Get in Gear for Tax Changes in 2012

By Donna Funk | February 22, 2012

The beginning of a new year brings new opportunities, even when expected changes are on the horizon. As ethanol plants said good good-bye to 2011, they also prepared for the end of the small producer tax credit, the Volumetric Ethanol Excise Tax Credit, the 100 percent bonus depreciation and the research and development credit—to name just a few.

While the industry has appreciated those credits and incentives, this year also marks the final year for two additional biofuel tax advantages passed during the presidency of George W. Bush that generally lowered tax rates and revised the code. These included the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.

The Obama administration extended the rates for two years as part of a larger tax package we know as the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The 15 percent capital gains rate will end Dec. 31 and yet another good-bye will be to the 50 percent bonus depreciation, which was intended to stimulate the economy.

Still, ethanol plants and ethanol plant owners in a pass-through structure should continue to monitor these tax opportunities as Congress could extend or modify either one. To take advantage of the capital gains rate, it might be worth considering triggering some LT capital gains in 2012 and paying the 15 percent tax, then rebuying the asset with a higher basis to be used in future years when capital gains rates are higher. This, of course, assumes a taxpayer’s ordinary income is going to be taxed at the same or higher rates in the future when compared to today. If a plant is considering capital expenditure projects and, all things being equal, the time value of money might suggest buying the assets in 2012 versus waiting until next year or 2014.

Did I mention a new year also brings new opportunities and challenges? There are tax changes slated to take effect in 2013 as a result of the Healthcare and Education Reconciliation Act. Investors in ethanol plants may find a significant provision called the surtax, which is a 3.8 percent Medicare tax. This surtax applies to individuals, trusts and estates with income that exceeds specific thresholds. In addition, the surtax is assessed differently for trusts and estates than for individuals. The 3.8 percent surtax will be applied to the lessor of net investment income or modified adjusted gross income in excess of a threshold (ranging from $11,000 to $250,000, depending on filing status). Income from passive investment activities is included in net investment income and therefore, many ethanol investors will have net investment income subject to the surtax.

An immediate question is how to make an investment active or not passive. Unfortunately, that isn’t always possible, and those considered active can be subject to self-employment income on that activity, which results in a 3.8 percent tax as well. Every situation will be different but, for example, if an ethanol plant allocates $2 million of passive income to its members, the additional tax could be $76,000. A plant and the members should consult their tax advisor for specific details on the impact of the surtax.

The new year also brings new legislative sessions at the federal and state level.  As the respective governmental bodies deal with budget crisis, stimulate new business and modify the tax code, we are guaranteed to see additional proposed changes that must be followed and analyzed to lend our support for or against these measures—both to protect our own business but also the industry as a whole.

Though we always anticipate change in tax credits from year to year, it is important for any business to plan from the beginning for the year ahead. Taking advantage of the the capital gains rate and bonus depreciation in 2012 and planning for the surtax in 2013 can make your year the best it can be.

Author: Donna Funk
CPA, Kennedy and Coe LLC
(800) 303-3241