Transcript STATE TAX ISSUES

Tax Updates, Incentives and Planning to
Consider in Tough Economic Times
Michael Hadjiloucas and Lori McMahon
December 10, 2008
“Seeing beyond
the numbers...”
New Federal Legislation
Nine New Acts in Last 12 Months
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“Seeing beyond
the numbers…”
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)
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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
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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:
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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
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Bonus Depreciation Example
5 Year Asset
Cost Basis
No Bonus
$100,000
$100,000
50%
N/A
Bonus Depreciation
$50,000
0
Regular Depreciation (20%)
$10,000
$20,000
Total First Year Depreciation
$60,000
$20,000
Bonus Rate
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the numbers…”
Bonus
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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
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the numbers…”
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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
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the numbers…”
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Emergency Economic Stabilization
Act of 2008
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Research Tax Credit Extended through 12/31/09 and Modified
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R&E Credit increases cash flow through permanent tax savings that affects a
Company’s Effective Tax Rate
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Estimated federal benefit approximates 6.5% of qualified research expenses
(“QRE’s) incurred plus, many states provide a benefit for R&E credit as well
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Any unused credit may be carried back 1 year and carried forward 20 years
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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)
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Code Sec. 41 revised to increase the alternative simplified credit from 12% to 14%
of QRE’s above 50% of average annual QRE’s in previous 3 years.
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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
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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
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the numbers…”
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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
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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
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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
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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 R&D 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 R&D credits and net
operating losses
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the numbers…”
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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 R&D 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
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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”
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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
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New Jersey Credits/NOL Carry Forward
• Assorted other credits
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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
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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
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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
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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 R&D 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 R&D credit
equal to 20% of the amount by which the corporation's qualified R&D
expenses exceed taxpayer's PA base amount.
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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
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Other Items to Consider
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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
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Write Off Bad Debts/Sale of A/R
State and Local Nexus Review
Sales Tax Review
International Tax Review
Transfer Pricing Study
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Other Items to Consider
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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
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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 Co’s) or date the Corporation files its
return
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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
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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 R&D Credit Permanent
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the numbers…”
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Questions?
“The material contained in this presentation
is for general information and should not
be acted upon without prior professional
consultation.”
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the numbers…”
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