coverstories
as elderly or disabled individuals; business
credits, which further incentives to businesses; and the foreign tax credit, which may be
available to both individuals and businesses.
Other code categories, such as the depreciation regime, provide signi;cant incentives to
engage in business investments.
Credit
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1
ENCOURAGING INVESTMENTS
Bonus depreciation, introduced about a decade ago, has greatly increased the incentive
for certain types of real estate investments,
according to Shapiro.
“It’s most useful application to real estate
is the type of property that includes quali;ed
leasehold improvement property,” he said.
“The extension and expansion of bonus
depreciation has somewhat eclipsed the at-
tention that was paid to Code Section 179 [the
;rst-year expensing write-o; ],” he said. “For
the ;rst time, bonus ;rst-year depreciation
is 100 percent, for property placed in service
after Sept. 8, 2010, and before Jan. 1, 2012.
Property that qualifies can be completely
written o; in its ;rst year.”
Property eligible for the deduction in-
cludes most tangible personal property,
computer software, and quali;ed leasehold
improvement property. “Quali;ed leasehold
improvement property includes self-con-
structed property, such as when a landlord
hires a contractor to build out space for a
tenant,” said Shapiro. “;is type of incentive
encourages economic activity in two ways.
It encourages the initial investment in quali-
fying property, and the first-year write-off
generates immediate tax-savings cash ;ow
to re-invest in the business.”
Despite the economic benefits of the
incentive, Shapiro noted that a number of
states, including New York, have opted out
of bonus depreciation, most likely due to rev-
enue concerns.
SMALL-BIZ HEALTH CARE CREDITS
;e new Small Employer Health Insurance
Credit, part of last year’s health care law, is
so complicated that many businesses forego
the credit, according to Tim Morrison, a bene;ts broker and chief executive of Tax Credits.
“Many think it’s too complicated and they
won’t qualify anyway,” he said.
;e credit is o;ered to eligible small employers, which are employers with no more
than 25 full-time-equivalent employees, and
whose employees have average annual wages
of no more than $50,000.
Both the full-time employees and the aver-
age annual wages are calculated according
to varying formulas. “You can have full-time
employees in multiple states, and you have to
use an average premium for each employee’s
state in your calculation,” said Morrison. “And
each calculation can be measured in hours,
days or weeks.”
Because the tax credit’s matching rate is
highest for employers with 10 or fewer full-
time-equivalent employees, the number of
hours worked is a crucial factor in calculating
the credit. ;e credit is worth up to 35 percent
of a small business’ premium costs in 2010,
and increases to 50 percent in 2014.
THE HIRE ACT
More than half of the employers that quali-
;ed to take the payroll tax exemption under
the HIRE Act in 2010 ;led to do so, noted Is-
berg. “Many employers actually hired people
who quali;ed, but they didn’t know enough
to ;ll out the Form W-11. It’s worth quite a bit
of money, so they should go back and amend
their return. ;ere’s also the New Hire Re-
tention Credit, for anyone who quali;ed as
a new employee under the HIRE Act, and is
still employed 52 weeks later.”
;e Small Business Jobs Act enacted last
September greatly increased the value of the
R&D credit, according to Brandon Edwards,
president of ;e Tax Credit Company, a tax
incentive consultancy. “;e act changes the
operation of the research credit for eligible
companies,” he said. “In the past, the credit
did not o;set the Alternative Minimum Tax,
so the maximum amount of a credit a com-
pany could use was limited to the amount
their regular tax was greater than their AMT.
;e Jobs Act makes the credits you generate
in 2010 o;set the AM T. It applies to all federal
tax credits, so it includes the Empowerment
Zones Credit and Work Opportunity Credit,
as well.”
RESEARCH CREDITS
Under the Jobs Act, general business credits,
including the R&D credit, generated during
2010 o;set both regular income tax and the
AMT of eligible small businesses, which include sole proprietorships, partnerships and
non-public corporations with $50 million or
less in average annual gross receipts for the
prior thee years.
In the past, it had been common for a
small manufacturer to generate $250,000 in
research credit that it couldn’t use, Edwards
noted. “Now they can use all of it. If they can’t
o;set all the tax this year, they can carry it
back ;ve years.”
;ere is now more clarity as to what quali-
;es for the credit as a result of a number of
court cases, most of which have been decided
in favor of the taxpayer, Edwards noted. “Even
if the amount of research is remaining steady
or decreasing, you can still bene;t from the
credit on the federal side,” he said. “On the
state side you can never assume that the
taxpayer is increasing research until you do
the calculations. A company that is perform-
ing quali;ed activities within a jurisdiction
should run the calculations to determine if
it quali;es, and not assume that research is
increasing or decreasing, because the rules
are di;erent for each jurisdiction.”
“The message here is that accountants
should take another look at the research
credit,” he said. “The bar has really been
lowered as far as the level of innovation that
is necessary to qualify for the credit. ;is is
partly a re;ection of the competitive pres-
sure. ;irty years ago, the credit was more
valuable in the U.S. compared to any other
county. Now, we’re ranked seventeenth in
the world. Mexico, Canada, China, Japan and
the U.K. all have better research credits than
we do now.”
“;ey take di;erent forms,” he observed.
“Some are accelerated super-deductions,
rather than credits, but the equivalent value
provides a greater incentive than we do. Be-
cause of that, we should see the trend con-
tinue to be favorable for businesses that are
engaged in those activities.”
Carl Giordano, a tax partner in the Bos-
ton o;ce of CPA ;rm Marcum, agreed. “In
1981, we were ;rst over other countries in
providing the credit,” he said. “;e problem
is that the rest of the world was right behind
us. For example, Australia has a 30 percent
corporate tax rate, compared to ours, which
is 35 percent. On top of that, their research
incentive is a super-deduction of 175 percent
of the amount that was spent.”
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