The American Taxpayer Relief Act of 2012
A focus on asset managers
On January 2, 2013, President Obama signed the American Taxpayer Relief Act (the "Act" or "ATPR Act") of 2012 into law. In addition to increasing income tax rates for many high-income taxpayers, extending the Bush-era tax rates for middle-income taxpayers, and extending many other provisions, a number of provisions in the Act directly affect the asset management industry.
Specific issues for asset managers
- Capital gains and qualified dividend income ("QDI")
- Prior to the Act, most taxpayers paid a 15 percent tax rate with respect to long term capital gains and QDI. The Act instituted a top marginal tax rate of 20 percent on capital gains and QDI for taxpayers in the top 39.6 percent of ordinary income tax bracket.i Significantly, unlike the Bush-era tax rate reductions which included "sunset" provisions, the newly enacted tax rate structure is not scheduled to expire and is therefore permanent until future legislation directly amends these provisions.
- Flow-through of interest and short-term gains to foreign shareholders of Regulated Investment Companies ("RICs")
- Under the Act, foreign persons continue to be exempt from withholding on 'interest-related and short-term capital gain dividends' RICs. The Act extends this exemption two years to taxable years of RICs beginning before January 1, 2014. Such income earned in taxable years beginning after December 31, 2011 was subject to withholding prior to the Act's extension of the exemption, but RICs may be able to refund such withholding to shareholders until March 15, 2013.ii
- RIC Foreign Investment in Real Property Act ("FIRPTA") exemption
- Similar to the interest-related dividend exemption, the Act retroactively extends the exemption for non-U.S. shareholders of a RIC that invests in FIRPTA property. Under this exemption, distributions with respect to RIC taxable years beginning before January 1, 2014, to non-U.S. persons by publicly traded mutual funds that held substantial U.S. real property interests are not subject to the FIRPTA tax. Such income earned in taxable years beginning after December 31, 2011 was subject to the FIRPTA tax prior to the Act's extension of the exemption, but certain RICs may be able to refund the tax to shareholders until March 15, 2013.
- Controlled Foreign Corporations ("CFC") and Sub-Part F
- Generally, certain payments on indebtedness between related CFCs generate Sub-Part F income, which is taxable income generally without the receipt of cash from the CFC. The Act extends rules that exclude from Sub-Part F income, qualifying payments on intercompany indebtedness between related CFCs for taxable years beginning before 2014. iii
- Qualified Small Business Stock ("QSBS")
- A 100 percent exclusion of gain, for regular and AMT purposes, on the sale of QSBS is made applicable for acquisitions made in 2010 through 2013. iv Certain limitations apply to the amount of the excluded gain, and the bill does not address the continuing question of whether the general partner's carry allocation of gain will qualify for the exclusion.
- Carry legislation
- The Act did not include any provisions addressing the taxation of carried interest, and therefore the treatment of carry or incentive allocations remains unchanged from prior law. Some taxpayers may be subject to higher tax rates on carry or incentive allocations depending on their specific tax situation.
The Act also extended many provisions for energy investment, and those investing in this segment should continue to see certain tax benefits.
The personal exemption phaseout and limitation on itemized deductions are also set to take effect for married couples filing joint returns with an AGI of over $300,000 [this threshold will be indexed for inflation]. Although these taxpayers are not in the top income bracket, they may be subject to certain limitations of their itemized deductions and personal exemption phase-outs, increasing their effective tax rate.
As a reminder, the 3.8 percent net investment income tax imposed by the Health Care and Education Reconciliation Act of 2010 became effective on January 1, 2013 for married taxpayers with AGI over $250,000 ($200,000 for individual taxpayers). This tax, on investment income such as interest, dividends, capital gains, and other 'unearned income,' is in addition to the increased tax rates based by the ATPR Act.
General tax issues
A general overview and Deloitte insights of the entire Act can be found in Deloitte report Swerving from the Cliff: Tax Provisions in the American Taxpayer Relief Act of 2012.
For additional information or questions, please contact:
National Managing Partner, Asset Management Tax
Deloitte Tax LLP
+1 212 436 2165
i The 20 percent top rate applies only to joint filers earning above $450,000 and single filers earning above $400,000. On top of these stated rates, joint filers generally earning in excess of $250,000 and single filers generally earning over $200,000 may be subject to a 3.8 percent net investment income tax on certain types of investment income. This provision was enacted in the Patient Protection and Affordable Care Act of 2010 and became effective on January 1, 2013.
iiIRC Sec. 1441(c)(12) & IRC Sec 871(k)
iiiIRC Sec. 954(c)(6)
iv IRC Sec. 1202(a)
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