By Mark E. Battersby
A number of tax provisions either expired at the end of 2011 or are scheduled to expire at the end of this year. Among the largest in terms of estimated tax savings for at least smaller coal mining or processing operations, are the “bonus” depreciation deductions and the Section 179, first year expensing write-off for newly acquired equipment and other business property.
Although Congress may retroactively reinstate some or all of these provisions, an agreement before the November elections seems unlikely for some of the most taxpayer-favorable business tax incentives that expired at the end of 2011, or others that are slated to expire after 2012.
Bye-bye Write Offs
Bonus depreciation was originally created in 2002 as a temporary economic incentive by which companies could immediately deduct 30% of the basis of qualifying assets that were placed in service after September 10, 2001 and before January 1, 2005. An increase in the percentage of the deduction in 2003 to 50% expired in 2005. Reintroduced by lawmakers in 2008, bonus depreciation has subsequently been extended three times.
Although the concept of taking the additional depreciation in the first year is quite simple, changes to the applicable percentage, timeframes during which each is available and variations related to unique types of assets which qualify have made application of the rules somewhat complex.
The definition of property eligible for bonus depreciation under the 2010 Tax Relief Act is the same as under prior law, but the percentage and placed-in-service dates have changed. The percentage increased from 50% to 100% for qualifying property placed in service after September 8, 2010, and before January 1, 2012. Bonus depreciation reverts to the 50% level for the current 2012 tax year and, failing action by our lawmakers, will disappear completely after January 1, 2013.
Those coal mining or processing businesses investing in qualifying assets will be able to deduct 50% of the cost of new equipment and business property during the current tax year. This will reduce taxable income and taxes paid, resulting in an increase in cash flow that can be reinvested in the business—but only until December 31, 2012.
Unlike bonus depreciation that applies only to “new” property, a coal business may immediately deduct as a Section 179 expense as much as $125,000 in costs. Of course, the Section 179 expensing write-off is reduced, dollar-for-dollar, by any property acquisitions in excess of the $500,000 investment ceiling, limiting the write-off to smaller coal mining or processing businesses.
Earlier legislation created first-year expensing dollar and investment limits of $500,000 and $2 million, respectively, for the 2010 and 2011 tax years. The Tax Relief Act included a $125,000 dollar limit and a $500,000 investment limit for tax years beginning in 2012 and expiring before January 1, 2013.
Indian Coal Tax Credits
Also slated to expire is a unique tax credit for coal produced on Indian lands. A $2-per-ton tax credit (adjusted for inflation from 2005; and now at $2.267 per ton for 2012) is available through 2012. The tax credit can still be claimed for coal produced at facilities placed in service before 2009 that produce coal from reserves that on June 14, 2005, were owned by (or held in trust on behalf of) an Indian tribe. First enacted as part of the Energy Policy Act of 2005, the tax credit is available only through December 31, 2012.
Rescuing the Mine Rescue Team Training Tax Credit
Another tax credit, the Mine Rescue Training tax credit, a direct reduction of an operation’s tax bill rather than a reduction in the income upon which the tax is computed, shows up on many congressional “to-do” lists. The mine rescue training tax credit was available for each qualified mine rescue team employee, employed by a mining operation. The credit was the lesser of: (1) 20% of the amount paid or incurred by the mining operation during the taxable year for training program costs of each qualified mine rescue team employee (including the wages of the employee while attending the program); or (2) $10,000.
Originally enacted as part of the Tax Relief and Health Care Act of 2006, the provision was effective for tax years beginning after December 31, 2005, through December 31, 2008. The provision was most recently extended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, but only for taxable years beginning on or before December 31, 2011.
Mining Safety Equipment Write-offs
The tax provision that allowed mining operations to choose to treat 50% of the cost of any qualified advanced mine safety equipment property as an expense in the taxable year in which it was placed in service is also being talked about for renewal. First enacted under the Tax Relief and Health Care Act of 2006, the provision was