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

New Federal Legislation: Nine New Acts in Last 12

  1. The Emergency Economic Stabilization Act (10/3/08)
  2. The Housing and Economic Recovery Act (7/30/08)
  3. The Farm Act (6/18/08)
  4. The Heroes Earnings Assistance and Relief Tax Act (6/17/08)
  5. The Economic Stimulus Act (2/13/08)
  6. The Technical Corrections Act (12/29/07)
  7. The Tax Increase Prevention Act (12/26/07)
  8. The Mortgage Forgiveness Debt Relief Act (12/20/07)
  9. The Energy Independence and Security Act (12/19/07)

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
  • 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

Bonus Depreciation Example 

5 Year Asset  Bonus  No Bonus 
Cost Basis $100,000 $100,000
Bonus Rate 50% N/A
Bonus Depreciation $50,000 0
Regular Depreciation (20%) $10,000 $20,000
Total First Year Depreciation $60,000 $20,000


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
  • Business Extenders Through 12/31/09
    • Research Tax Credit, including modification to the alternative simplified credit
    • 15 Year Life for Qualified Leasehold Improvements
  • Research Tax Credit Extended through 12/31/09 and Modified
    • R&E Credit increases cash flow through permanent tax savings that affects a Company’s Effective Tax Rate
    • 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
    • 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)
  • 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
  • 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  
  • 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
  • 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

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
  • 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
  • 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"
  • 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

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

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
  • 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
  • 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.
  • 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

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
  • 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 Co’s) 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

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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