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Title: Tax Updates, Incentives and Planning to Consider in Tough Economic Times


1
Tax Updates, Incentives and Planning to Consider
in Tough Economic Times
  • Michael Hadjiloucas and Lori McMahon
  • December 10, 2008

2
New Federal LegislationNine New Acts in Last 12
Months
  • The Emergency Economic Stabilization Act
    (10/3/08)
  • The Housing and Economic Recovery Act (7/30/08)
  • The Farm Act (6/18/08)
  • The Heroes Earnings Assistance and Relief Tax Act
    (6/17/08)
  • The Economic Stimulus Act (2/13/08)
  • The Technical Corrections Act (12/29/07)
  • The Tax Increase Prevention Act (12/26/07)
  • The Mortgage Forgiveness Debt Relief Act
    (12/20/07)
  • The Energy Independence and Security Act
    (12/19/07)

3
Economic Stimulus Act of 2008
  • Enhanced Section 179 Expense
  • Expense deduction for certain taxpayers who elect
    to expense rather than capitalize qualifying 179
    property
  • New or used tangible personal property, including
    computer software, used in a trade or business
  • Expense increased to 250,000 and threshold
    increased to 800,000 for tax years beginning in
    2008
  • Expense is 133,000 and threshold is 530,000 for
    2009

4
Economic Stimulus Act of 2008
  • Bonus Depreciation
  • Write Off 50 of cost in first year
  • Original use of property must commence with the
    taxpayer after 12/31/07
  • Qualified Property
  • MACRS property with recovery period of 20 years
    or less
  • Computer software not covered by Sec. 197
  • Water utility property
  • Qualified leasehold improvement property
  • Binding written contract during 2008
  • Construction must begin before year- end

5
Bonus Depreciation Example
6
Emergency Economic Stabilization Act of 2008
  • Provides 700 Billion to Treasury for purchase of
    certain illiquid assets from troubled
    institutions
  • Also, one of the largest Tax Acts in recent years
  • Makes nearly 300 changes to the Internal Revenue
    Code at a cost of 150 billion including
  • A one-year AMT patch
  • An extension of a number of business and
    individual deductions, credits and incentives
  • Several energy-related provisions and
  • Disaster relief to those impacted by recent
    hurricanes flooding

7
Emergency Economic Stabilization Act of 2008
  • Business Extenders Through 12/31/09
  • Research Tax Credit, including modification to
    the alternative simplified credit
  • 15 Year Life for Qualified Leasehold Improvements

8
Emergency Economic Stabilization Act of 2008
  • Research Tax Credit Extended through 12/31/09 and
    Modified
  • RE Credit increases cash flow through permanent
    tax savings that affects a Companys Effective
    Tax Rate
  • Estimated federal benefit approximates 6.5 of
    qualified research expenses (QREs) incurred
    plus, many states provide a benefit for RE
    credit as well
  • Any unused credit may be carried back 1 year and
    carried forward 20 years
  • For tax years beginning after 12/31/08, taxpayers
    will no longer be able to elect the Alternative
    Incremental Credit (used a sliding scale of a
    lower fixed base and lower credit rates)
  • Code Sec. 41 revised to increase the alternative
    simplified credit from 12 to 14 of QREs
    above 50 of average annual QREs in previous 3
    years.
  • Increase applicable to tax years ending on or
    after 1/1/09
  • Election to use this method must be made on a
    timely filed original return

9
Emergency Economic Stabilization Act of 2008
  • 15 Year straight-line depreciation for qualified
    leasehold and restaurant improvement property
  • Extended through 2009
  • Any improvement to an interior portion of
    nonresidential real property if various
    requirements are met
  • Definition of qualified restaurant property
    expanded to cover new restaurant buildings as
    well as improvements if placed in service after
    12/31/08 and before 1/1/10
  • For restaurant improvements, no longer must be
    made more than 3 years after the building was
    placed in service
  • Bonus depreciation is generally available for
    property acquired after 12/31/07 and placed in
    service (PIS) before 1/1/09. This PIS deadline
    was not extended

10
Emergency Economic Stabilization Act of 2008
  • Expansion of 15-year Recovery Period for
    Qualified Retail Improvement Property (QRIP)
  • QRIP is 15-year property if placed in service
    after 12/31/08 and before 1/1/10
  • Includes any improvement to an interior portion
    of a building which is nonresidential real
    property if
  • Such portion is open to the general public and is
    used in the retail T/B of selling tangible
    personal property to the general public and
  • Such improvement is placed in service more than 3
    years after the building was first placed in
    service
  • Excludes expenses due to enlargement of the
    building, elevators, escalators, structural
    components benefiting a common area, or internal
    structural framework
  • Bonus depreciation does not apply

11
Emergency Economic Stabilization Act of 2008
  • Energy Tax Incentives for Corporations
  • Section 179D is modified to extend the tax
    deduction for energy efficient commercial
    building property for property placed in service
    after 12/31/05 but before 01/01/2014
  • Section 168(m) is added to allow a 50
    depreciation deduction allowance for reuse and
    recycling property used to collect, distribute,
    or recycle certain materials including scrap,
    fibers, and metals
  • Applies to property placed in service after
    8/31/08 and having a useful life of at least 5
    years

12
Emergency Economic Stabilization Act of 2008
  • Other
  • Modifications to Section 199-Manufacturing
    Deduction
  • Section 199(d) is amended to freeze the tax
    deduction at 6 (reduction of 3) for gross
    receipts derived from the sale, exchange or other
    disposition of oil, gas or any primary products
    of oil or gas
  • Other taxpayers use 6 through 2009, and 9
    thereafter
  • Extended the deduction allowable with respect to
    income attributable to domestic production
    activities in Puerto Rico
  • Amended to add definition of W-2 wages for a
    qualified film and attribution rules added for
    partnerships and S-Corps for purposes of the
    domestic production activities deduction

13
New Jersey Credits
  • Research and Development Credit
  • Corporate entities allowed a credit for qualified
    expenditures with respect to research conducted
    in New Jersey
  • Credit equals 10 of the excess of the qualified
    research expense for the fiscal or calendar year
    over a base amount and 10 of basic research
    payments
  • No deduction allowed for RD expenditures unless
    those expenditures are also used to compute a
    federal credit claimed under IRC Sec. 41
  • High-tech companies also allowed to sell unused
    RD credits and net operating losses

14
New Jersey Credits
  • Credit for High Technology Companies
  • Corporate entities allowed a credit, for three
    successive tax years, equal to 10 of any
    qualified investment made in a small NJ-based
    high-technology business
  • Expenses qualifying for the small high-technology
    business credit cannot be used for the RD tax
    credit
  • Qualified investment is defined as
    non-refundable at-risk cash investment made by an
    unrelated entity and transferred to a small
    NJ-based high-technology business in exchange for
    stock or interests

15
New Jersey Credits
  • Manufacturing equipment tax credit
  • Investments in qualified equipment
  • Credit equal to 2 of investment credit base of
    qualified equipment placed in service in the tax
    year, up to a maximum credit of 1 million
  • Credit equal to 4 of investment credit base, up
    to a maximum credit of 1 million, if the
    taxpayer has 50 or fewer employees and net income
    of less than 5 million for the year
  • Taxpayers qualifying for the credit also
    qualified for the New Jobs Investment Credit

16
New Jersey Credits
  • New Jobs Investment Tax Credit
  • Corporate entities entitled to a credit against
    the portion of their corporation business tax
    liability attributable to their qualified
    investments in buildings, equipment and
    capitalized start-up costs
  • Investment must
  • Be in any new or expanded business facility in NJ
  • Result in the creation of a specified number of
    new jobs
  • Credit is determined by multiplying the amount of
    a corporation's qualified investment by the its
    new jobs factor.
  • Large business taxpayers must create a minimum of
    50 new jobs at or above the level established as
    the median compensation for that year to qualify
    for the minimum credit of 0.5 of their qualified
    investment

17
New Jersey Credits/NOL Carry Forward
  • Assorted other credits
  • Credit for film production expenses
  • Credit for employing the severely handicapped
  • Credit for remediation of contaminated sites
  • HMO Credit for payments to the New Jersey
    insolvent health maintenance organization
    assistance association
  • Ride share tax credit
  • Credit for purchase of equipment used in effluent
    treatment
  • Urban development project employee tax credit
  • Urban enterprise zone credits
  • Qualified businesses are entitled either to a
    one-time enterprise zone employee credit or an
    enterprise zone investment credit
  • Extension of NOL carry forward from 7 years to 20
    years

18
Pennsylvania Credits
  • Credit for new jobs
  • Credit provided for companies that create a
    minimum of 25 new jobs, or increase number of
    employees by at least 25 within 3 years
  • A new job for purposes of credit is a full time
    job for which the average hourly rate (excluding
    benefits) is at least 150 of the federal minimum
    wage
  • Companies must demonstrate ability to create the
    jobs, development or deployment in leading
    technologies, financial stability (including the
    project's viability), and intent to maintain
    operations in the Commonwealth for 5 years
  • Credit is 1,000 for each new job created up to a
    maximum credit as specified in the commitment

19
Pennsylvania Credits
  • Keystone Opportunity Zone/Innovation Zones
  • To provide relief to economically distressed
    urban and rural areas, PA has authorized the
    creation of Keystone Opportunity Zones (KOZs),
    Keystone Opportunity Expansion Zones (KOEZs), and
    Keystone Opportunity Improvement Zones (KOIZs)
  • Development in the KOZs, KOEZs and KOIZs is
    enhanced through both state and local tax
    incentives, making the areas virtually tax-free
    zones
  • Qualifying taxpayers in designated KOZs entitled
    to exemptions, deductions and credits for up to
    15 years, 1/1/1999-12/31/2013

20
Pennsylvania Credits
  • Research and Development Credit
  • Except for small businesses (see below), credit
    is equal to 10 of the amount by which the
    corporation's qualified RD expenses exceed the
    taxpayer's PA base amount
  • The PA base amount is calculated using the same
    formula provided for calculating federal base
    amounts under IRC 41(c)
  • Qualified taxpayer that is a small business may
    apply for a RD credit equal to 20 of the amount
    by which the corporation's qualified RD expenses
    exceed taxpayer's PA base amount.

21
Pennsylvania Credits
  • Assorted other credits
  • Manufacturing credit
  • Coal removal and ultraclean fuels credit
  • Credit for contributions to qualified educational
    improvement organizations
  • Credit for contributions to the mortgage
    emergency assistance fund
  • Credit for providing leave for organ donation
  • Employment incentive payment credit
  • Film production credit
  • Neighborhood assistance credit
  • Resource enhancement and protection credit
  • Strategic development area credits
  • Waste tire recycling credit

22
Other Items to Consider
  • Take Advantage of Section 179 and Bonus
    Depreciation
  • Cost Segregation Study
  • Section 199 Study
  • Accounting Method Review/Changes in Accounting
    Method
  • Accelerate or defer income?
  • Accelerate or defer expenses?
  • Inventory accounting
  • Write Off Bad Debts/Sale of A/R
  • State and Local Nexus Review
  • Sales Tax Review
  • International Tax Review
  • Transfer Pricing Study

23
Other Items to Consider
  • If Corporation expects to report a net operating
    loss (NOL) for the year and taxes were paid in
    the past one or two years, consider carrying back
    the NOL
  • Losses not used in the carry-back years are
    permitted to be carried forward for 20 years
  • C Corps Apply for a Quick Refund
  • Ability to quickly recover some or all estimated
    tax payments made during the year
  • Filed after close of tax year but before the
    earlier of unextended due date of corporate
    return (3/15 for calendar year Cos) or date the
    Corporation files its return
  • Corporations expecting losses in a year
    originally thought to be profitable could
    consider triggering gains on appreciated assets
    that are no longer needed
  • Be careful of special treatment for capital
    losses

24
Potential Obama Tax Plan
  • Businesses
  • Establish 3,000 Credit for Each Full-Time
    Employee Added to the Workforce
  • 50 Health Tax Credit
  • Limit Use of Foreign Tax Credits for Businesses
    Who Move Jobs Outside U.S.
  • Extend 250,000 Section 179 Expense Through 2009
  • Make RD Credit Permanent

25
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