SO HOW CAN INVESTING TECHNOLOGY CHANGE THE TAX TABLE? 2010 TAX RELIEF ACT ALSO – Extended the 50% bonus depreciation for business property acquired and placed in service after 1/1/12 and before 1/1/13 Set the expensing limitation under IRC §179 at $139,000 and the phase-out threshold amount at $560,000 for 2012.
SO WHAT IS BONUS DEPRECIATION? Depreciation allows businesses to recover the cost of capital expenditures over time. Bonus depreciation allows businesses to recover these costs faster. Allows 50% expensing Plus regular depreciation Tangible personal property Off the shelf software Must be brand new Can elect out of No taxable income limitations Many states have decoupled No AMT preference
BONUS DEPRECIATION EXAMPLE #1 GIGCO PURCHASES AND PLACES IN SERVICE 50 BRAND NEW COMPUTERS ON 6/30/12 FOR A TOTAL COST OF $200,000. GIGCO ELECTS TO TAKE BONUS DEPRECIATION AND IS IN A 35% TAX BRACKET. BONUS DEPRECIATION $100,000 REGULAR DEPRECIATON $20,000 TOTAL DEPRECIATION $120,000 TAX SAVINGS $42,000 NET COST OF INVESTMENT $158,000
BONUS DEPRECIATION EXAMPLE #2 GIGCO PURCHASES AND PLACES IN SERVICE 50 BRAND NEW COMPUTERS ON 6/30/12 FOR A TOTAL COST OF $200,000. GIGCO ELECTS NOT TO TAKE BONUS DEPRECIATION AND IS IN A 35% TAX BRACKET. REGULAR DEPRECIATON $40,000 TAX SAVINGS $14,000 NET COST OF INVESTMENT $186,000
LETS TALK CODE! CODE SECTION 179 Allows 100% expensing up to $139,000 Plus regular depreciation on remaining basis Tangible personal property Off the shelf software Can be new or used property Must have taxable income More state conformity No AMT preference Phase out starts at $560,001
SECTION 179 EXAMPLE #1 CLOUDCO PURCHASES AND PLACES IN SERVICE 50 VOICE OVER IP PHONES ON 6/30/12 FOR A TOTAL COST OF $200,000. CLOUDCO ELECTS TO TAKE SECTION 179 AND IS IN A 35% TAX BRACKET. SECTION 179 $139,000 REGULAR DEPRECIATION $12,200 TOTAL DEPRECIATION $151,200 TAX SAVINGS $52,920 NET COST OF INVESTMENT $147,080
SECTION 179 EXAMPLE #2 CLOUDCO PURCHASES AND PLACES IN SERVICE 50 VOICE OVER IP PHONES ON 6/30/12 FOR A TOTAL COST OF $200,000. CLOUDCO ELECTS NOT TO TAKE SECTION 179 AND IS IN A 35% TAX BRACKET. REGULAR DEPRECIATION $40,000 TAX SAVINGS $14,000 NET COST OF INVESTMENT $186,000
BONUS DEPRECIATION AND SECTION 179 EXAMPLE #1 VIRTUALCO PURCHASES AND PLACES IN SERVICE 200 BRAND NEW ULTRABOOKS 6/30/12 FOR A TOTAL COST OF $300,000. VIRTUALCO ELECTS TO TAKE BONUS DEPRECIATION AND SECTION 179 AND IS IN A 35% TAX BRACKET. BONUS DEPRECIATION $150,000 SECTION 179 $139,000 REGULAR DEPRECIATION $ 2,200 TOTAL DEPRECIATION $291,200 TAX SAVINGS $101,920 NET COST OF INVESTMENT $198,080
BONUS DEPRECIATION AND SECTION 179 EXAMPLE #2 VIRTUALCO PURCHASES AND PLACES IN SERVICE 200 BRAND NEW ULTRABOOKS 6/30/12 FOR A TOTAL COST OF $300,000. VIRTUALCO ELECTS TO NOT TO TAKE BONUS DEPRECIATION AND SECTION 179 AND IS IN A 35% TAX BRACKET. REGULAR DEPRECIATION $60,000 TAX SAVINGS $21,000 NET COST OF INVESTMENT $279,000
CREDIT FOR INCREASING RESEARCHING ACTIVITIES New or improved business component Technological in nature Elimination of uncertainty Process of experimentation
RESEARCH AND DEVELOPMENT CREDIT New or improved business component Function, performance, reliability, quality, durability Technological in nature E.g. Computer sciences Elimination of uncertainty Discover information Can we? How? What will it look like? Process of experimentation Evaluate processes and alternatives, design to achieve a result uncertain at outset. Involves testing, analyzing, refining, modeling, simulation, systematic trial and error
QUALIFIED R & D EXPENSES ELIGIBLE FOR CREDIT Wages paid to an employee for qualified services performed by such employee, Amounts paid for supplies used in the conduct of qualified research, and 65% of qualified contract research Depreciation not an eligible cost
SOFTWARE DEVELOPMENTAL ACTIVITIES ELIGIBLE FOR CREDIT Conducting requirements, domain, software elements, or scope analysis for a new functional software enhancement Evaluating and establishing functional specifications Designing and developing the structural software architecture Establishing electronic interfaces and functional relationships between various software modules Programming software source code Compiling and testing source code Conducting unit, integration, functional, performance, and regression testing
SOFTWARE APPLICATIONS THAT MAY BE ELIGIBLE FOR CREDIT Accounting and Financial CRM Software Software Content Management Software Enterprise Infrastructure Database Management Systems Software Analytical Software ERP Software Distribution Management Digital Asset Management Software Systems Video Games and Game Creation Logistics Management Software Software Document Management Systems Food Software Claims Processing Software Software Drivers Geographic Information System Marketing Software Educational Software Firmware Time and Resource Management Medical and Healthcare Software Management Software
IRS ASSESSMENT ON THE CREDIT These activities rarely fail to constitute qualified research under I.R.C. § 41(d). The initial release of an application software product may require new constructs such as, new architectures, new algorithms, or new database management techniques. The design of these new constructs often requires a process of experimentation to resolve specific software development uncertainties. The development of system software, such as operating systems and compilers, frequently entails the resolution of software development uncertainties related to process scheduling and memory management designs, and instruction execution optimization. New constructs and software development uncertainties are typically resolved through identifying and conducting a process designed to evaluate technical alternatives which fundamentally relies on the principles of computer science.
IRS ASSESSMENT ON THE CREDIT These activities rarely fail to constitute qualified research under I.R.C. § 41(d). The development of specialized technologies, such as image processing, artificial intelligence, or speech recognition. Software developed as part of a hardware product wherein the software interacts directly with that hardware in order to make the hardware/software package function as a unit.
CALCULATING THE CREDIT The regular research credit is an incremental credit that equals 20% of a taxpayer’s current year qualified research expenses(QREs) that exceed a base amount. Base amount is the taxpayer’s historical % of gross receipts spent on QREs (the fixed-base %) to the four most recent years’ average gross receipts. For taxpayers that had QREs in calendar years 1984-1988, that is the historical period for determining the fixed-base %. For those that had fewer than three tax years with QREs and gross receipts during that period or began having them subsequently, the fixed-base % starts at 3% during the first five years beginning after 1993 and over each of the next five years successively approximates the actual % by an increasing fraction. Fixed base cannot exceed 16% and the base amount cannot be less that half of current year QREs.
REGULAR RESEARCH CREDIT ILLUSTRATION #1For non start up company existed prior to 1993: Current year QREs = $125,000 1984–1988 aggregate QREs = $250,000 Divided by 1984–1988 gross receipts = $1,000,000 Fixed-base percentage = 25% Lesser of FBP or 16% = 16% Multiplied by average annual gross receipts previous four years of $700,000 Equals base amount = $112,000 Greater of base amount or 50% current QREs = $112,000 Excess of current QREs over minimum base amount = $13,000 Multiplied by 20% equals credit $2,600
REGULAR RESEARCH CREDIT ILLUSTRATION #2 For startup (first five years): Current year QREs = $125,000 Fixed base percentage = 3% Lesser of FBP or 16% = 3% Multiplied by average annual gross receipts previous four years of $700,000 Equals base amount = $21,000 Greater of base amount or 50% current QREs = $62,500 Excess of current QREs over minimum base amount = $62,500 Multiplied by 20% equals credit $12,500
REGULAR RESEARCH CREDIT ILLUSTRATION #3 For startup in sixth year: Current year QREs = $125,000 Aggregate QREs for years 4 and 5 = $100,000 Years 4 and 5 aggregate gross receipts = $400,000 Percentage of QREs/AGRs x 1/6 = 4.17% Lesser of FBP or 16% = 4.17% Multiplied by average annual gross receipts previous four years of $700,000 Equals base amount = $29,190 Greater of base amount or 50% current QREs = $62,500 Excess of current QREs over minimum base amount = $62,500 Multiplied by 20% equals credit $12,500
ALTERNATIVE SIMPLIFIED CREDIT For tax years beginning on or after Jan. 1, 2009 the credit equals 14% of the current year QREs that exceed 50% of the average QREs for the three preceding taxable years. If there are no QREs in any one of the three preceding tax years, the ASC rate equals 6% of the QREs for the credit determination year. The election to claim the ASC must be made on the original tax return and cannot be made retroactively.
ALTERNATIVE SIMPLIFIED CREDIT ILLUSTRATION Current year QREs = $125,000 Less average QREs previous three years $100,000 x 50% = $50,000 Difference = $75,000 Multiplied by 14% equals credit = $10,500
CREDIT MECHANICS The credit is subject to limitations of the general business credit. Limited to 25% of the taxpayer’s net tax liability over $25,000. To the extent that a research credit is not available for use in the current year or immediate prior year, unused credits have a 20-year carry forward.
CHA CHING! ARE YOU MAKING THE MOST OF YOUR BUCK NOW?
WHAT CHANGES IN 2013? SECTION 179 DEPRECIATION LIMIT DROPS TO $25,000 and PHASE OUT THRESHOLD TO $200,000 IN 2013. BONUS DEPRECIATION IS ELIMINATED RESEARCH AND DEVELOPMENT CREDIT EXPIRES
ARE YOU THROWING MONEY AWAY? 2012 COULD BE YOUR YEAR
CONTACT ME Kim Lawrence, CPA Tax Principal in Charge 423.756.7100 firstname.lastname@example.org On LinkedIn: http://www.linkedin.com/pub/kim-%20lawrence/ 1/5aa/5aaDISCLAIMER: The contents and opinions contained in this presentation are for informational purposesonly. The information is not intended to be a substitute for professional accounting counsel. Always seekthe advice of your accountant or other financial planner with any questions you may have regarding yourfinancial goals.
ABOUT THE SPEAKERKim Lawrence is the Tax Principal in Charge for Decosimo’s Chattanooga office. She has 23years experience in tax practice and is actively involved in the firm’s tax compliance practice,which includes review of partnership, corporate, state, consolidated, and individual tax returns,tax planning and tax consultation. Areas of emphasis include state taxation, financialinstitutions, real estate development and closely held businesses.Kim is licensed to practice in Tennessee and Rhode Island, and holds a Bachelor of Sciencedegree with a major in Accounting from Rhode Island College. As part of her continuingprofessional education, she attends banking seminars, real estate seminars, and state taxationcourses.She is a member of several professional organizations including the American Institute ofCertified Public Accountants (AICPA), Chattanooga Tax Practitioners and the TennesseeSociety of Certified Public Accountants (TSCPA), where she served as the 2010-2011president of the Chattanooga Chapter. Kim is a also a member of the Chattanooga Women’sLeadership Institute, the Rotary Club and is a graduate of Leadership Chattanooga. Currently,she serves as the Board Chair of Girls, Inc. and has been appointed Chair of TSCPA WomenInitiative Committee, which is an emerging committee focused on encouraging femaleleadership across Tennessees accounting sector. She previously served as a CampaignCabinet volunteer with United Way of Greater Chattanooga.