Michael Hadjiloucas and Lori McMahon
December 10, 2008
- 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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Enhanced Section 179 Expense
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Expense deduction for certain taxpayers who elect to expense rather than capitalize qualifying 179 property
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New or used tangible personal property, including computer software, used in a trade or business
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Expense increased to $250,000 and threshold increased to $800,000 for tax years beginning in 2008
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Expense is $133,000 and threshold is $530,000 for 2009
- Bonus Depreciation
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Write Off 50% of cost in first year
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Original use of property must commence with the taxpayer after 12/31/07
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Qualified Property:
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MACRS property with recovery period of 20 years or less
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Computer software not covered by Sec. 197
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Water utility property
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Qualified leasehold improvement property
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Binding written contract during 2008
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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 |
- Provides $700 Billion to Treasury for purchase of certain illiquid assets from troubled institutions
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Also, one of the largest Tax Acts in recent years
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Makes nearly 300 changes to the Internal Revenue Code at a cost of $150 billion including:
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A one-year AMT patch;
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An extension of a number of business and individual deductions, credits and incentives;
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Several energy-related provisions; and
Disaster relief to those impacted by recent hurricanes & flooding
- Business Extenders Through 12/31/09
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Research Tax Credit, including modification to the alternative simplified credit
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15 Year Life for Qualified Leasehold Improvements
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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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15 Year straight-line depreciation for qualified leasehold and restaurant improvement property
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Extended through 2009
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Any improvement to an interior portion of nonresidential real property if various requirements are met
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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
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For restaurant improvements, no longer must be made more than 3 years after the building was placed in service
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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)
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QRIP is 15-year property if placed in service after 12/31/08 and before 1/1/10
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Includes any improvement to an interior portion of a building which is nonresidential real property if:
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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
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Such improvement is placed in service more than 3 years after the building was first placed in service
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Excludes expenses due to enlargement of the building, elevators, escalators, structural components benefiting a common area, or internal structural framework
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Bonus depreciation does not apply
- Energy Tax Incentives for Corporations
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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
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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
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Applies to property placed in service after 8/31/08 and having a useful life of at least 5 years
- Other
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Modifications to Section 199-Manufacturing Deduction
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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
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Other taxpayers use 6% through 2009, and 9% thereafter
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Extended the deduction allowable with respect to income attributable to domestic production activities in Puerto Rico
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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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Research and Development Credit
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Corporate entities allowed a credit for qualified expenditures with respect to research conducted in New Jersey
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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
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No deduction allowed for R&D expenditures unless those expenditures are also used to compute a federal credit claimed under IRC Sec. 41
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High-tech companies also allowed to sell unused R&D credits and net operating losses
- Credit for High Technology Companies
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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
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Expenses qualifying for the small high-technology business credit cannot be used for the R&D tax credit
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"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
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Investments in qualified equipment
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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
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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
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Taxpayers qualifying for the credit also qualified for the "New Jobs Investment Credit"
- New Jobs Investment Tax Credit
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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
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Investment must
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Be in any new or expanded business facility in NJ
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Result in the creation of a specified number of new jobs
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Credit is determined by multiplying the amount of a corporation's "qualified investment" by the its "new jobs factor."
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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
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Credit for new jobs
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Credit provided for companies that create a minimum of 25 new jobs, or increase number of employees by at least 25% within 3 years
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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
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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
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Credit is $1,000 for each new job created up to a maximum credit as specified in the commitment
- Keystone Opportunity Zone/Innovation Zones
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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)
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Development in the KOZs, KOEZs and KOIZs is enhanced through both state and local tax incentives, making the areas virtually tax-free zones
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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
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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
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The PA base amount is calculated using the same formula provided for calculating federal base amounts under IRC §41(c)
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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
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Manufacturing credit
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Coal removal and ultraclean fuels credit
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Credit for contributions to qualified educational improvement organizations
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Credit for contributions to the mortgage emergency assistance fund
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Credit for providing leave for organ donation
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Employment incentive payment credit
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Film production credit
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Neighborhood assistance credit
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Resource enhancement and protection credit
Strategic development area credits
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Waste tire recycling credit
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Take Advantage of Section 179 and Bonus Depreciation
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Cost Segregation Study
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Section 199 Study
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Accounting Method Review/Changes in Accounting Method
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Accelerate or defer income?
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Accelerate or defer expenses?
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Inventory accounting
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Write Off Bad Debts/Sale of A/R
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State and Local Nexus Review
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Sales Tax Review
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International Tax Review
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Transfer Pricing Study
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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
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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
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Ability to quickly recover some or all estimated tax payments made during the year
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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
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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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