Title: Tax Updates, Incentives and Planning to Consider in Tough Economic Times
1Tax Updates, Incentives and Planning to Consider
in Tough Economic Times
- Michael Hadjiloucas and Lori McMahon
- December 10, 2008
2New 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)
3Economic 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
4Economic 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
6Emergency 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
7Emergency 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
8Emergency 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
9Emergency 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
10Emergency 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
11Emergency 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
12Emergency 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
13New 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
14New 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
15New 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
16New 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
17New 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
18Pennsylvania 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
19Pennsylvania 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
20Pennsylvania 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.
21Pennsylvania 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
22Other 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
23Other 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
24Potential 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
25Questions?