLDS AND SURVIVING SPOUSES), THE 2013 RATE BRACKETS ARE: If taxable income is: Not over $8,925 The tax is: 10% of taxable income Over $8,925 but not over $36,250 $892.00 plus 15% of the excess over $8,925 Over $36,250 but not over $87,850 $4,991.25 plus 25% of the excess over $36,250 Over $87,850 but not over $183,250 $17,891.25 plus 28% of the excess over $87,850 Over $183,250 but not over $398,350 $44,603.25 plus 33% of the excess over $183,250 Over $398,350 but not over $400,000 $115,586.25 plus 35% of the excess over $398,350 Over $400,000 $116,163.75 plus 39.6% of the excess over $400,000

Chapter 1: Recent Tax Legislation 1-3 FOR HEADS OF HOUSEHOLDS, THE 2013 RATE BRACKETS ARE: If taxable income is: Not over $12,750 The tax is: 10% of taxable income Over $12,750 but not over $48,600 $1,275.00 plus 15% of the excess over $12,750 Over $48,600 but not over $125,450 $6,652.50 plus 25% of the excess over $48,600 Over $125,450 but not over $203,150 $25,865.00 plus 28% of the excess over $125,450 Over $203,150 but not over $398,350 $47,621.00 plus 33% of the excess over $203,150 Over $398,350 but not over $425,000 $112,037.00 plus 35% of the excess over $398,3500 Over $425,000 $121,364.50 plus 39.6% of the excess over $425,000 FOR MARRIEDS FILING SEPARATE RETURNS, THE 2013 RATE BRACKETS ARE: If taxable income is: Not over $8,925 The tax is: 10% of taxable income Over $8,925 but not over $36,250 $892.50 plus 15% of the excess over $8,925 Over $36,250 but not over $73,200 $4,991.25 plus 25% of the excess over $36,250 Over $73,200 but not over $111,525 $14,228.75 plus 28% of the excess over $73,200 Over $111,525 but not over $199,175 $24,959.75 plus 33% of the excess over $111,525 Over $199,175 but not over $225,000 $53,884.25 plus 35% of the excess over $199,175 Over $225,000 $62,923.00 plus 39.6% of the excess over $225,000 FOR ESTATES AND TRUSTS, THE 2012 RATE BRACKETS ARE: If taxable income is: Not over $2,400 The tax is: 15% of taxable income Over $2,400 but not over $5,600 $360.00 plus 25% of the excess over $2,400 Over $5,600 but not over $8,500 $1,160.00 plus 28% of the excess over $5,600 Over $8,500 but not over $11,350 $1,972.00 plus 33% of the excess over $8,500 Over $11,650 $3,011.50 plus 35% of the excess over $11,650

1-4 2013 Tax Season Update D. Reduced Capital Gains & Qualified Dividends Rate Except for Higher-Income Taxpayers 1. Under Sec. 303 of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. 108-27), as modified by Sec. 102 of P.L. 109-222, favorable tax treatment was provided for long-term capital gain and qualified dividends. a. However, JGTRRA provided that this treatment ended after 2010. 2. Capital gain. For tax years beginning in 2010, under JGTRRA, for both regular tax and alternative minimum tax (AMT) purposes, the maximum rate of tax on the adjusted net capital gain of an individual was 15%. a. If the adjusted net capital gain would otherwise be taxed at a rate below 25% if it were ordinary income, it was taxed at a 0% rate. b. That part of net capital gain attributable to unrecaptured 1250 gain (i.e., gain attributable to real estate depreciation) was taxed at a maximum rate of 25%. c. Net capital gain attributable to collectibles gain and section 1202 gain is taxed at a maximum rate of 28%. d. The 2010 Tax Relief Act provided that net capital gain was to be taxed at a maximum rate of 0/15% for two additional years, through 2012. 3. Under pre-act law, for tax years beginning after Dec. 31, 2012, the maximum rate of tax on an individual's adjusted net capital gain was to be 20%. a. Any adjusted net capital gain which otherwise would be taxed at the 15% rate was to be taxed at a 10% rate. b. In addition, any gain from the sale or exchange of property held more than five years that would otherwise have been taxed at the 10% capital gain rate would be taxed at an 8% rate.! c. Any gain from the sale or exchange of property acquired after 2000 and held for more than five years, that would otherwise have been taxed at a 20% rate, was to be taxed at an 18% rate. d. Net capital gain attributable to unrecaptured section 1250 gain was to continue to be taxed a maximum rate of 25%. e. Net capital gain attributable to collectibles gain and section 1202 gain was to continue to be taxed at a maximum rate of 28%. 3. Qualified dividend income. For tax years beginning in 2010, under JGTRRA, for both the regular tax and AMT purposes, an individual's qualified dividend income was taxed at the same rates that apply to net capital gain. a. Thus, an individual's qualified dividend income was taxed at a 15% or (for qualified dividend income which otherwise would be taxed at a 10% or 15% rate if the special rates did not apply) at a zero rate. b. The amount of a taxpayer's unrecaptured 1250 gain taxed at a maximum 25% rate was limited to the taxpayer's net capital gain determined without regard to the taxpayer's qualified dividend income. (In addition, a taxpayer had to hold stock for at least 61 days during the 121-day period beginning 60 days before the exdividend date in order for dividends on the stock to qualify as qualified dividend income.) c. The 2010 Tax Relief Act extended for two years, through 2012, the rules excluding qualified dividend income from net capital gain in computing unrecaptured 1250 gain and the holding period rule for determining when dividends on stock qualify as qualified dividend income. 4. Under pre-act law, for tax years beginning after Dec. 31, 2012, dividends received by an individual were to be taxed at ordinary income tax rates.

Chapter 1: Recent Tax Legislation 1-5 a. The rules excluding qualified dividend income from net capital gain in computing unrecaptured 1250 gain taxed at a 25% rate, and the holding period rule for determining when dividends on stock qualify as qualified dividend income, were to expire for tax years beginning after Dec. 31,2012. 5. New law. For tax years beginning after 2012, the 2012 Taxpayer Relief Act eliminates the provision in JGTRRA that calls for its provisions to sunset. a. Accordingly the provisions in JGTRRA, except as modified by other provisions in the new law, are made permanent and no longer automatically sunset in future years. [Sec. 303 of JGTRRA, as amended by Act Sec. 102(a)] 6. For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with taxable incomes exceeding $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately. [ 1 (h)(1), as amended by Act Sec. 102(b)] 7. For taxpayers whose ordinary income is generally taxed at a rate below 25%, capital gains and dividends will permanently be subject to a 0% rate. [ 1(h)(1)(8), as amended by Act Sec. 102(c)(2)] a. Taxpayers who are subject to a 25%-or-greater rate on ordinary income, but whose taxable income levels fall below the applicable threshold-$450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately-will continue to be subject to a 15% rate on capital gains and dividends. E. No Phase-Out of Personal Exemptions for Higher-Income Taxpayers 1. Personal exemptions generally are allowed for the taxpayer, his or her spouse, and any dependents. a. For tax years beginning in 2010, under EGTRRA, there was no overall reduction in the personal exemption amount based on the taxpayer's AGI. b. For tax years beginning after Dec. 31, 2010, the total amount of exemptions that could be claimed by a taxpayer was to be reduced (personal exemption phaseout (PEP)) by 2% for each $2,500 (or portion thereof) by which the taxpayer's AGI exceeds the applicable threshold. c. The phase-out rate was to be 2% for each $1,250 for married taxpayers filing separate returns. d. However, the 2010 Tax Relief Act provided that a higher-income taxpayer's personal exemptions weren't phased out for two additional years (for 2011 and 2012) when AGI exceeds an inflation-adjusted threshold. 2. New law. For tax years beginning after 2012, PEP, which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. a. Under the phaseout, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer's AGI exceeds the applicable threshold. b. These dollar amounts are inflation-adjusted for tax years after 2013. [ 151(d), as amended by Act Sec. 101 (b )(2)] F. 3%/80% Limitation on Itemized Deductions for Higher-Income Taxpayers 1. In lieu of taking the standard deduction, a taxpayer may take itemized deductions [generally those deductions which aren't allowed in computing adjusted gross income (AGI)]. a. For tax years beginning in 2010, there was no overall limitation on itemized deductions based on the taxpayer's AGI, although separate limitations (floors) might apply to the particular deduction.

1-6 2013 Tax Season Update b. For tax years beginning after Dec. 31, 2010, the total amount of itemized deductions was to be reduced (the "Pease limitation") by 3% of the amount by which the taxpayer's AGI exceeds a threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions.! c. However, the 2010 Tax Relief Act provided that the itemized deductions of higher-income taxpayers are not reduced for two additional years, through 2012. 2. New law. For tax years beginning after 2012, the 2012 Taxpayer Relief Act provides that the "Pease" limitation on itemized deductions, which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. a. Thus, for taxpayers subject to the "Pease" limitation, the total amount of their itemized deductions is reduced by 3% of the amount by which the taxpayer's AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. b. These dollar amounts are inflation-adjusted for tax years after 2013. [ 68(b), as amended by Act Sec. 101 (b )(2)] G. AMT Exemption Permanently Increased With Indexing 1. The alternative minimum tax (AMT) is the excess, if any, of the tentative minimum tax for the year over the regular tax for the year. a. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels). b. The result is alternative minimum taxable income (AMTI), which is subject to an AMT rate of 26% or 28%. 2. Under pre-act law, the AMT exemption amounts for tax years beginning after 2011 were: $33,750 for unmarried individuals; $45,000 for married couples filing jointly and surviving spouses; and $22,500 for married individuals filing separately. 3. New law. Retroactively effective for tax years beginning after 2011, the Act permanently increases the AMT exemption amounts. As a result, the AMT exemption amounts for tax years beginning after 2011 are as follows: a. Married individuals filing jointly and surviving spouses: $78,750, less 25% of AMTI exceeding $150,000 (zero exemption when AMTI is $465,000); b. Unmarried individuals: $50,600, less 25% of AMTI exceeding $112,500 (zero exemption when AMTI is $314,900); and c. Married individuals filing separately: $39,375, less 25% of AMTI exceeding $75,000 (zero exemption when AMTI is $232,500). i. But AMTI is increased by the lesser of $39,375 or 25% of the excess of AMTI (without the exemption reduction) over $232,500. [ 55(d), as amended by Act Sec. 104] 4. In addition, for tax years beginning after 2012, the 2012 Taxpayer Relief Act indexes these exemption amounts for inflation. ( 55(d), as amended by Act Sec. 104) 5. AMT exemption of a child subject to the kiddie tax. For tax years beginning after 2011, for a child subject to the kiddie tax (i.e., certain children with unearned income over $1,900 for 2012, $2,000 for 2013), the AMT exemption amount can't exceed the sum of the child's earned income plus an annually adjusted amount ($6,950 for 2012( $7,150 for 2013). a. In addition, the kiddie tax AMT exemption can't be more than the child's regular AMT exemption (i.e., the unmarried individual's exemption amount, see above).

Chapter 1: Recent Tax Legislation 1-7 b. Thus, for example, under the 2012 Taxpayer Relief Act, a child subject to the kiddie tax is entitled to a maximum AMT exemption for 2013 of $50,600, but only if he has earned income of $43,450 ($7,150 + $43,450 = $50,600) or more before taking the phaseout for unmarried individuals into account. H. Personal Nonrefundable Credits May Offset AMT and Regular Tax for All Tax Years 1. Nonrefundable personal credits-other than the adoption credit, the child credit, the savers' credit, the residential energy efficient property credit, the non-depreciable property portions of the alternative motor vehicle credit, the qualified plug-in electric vehicle credit, and the new qualified plug-in electric drive motor vehicle credit-were to be allowed for 2012 only to the extent that the individual's regular income tax liability exceeded his tentative minimum tax, determined without regard to the minimum tax foreign tax credit. 2. New law. Retroactively effective for tax years beginning after 2011, the Act permanently allows an individual to offset his entire regular tax liability and AMT liability by the nonrefundable personal credits. [ 26(a), as amended by Act Sec. 104(c)] I. Expanded American Opportunity Tax Credit Extended 1. The American Opportunity Tax Credit (AOTC) under 25A(i) was originally enacted as part of the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5), essentially as a modified version of the pre-existing Hope credit. a. The AOTC allowed eligible taxpayers to claim a credit equal to 100% of the first $2,000 of qualified tuition and related expenses, and 25% of the next $2,000 of qualified tuition and related expenses (for a maximum tax credit of $2,500 for the first four years of post-secondary education), for tax years beginning in 2009 or 2010. b. The AOTC was subsequently extended for two years (through 2011 and 2012) by the 2010 Tax Relief Act. 2. Under pre-act law, after 2012, the AOTC was scheduled to fall to 100% of the first $1,000 (as inflation adjusted) of qualified tuition and related expenses, and 50% of the next $1,000 (as inflation adjusted) of qualified tuition and related expenses. a. Other favorable rules relating to the AOTC that were also set to expire included increased AGI limits for qualification, refundability for a portion of the credit, and allowance of the credit for course materials. 3. New law. The 2012 Taxpayer Relief Act provides a 5-year extension of the expanded AOTC, allowing it to be claimed in tax years after 2008 and before 2018. [ 25A(i), as amended by Act Sec. 1 03(a)(1)] J. Various Child Tax Credit Provisions Made Permanent or Extended 1. The Child Tax Credit (CTC) allows taxpayers to claim a tax credit for each qualifying child under age 17 that the taxpayer can claim as a dependent. a. The CTC phases out when taxpayers' income exceeds certain thresholds. 2. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16) increased the per-child credit amount from $500 to $1,000, and made the CTC partially refundable for eligible taxpayers. In 2009, the ARRA modified the formula for determining the refundable portion of the CTC in a taxpayer-friendly way to apply to 15% of earned income in excess of $3,000 for tax years beginning in 2009 and 2010. These provisions were extended through 2012 by subsequent legislation (including the 2010 Tax Relief Act), but were set to expire thereafter. 3. Under pre-act law, after 2012, the maximum CTC was to drop from $1,000 to $500, the credit was not to be allowed against AMT, and the liberalized rules on refundability (above) would no longer apply. 4. New law. The 2012 Taxpayer Relief Act eliminated the "sunsetting" provision in EGTRRA that would have caused the $1,000 credit amount and other EGTRRA rules to expire. a. Thus, these rules are now permanent.

1-8 2013 Tax Season Update b. The 2012 Taxpayer Relief Act also provides a 5-year extension of ARRA's provision on refundability, such that it applies in tax years after 200B and before 201B. [ 24(d)(4), as amended by Act Sec. 103(b)] K. Certain Earned Income Tax Credit Rules Extended 1. Certain low-income workers are allowed a refundable Earned Income Tax Credit (EITC). a. An eligible individual is allowed a credit against his or her tax for the tax year in an amount equal to the credit percentage of so much of the taxpayer's earned income for the tax year as doesn't exceed the earned income amount. b. The credit percentage and the earned income amount, and therefore the maximum EITC, depend on the number of qualifying children that the taxpayer has. c. The statutory earned income amounts are increased annually for inflation, and phaseout amounts limit the amount of the credit. 2. In 2009, ARRA provided special EITC rules for 2009 and 2010 with higher credit amounts (45%) for eligible taxpayers with three or more children and marriage penalty relief (by increasing the income threshold at which the phaseout begins). a. These favorable rules were extended for two years by the 2010 Tax Relief Act. 3. Under pre-act law, after 2012, these favorable rules would disappear, and the EITC would revert to pre-2009 rules. 4. New law. The 2012 Taxpayer Relief Act provides a 5-year extension of these favorable EITC rules, rendering them applicable to tax years after 200B and before 201B. [ 32(b)(3), as amended by Act Sec. 103(c)] L. Rule Disregarding Refunds in Determining Eligibility for Certain Benefits Modified and Made Permanent 1. 6409, which was added by the 2010 Tax Relief Act, provides that for purposes of determining a taxpayer's eligibility for benefits or assistance under any federal program or federally-financed state or local program (or the amount or extent of benefits thereunder), any refunds made to the taxpayer aren't taken into account as income or resources for a 12-month period after receipt. a. This provision applied retroactively, starting with amounts received after Dec. 31,2009. 2. Under pre-act law, this provision wasn't to apply to amounts received after 2012. 3. The 2012 Taxpayer Relief Act removed the termination date from this section and made it permanent. [ 6409, as amended by Act Sec. 103(d)] 6409, as amended, applies to amounts received after Dec. 31, 2012. M. New Liberalized Rules for Transferring Amounts in Applicable Retirement Plans to Designated Roth Accounts 1. Under current law, a taxpayer with an applicable retirement plan which includes a qualified Roth IRA contribution plan can transfer amounts to a Roth IRA account, but only to the extent that the taxpayer had a right to remove such amounts from the plan (e.g., because he had attained age 591/2). a. The amount converted is included in the taxpayer's income in the year of the conversion, but future distributions from the Roth IRA are tax-free (as is the account's appreciation). 2. New law. For transfers after Dec. 31,2012, in tax years ending after that date, plan provisions in an applicable retirement plan which includes a qualified Roth contribution program can allow participants to elect to transfer amounts to designated Roth accounts with the transfer being treated as a taxable qualified rollover contributior under 40BA(e). a. Such a transfer will not be treated as violating 401 (k)(2)(b)(i), 403(b)(7)(A)(i), 403(b)(11), or 457(d)(1 )(A). [ 402A(c)(4)(E), as added by Act Sec 902]

Chapter 1: Recent Tax Legislation 1-9 RIA Special Study: Individual Tax Breaks Retroactively Reinstated and Extended by the 2012 Taxpayer Relief Act A. On Jan. 1, 2013, Congress passed the American Taxpayer Relief Act (2012 Taxpayer Relief Act), which the President quickly signed into law on Jan. 2, 2013. 1. The 2012 Taxpayer Relief Act will prevent many of the tax hikes that were scheduled to go into effect this year and retain many favorable tax breaks that were scheduled to expire, but will also increase income taxes for some high-income individuals and slightly increase transfer tax rates from 2012 levels. a. Further, it extends a host of expired and expiring tax breaks for businesses and individuals. 2. This Special Study explains the individual income tax provisions that were extended, added, and/or modified by the 2012 Taxpayer Relief Act. a. Many of the affected provisions had expired at the end of 2011, including the above-the-line deduction for educator expenses and the allowance of tax-free charitable transfers from a taxpayer's IRA, and these were retroactively resuscitated and extended through 2013. B. Above-the-Line Deduction for Educator Expenses Reinstated and Extended 1. Eligible elementary and secondary school teachers may claim an above-the-line deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom. a. Under pre-2012 Taxpayer Relief Act law (pre-act law), the educator expense deduction didn't apply for tax years beginning after Dec. 31,2011. 2. New law. The 2012 Taxpayer Relief Act retroactively extends the educator expense deduction for two years so that it applies to expenses paid in incurred in tax years 2012 and 2013. ( 62(a)(2)(D), as amended by Act Sec. 201 ) C. Exclusion for Discharged Home Mortgage Debt Extended 1. Discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately) is excluded from gross income. a. Under pre-act law, this exclusion didn't apply to any debt discharged after Dec. 31, 2012. 2. New law. The 2012 Taxpayer Relief Act extends this exclusion for one year so that it applies to home mortgage debt discharged before 2014. [ 1 08(a)(1 )(E), as amended by Act Sec. 202] D. Increase in Excludible Employer-Provided Mass Transit and Parking Benefits Reinstated and Extended 1. For 2011, an employee could exclude from gross income up to $230 per month in employer-provided inflation adjustment, but it fell to $125 for employer-provided transit and van pooling benefit, creating a disparity with other qualified transportation fringe benefits. a. Under pre-act law, this disparity was scheduled to continue for post-2012 years, and mass transit and van pool benefits extended to employees would only be excludable up to $125 per month. 2. New law. The 2012 Taxpayer Relief Act retroactively extends this increase in the monthly exclusion for employerprovided transit and van pool benefits, so that the exclusion for employer-provided transit and vanpool benefits is equal to that of the exclusion for employer-provided parking benefits, through 2013. [ 132(f)(2), as amended by Act Sec. 203] E. Treatment of Mortgage Insurance Premiums as Deductible Qualified Residence Interest Reinstated and Extended

1-10 2013 Tax Season Update 1. Mortgage insurance premiums paid or accrued by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer's qualified residence are treated as deductible qualified residence interest, subject to 8 phase-out based on the taxpayer's AGI. I a. Under pre-act law, this provision only applied to premiums paid or accrued before Jan. 1,2012. 2. New law. The 2012 Taxpayer Relief Act retroactively extends this provision for two years so that a taxpayer can deduct, as qualified residence interest, mortgage insurance premiums paid or accrued before Jan. 1, 2014. [ 163(h)(3)(E), as amended by Act Sec. 204] F. State and Local Sales Tax Deduction Reinstated and Extended 1. Taxpayers who itemize deductions may elect to deduct state and local general sales and use taxes instead of state and local income taxes. a. Under pre-act law, this choice was unavailable for tax years beginning after Dec. 31, 2011. 2. New law. The 2012 Taxpayer Relief Act retroactively extends this provision for two years so that itemizers can elect to deduct state and local sales and use taxes instead of state and local income taxes for tax years beginning before Jan. 1, 2014. [ 164(b )(5)(1), as amended by Act Sec. 205] G. Liberalized Rules for Qualified Conservation Contributions Reinstated and Extended 1. A taxpayer's aggregate qualified conservation contributions (i.e., contributions of appreciated real property for conservation purposes) are allowed up to the excess of 50% of the taxpayer's contribution base over the amount of all other allowable charitable contributions (100% for qualified farmers and ranchers), with a 15-year carryover of such contributions in excess of the applicable limitation. a. Under pre-act law, these rules didn't apply to any contribution made in a tax year beginning after Dec. 31 ( 2011, and contributions made thereafter were to be subject to the otherwise applicable 30% limit for capital gain property (50% limit for qualified farmers and ranchers). 2. New law. The 2012 Taxpayer Relief Act retroactively extends for two years the 50% and 100% limitations on qualified conservation contributions of appreciated real property so that they apply to contributions made in tax years beginning before Jan. 1,2014. [ 170(b)(1 )(E), as amended by Act Sec. 206] H. Above-the-Line Deduction for Higher Education Expenses Reinstated and Extended 1. A taxpayer may claim an above-the-line deduction for qualified tuition and related expenses for higher education paid by that taxpayer during the tax year, subject to applicable adjusted gross income (AGI) and dollar limits. a. Under pre-act law, this deduction wasn't available for tax years beginning after Dec. 31, 2011. 2. New law. The 2012 Taxpayer Relief Act retroactively extends the qualified tuition deduction for two years so that it can be claimed for tax years beginning before Jan. 1,2014. [ 222(e), as amended by Act Sec. 207] I. Nontaxable IRA Transfers to Eligible Charities Reinstated and Extended 1. Taxpayers who are age 70 112 or older can make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000 per year. a. These distributions aren't subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the taxpayer's return. b. Under pre-act law, these rules didn't apply to distributions made in tax years beginning after Dec. 31, 2011. r 2. New law. The 2012 Taxpayer Relief Act retroactively extends this provision for two years so that it's available for charitable IRA transfers made in tax years beginning before Jan. 1,2014. [ 408(d)(8)(F), as amended by Act Sec. 208]

Chapter 1: Recent Tax Legislation 1-11 a. The Act includes two elections to deal with the retroactive reinstatement of this provision: i. A taxpayer may elect to have a distribution made in January of 2013 be treated as if it were made on Dec. 31,2012. [Act Sec. 208(b)(2)(A)] ii. A taxpayer may elect to treat any portion of a distribution from an IRA to the taxpayer during December of 2012 as a qualified charitable distribution, provided that (i) the portion is transferred in cash after the distribution to an eligible charitable organization before Feb. 1, 2013, and (ii) except for the fact that the distribution wasn't originally transferred directly to the organization, the distribution otherwise meets 408( d)(8)'s requirements. [Act Sec. 208(b )(2)(B)] J. False Prisoner Tax Return Disclosure Rules Modified and Made Permanent 1. The IRS is allowed to disclose to the head of the Federal Bureau of Prisons (Bureau), and the head of any state agency charged with the responsibility for prison administration (agency), return information for individuals incarcerated in federal prison or state prison whom the IRS has determined may have filed or facilitated the filing of a false return. a. The disclosure is permitted to the extent that the IRS determines that it is necessary to permit effective federal tax administration. b. Under pre-act law, these rules didn't apply beyond Dec. 31,2011. 2. New law. The 2012 Taxpayer Relief Act expands the persons to whom false prisoner returns and return information can be disclosed to include officers and employees of the Bureau or agency, contractors responsible for operating a Federal or state prison on behalf of the Bureau or agency, and legal representatives of the Bureau, agency, responsible contractor, or prisoner. a. It also expands the authorized uses of the disclosed information to include administrative and judicial proceedings arising from various administrative actions. b. These provisions are made permanent by the 2012 Taxpayer Relief Act. [ 61 03(k)(1 0), as amended by Act Sec. 209] RIA Special Study: Business Tax Breaks Retroactively Reinstated and Extended by the 2012 Taxpayer Relief Act A. On Jan. 1, 2013, Congress passed the American Taxpayer Relief Act (2012 Taxpayer Relief Act), which the President quickly signed into law on Jan. 2, 2013. 1. The 2012 Taxpayer Relief Act will prevent many of the tax hikes that were scheduled to go into effect this year and retain many favorable tax breaks that were scheduled to expire, but will also increase income taxes for some high-income individuals and slightly increase transfer tax rates from 2012 levels. a. Further, it extends a host of expired and expiring tax breaks for businesses and individuals. 2. This Special Study explains how the 2012 Taxpayer Relief Act retroactively reinstates and extends for two years a host of business tax breaks, including: the research credit; generous 179 expensing and phaseout limits; the new markets tax credit; employer wage credit for activated reservists; 15-year writeoff for qualifying leasehold improvements, restaurant buildings and improvements, and retail improvements; enhanced charitable deductions for contributions of food inventory; and empowerment zone tax incentives. a. It also covers the Act's one-year extension of 50% bonus first-year depreciation. ). Research Credit Reinstated and Liberalized 1. The research credit equals the sum of: (1) 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount, (unless the taxpayer elected an alternative simplified research credit); (2) the

1-12 2013 Tax Season Update university basic research credit (Le., 20% of the basic research payments); (3) 20% of the taxpayer's expenditures on qualified energy research undertaken by an energy research consortium. 2. Under pre-2012 Taxpayer Relief Act law (pre-act law), the research credit didn't apply for amounts paid or accrued after Dec. 31,2011. 3. New law. The 2012 Taxpayer Relief Act retroactively extends the research credit (including the university basic research credit and the energy research consortium credit) for two years so that it applies for amounts paid or accrued before Jan. 1, 2014. [ 41 (h)( 1), as amended by Act Sec. 301 (a)] 4. For tax years beginning after Dec. 31, 2011, the 2012 Taxpayer Relief Act liberalizes the research credit rules for persons that acquire the major portion of either a trade or business or a separate unit of a trade or business of another person. a. Here, for purposes of calculating the allowable research credit, the amount of qualified research expenses paid or incurred by the acquiring person during the measurement period is increased by certain expenses of the predecessor, and the gross receipts of the acquiring person for such period is increased by certain gross receipts of the predecessor. b. The measurement period is, with respect to the tax year of the acquiring person for which the research credit is determined, any period of the acquiring person preceding such tax year which is taken into account for purposes of determining the credit for such year. [ 41(f)(3)(A) and 41(f)(3)(8), as amended by Act Sec. 301(b)] 5. The 2012 Taxpayer Relief Act also revises the rules for allocating the research credit among members of a controlled group or members of a group of commonly controlled trades or businesses. a. For tax years beginning after Dec. 31, 2011, the credit for each member of a controlled group is determined on a proportionate basis to its share of the aggregate of the qualified research expenses, basic researdi payments, and amounts paid or incurred to energy research consortiums, taken into account by such controlled group for purposes of the research credit. [ 41 (f)(1 )(A)(ii), as amended by Act Sec. 301 (c)] b. A similar rule applies to members of a group of commonly controlled trades or businesses. [ 41 (f)(1 )(8)(ii), as amended by Act Sec. 301(c)] C. Bonus First-Year Depreciation Extended for One Year 1. Under pre-act law, the 168(k) additional first-year depreciation deduction (also called bonus first-year depreciation) generally is allowed equal to 50% of the adjusted basis of qualified property acquired and placed in service after Dec. 31, 2011, and before Jan. 1,2013 (before Jan. 1,2014 for certain longer-lived and transportation property). a. The additional first-year depreciation deduction is allowed for both regular tax and alternative minimum tax (AMT) purposes, but is not allowed for purposes of computing earnings and profits. b. The basis of the property and the depreciation allowances in the year of purchase and later years are appropriately adjusted to reflect the additional first-year depreciation deduction. c. A taxpayer may elect out of additional first-year depreciation for any class of property for any tax year. 2. In general, an asset qualifies for the bonus depreciation allowance if: a. It falls into one of the following categories: property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less; computer software other than computer software covered by 197; qualified leasehold improvement property; or certain water utility property. ( b. It is placed in service before Jan. 1, 2013. (Certain long-production-period property and certain transportation property may be placed in service before Jan. 1,2014)

Chapter 1: Recent Tax Legislation 1-13 c. Its original use commences with the taxpayer. Original use is the first use to which the property is put, whether or not that use corresponds to the taxpayer's use of the property. 3. Under pre-act law, these bonus depreciation provisions didn't apply to property placed in service after Dec. 31, 2012 (Dec. 31,2013 for certain longer-lived and transportation property). 4. New law. The 2012 Taxpayer Relief Act extends 50% first-year bonus depreciation so that it applies to qualified property acquired and placed in service before Jan. 1, 2014 (before Jan. 1, 2015 for certain longer-lived and transportation property). [ 168(k)(2), as amended by Act Sec. 331 (a)] a. A conforming change is made to 460(c)(6)(B) (relating to 50% bonus depreciation not being taken into account as a cost in applying the percentage of completion method for certain long-term contracts). D. First-Year Depreciation Cap for 2013 Autos and Trucks Boosted by $8,000 1. Under the luxury auto dollar limits of 280F, depreciation deductions (including 179 expensing) that can be claimed for passenger autos are subject to dollar limits that are annually adjusted for inflation. a. For passenger automobiles placed in service in 2012, the adjusted first-year limit is $3,160. b. For light trucks or vans, the adjusted first-year limit is $3,360. c. Light trucks or vans are passenger automobiles built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis that are subject to the 280F limits because they are rated at 6,000 points gross (loaded) vehicle weight or less. 2. The applicable first-year depreciation limit is increased by $8,000 (not indexed for inflation) for any passenger automobile that is "qualified property" under the bonus depreciation rules of 168(k) and which isn't subject to a taxpayer election to decline bonus depreciation. 3. Under pre-act law, qualified property didn't include property placed in service after Dec. 31, 2012 (except for certain aircraft and certain long-production-period property that had, instead, a Dec. 31, 2013 placed-in-service deadline). a. Thus, under pre-act law, the $8,000 boost in first-year depreciation allowances wasn't available for new cars and trucks purchased after 2012. 4. New law. The 2012 Taxpayer Relief Act provides that the placed-in-service deadline for "qualified property" is Dec. 31, 2013 [Dec. 31,2014 for aircraft and long-production-period property). ( 168(k)(2), as amended by Act Sec. 331(a)] Example 1-1: T, a calendar year taxpayer, places a new $40,000 vehicle into service in his business on Jan. 5, 2013. Assume that: (1) the vehicle is an auto that is "qualified property" (and an election to decline bonus depreciation and AMT depreciation relief doesn't apply to the vehicle); and (2) the passenger auto first-year allowances remain unchanged for 2013. T is allowed first-year depreciation for 2013 of $11,160 ($3,160 presumed general first-year allowance for 2013 plus $8,000). If the vehicle were instead a light truck or van, T is allowed first-year depreciation for 2013 of $11,360 (the presumed $3,360 general first-year allowance for 2013 plus $8,000). E. Extended Choice to Forego Bonus Depreciation and Claim Credits Instead 1. Pre-Act law's 168(k)(4) generally permits a corporation to increase the AMT credit limitation (but not the research credit limitation) by the bonus depreciation amount with respect to certain property placed in service after Dec. 31, 2010 and before Jan. 1, 2013 (Jan. 1, 2014 in the case of certain longer-lived and transportation property). 2. Under pre-act law, the above provision didn't apply to such property placed in service after Dec. 31, 2012 (Dec. 31, 2013 in the case of certain longer-lived and transportation property). 3. New law. For property placed in service after Dec. 31, 2012, in tax years ending after that date, the 2012 Taxpayer Relief Act provides a similar option to corporations with respect to "round three extension property,"

1-14 2013 Tax Season Update generally, property newly eligible for 50% bonus first-year depreciation under the 2012 Taxpayer Relief Act's oneyear extension provision, i.e., property placed in service after 2012 and before 2014 (before 2015 for the aircraft and long-production-period property). [ 168(k)(4)(d) and 168(k)(4)(J), as amended by Act Sec. 331(c)]. F. Boosted Expensing Amounts for 2013 1. Under 179, a taxpayer, other than an estate, a trust, or certain noncorporate lessors, can elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer's trade or business. a. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of 179 property placed in service during the tax year in excess of a specified investment ceiling. b. Amounts ineligible for expensing due to excess investments in expensing-eligible property can't be carried forward and expensed in a subsequent year. c. Rather, they can only be recovered through depreciation. d. The amount eligible to be expensed for a tax year can't exceed the taxable income derived from the taxpayer's active conduct of a trade or business. e. And any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years. 2. Under pre-act law, the maximum amount that may be expensed for tax years beginning in 2011 is $500,000. a. For tax years beginning in 2012, the maximum amount is $139,000. For tax years beginning after 2012, the maximum amount is $25,000. b. For tax years beginning in 2011, the maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of section 179 property placed in service during the tax year in excess of $2,000,000 (the investment ceiling). c. For tax years beginning in 2012, the investment ceiling is $560,000. For tax years beginning after 2012, the investment ceiling is $200,000. 3. In general, under pre-act law, property is eligible for 179 expensing if it is: a. Tangible property that's 1245 property (generally, machinery and equipment), depreciated under the MACRS rules of 168, regardless of its depreciation recovery period; b. For any tax year beginning in 2010 or 2011, up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property); and c. Off-the-shelf computer software, but only if placed in service in a tax year beginning before 2013. [ 179(d)(1)] 4. Under pre-act law, for tax years beginning before 2013, an expensing election or specification of property to be expensed may be revoked without the IRS's consent, but, if revoked, can't be re-elected. 5. New law. Retroactively effective for tax years beginning in 2012, the 2012 Taxpayer Relief Act increases the maximum expensing amount under 179 from $139,000 to $500,000. a. Effective for tax years beginning in 2013, the 2012 Taxpayer Relief Act increases the maximum expensing amount under 179 from $25,000 to $500,000. I b. The 2012 Taxpayer Relief Act also increases the investment-based phaseout amount for tax years beginning in 2012 or 2013 to $2,000,000.