United States: Year-End Legislation Extends Key Provisions for Businesses, Provides 100 Percent Expensing for Certain Assets and Enacts New Foreign Procurement Excise Tax

As part of legislation enacted at the end of 2010, the U.S. Congress extended several beneficial tax provisions for businesses, including the research credit, active financing exception under Subpart F and look-through rule for payments between controlled foreign corporations. In addition, the new legislation provides 100 percent expensing for certain assets purchased during the latter part of 2010 and during 2011 that are placed in service prior to January 1, 2012. Finally, as part of legislation providing benefits to 9/11 relief workers, a new excise tax will be imposed on certain procurement payments received by non-U.S. persons under contracts with the U.S. government.

Overview

On December 17, 2010, President Obama signed H.R. 4853, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act), into law. The 2010 Tax Act extends for two years all current individual income and capital gains tax rates, many of which had been set to expire (and thus to increase to prior-law levels) December 31, 2010. In addition, the 2010 Tax Act extends certain expired business tax provisions, including the research credit, the active financing exception under Subpart F and the look-through rule for payments between controlled foreign corporations (CFCs). Previous attempts to extend these expiring provisions languished in Congress. The 2010 Tax Act generally extends the provisions retroactively to the beginning of 2010 and through 2011.

Finally, the 2010 Tax Act extends 50 percent bonus depreciation under section 168(k) of the Internal Revenue Code (the Code) for certain business assets purchased prior to January 1, 2013, that are placed into service prior to that date (or by January 1, 2014, with respect to certain property). Temporary bonus depreciation has been enacted as a stimulus measure several times in recent years. However, the 2010 Tax Act creates an additional incentive by allowing for 100 percent expensing of certain business assets purchased after September 8, 2010, and before January 1, 2012, that are placed into service prior to January 1, 2012 (or by January 1, 2013, with respect to certain property).

On December 23, 2010, President Obama signed H.R. 847, the James Zadroga 9/11 Health and Compensation Act of 2010 (the 9/11 Act), into law. In order to partially offset the costs associated with providing benefits to 9/11 relief workers, the 9/11 Act imposes an excise tax on certain procurement payments received by non-U.S. persons under contracts with the U.S. government.

Expired Provisions

Research Credit—Section 41

In order to encourage research activities, section 41 of the Code provides for a nonrefundable 20 percent credit for certain research expenses. Prior to the enactment of the 2010 Tax Act, the research credit was not available for research expenses paid or incurred after December 31, 2009. Section 731 of the 2010 Tax Act extends the availability of the credit for two years, allowing taxpayers a credit for research expenses paid or incurred on or before December 31, 2011. The 2010 Tax Act does not otherwise alter a taxpayer's ability to qualify for the research credit under section 41.

The Active Financing Exception to Subpart F—Section 954(h)

Under the anti-deferral regime of Subpart F, U.S. shareholders of CFCs are required to immediately take into account passive income of the CFC. Specifically, the foreign personal holding company income (FPHCI) rules of section 954 generally require a U.S. shareholder to immediately include in its income its proportionate share of dividends, interest, royalties, rents and annuities of a CFC in which the U.S. shareholder has a direct or indirect 10 percent or greater interest. In addition, a U.S. shareholder is generally required to immediately include in its income its proportionate share of a CFC's foreign base company services income (FBC Services Income), which is income from services provided by a CFC that are performed outside of the CFC's country of organization for or on behalf of related parties.

Section 954(h) of the Code provides an exception to the FPHCI and FBC Services Income rules for qualified banking or financing income of CFCs engaged in the active conduct of banking, finance or similar businesses. Thus, for example, if a CFC is actively engaged in the business of lending, the interest derived by that CFC with respect to loans may be eligible for the active financing exception under section 954(h), such that the interest does not constitute FPHCI or FBC Services Income and is not subject to immediate taxation in the United States.

Prior to the enactment of the 2010 Tax Act, section 954(h) applied to tax years of the CFC beginning after December 31, 1998, and before January 1, 2010, and to tax years of U.S. shareholders with or within which any such taxable year of the CFC ended. Section 750 of the 2010 Tax Act extends the active financing exception of section 954(h) for two years, through tax years beginning before January 1, 2012.

Look-Through Treatment for Payments Received by a CFC from Related Persons—Section 954(c)(6)

Like section 954(h), section 954(c)(6) provides an exception to the general FPHCI regime of Subpart F that requires a U.S. shareholder of a CFC to immediately take into account passive income of the CFC. Specifically, section 954(c)(6) provides that certain payments (e.g., dividends, interest, rents and royalties) received by a CFC from related persons do not constitute FPHCI provided the payment is not allocable to income of the related persons which is Subpart F income or income effectively connected with the conduct of a trade or business within the United States.

Prior to the enactment of the 2010 Tax Act, section 954(c)(6) applied to tax years of the CFC beginning after December 31, 2005, and before January 1, 2010, and to tax years of U.S. shareholders with or within which such tax years of the CFC ended. Section 751 of the 2010 Tax Act extends the look-through rule of section 954(c)(6) for two years, through tax years beginning before January 1, 2012.

Other Provisions

In addition to the provisions discussed above, Section 731 through 765 of the 2010 Tax Act extended a number of other business tax provisions, including:

  • New Markets Tax Credit (section 45D of the Code)—through December 31, 2011
  • Deduction for Income Attributable to Domestic Production Activities in Puerto Rico (section 199(d)(8) of the Code)—through tax years beginning before January 1, 2012
  • Exemption for Certain Dividends of RICs (section 871(k) of the Code)—through December 31, 2011
  • 100% Exclusion of Gain on Certain Small Business Stock (section 1202(a)(4) of the Code)—stock acquired prior to January 1, 2012

Bonus Depreciation and 100 Percent Expensing

The 2010 Tax Act extends the 50 percent bonus depreciation allowable under section 168(k) to "qualified property" purchased prior to January 1, 2013, that is placed into service prior to that date (or before January 1, 2014, with respect to certain property). Prior to enactment of the 2010 Tax Act, section 168(k) applied to qualified property purchased prior to January 1, 2011, that was placed in service prior to that date (or before January 1, 2012, with respect to certain property). Temporary bonus depreciation has been enacted as a stimulus measure several times over the last several years.

Section 168(k)(2) of the Code provides that qualified property generally includes property which has a recovery period of 20 years or less, is computer software (for which a deduction is allowable under section 167), is water utility property or is qualified leasehold improvement property.

In addition to another extension of the 50 percent bonus depreciation under section 168(k), the 2010 Tax Act provides for a 100 percent depreciation deduction for certain business property acquired after September 8, 2010, and before January 1, 2012, that is placed into service prior to January 1, 2012 (or January 1, 2013, with respect to certain property). Specifically, new section 168(k)(5) will allow a taxpayer to expense 100 percent of the cost of qualified property acquired between the dates described above, during the tax year in which such property is placed in service (provided such property is placed in service prior to January 1, 2012 or January 1, 2013, with respect to certain property). For example, assume on September 9, 2010, a calendar year taxpayer acquired qualified property (discussed above) for which the 100 percent expensing allowance of section 168(k)(5) applies, and placed the property into service in its business the same day. The taxpayer would be permitted to expense the entire cost of such property during its 2010 tax year. Provided the property acquired is qualified property and was acquired and placed in service during the appropriate time frame, new section 168(k)(5) does not impose any additional limitations to obtaining the 100 percent depreciation deduction.

Foreign Procurement Excise Tax

To partially offset the cost of providing health benefits and compensation to relief workers of the September 11, 2011, terrorist attacks, the 9/11 Act creates new section 5000C of the Code, which imposes a 2 percent excise tax on any "specified Federal procurement payment" received by a foreign person. A "specified Federal procurement payment" is defined as a payment made pursuant to a contract with the government of the United States for the provision of goods, if such goods are manufactured or produced in any country that is not party to an international procurement agreement with the United States, or the provision of services, if such services are provided in any country which is not a party to an international procurement agreement with the United States.

Conclusion

Businesses should be encouraged by the extension of the favorable provisions described above, and new opportunities for capital investment may arise as a result of the 100 percent expensing provision provided by the Act. However, the temporary nature of these provisions requires taxpayers to consider planning opportunities to maximize the benefits of the provisions in the near term, as well as potentially to live without them.

Further, taxpayers should be aware of the new excise tax imposed on certain payments received by foreign persons under contracts with the U.S. government. The new tax appears to be fairly narrow in scope, but multinational companies that do significant business with the U.S. government should confirm the tax does not apply in their particular situations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions