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Tax Benefit Exchange Frequently Asked Questions


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Tax Benefit Exchange Frequently Asked Questions

  1. 1. FREQUENTLY ASKED QUESTIONSQ1. What is the Tax Benefit Exchange (TBE)? A. The TBE is an online exchange which matches sellers and buyers of new depreciation deductions. The sellers are small businesses and start-ups that buy new equipment, machinery, furniture, computers, etc. (collectively referred to as “equipment”) but cannot currently use the new tax depreciation deduction. The buyers are US business taxpayers who use private capital to buy the seller’s new depreciation deductions. Such buyers reduce their US income tax liability by buying the new depreciation deductions from the small business/start-up sellers. The price for the new depreciation deductions is FMV determined on a bid and asked basis.Q2. Will the TBE increase the US government’s deficit? A. No. The TBE uses existing depreciation deductions already scored (calculated) by the Congressional Budget Office. In fact, the TBE is expected to reduce the deficit by stimulating small business growth, employment and revenue by the 1.6 economic multiplier effect.Q3. Will the TBE require the use of government money? A. No. Private capital alone is used to buy the new depreciation deductions from small businesses/start- ups. Existing tax laws allowing depreciation for new equipment are used; no new tax incentives are required from the US government. Only a small change in the tax law allowing the sale of new depreciation deductions under current tax law is required.Q4. Will the TBE increase US gross domestic product (GDP)? A. Yes. The TBE allows small businesses/start-ups to monetize (receive cash for) its new depreciation deductions they currently cannot use. This will spur investment. These funds are used to i) reduce debt of equipment purchased, ii) provide working capital, iii) expand or maintain existing business and/or iv) hire new employees. The use of the funds in these activities increases GDP.Q5. Will the TBE increase US employment? A. Yes. Since about 70% of all new private sector employment derives from small businesses and start-ups, the TBE will directly, indirectly and favorably increase US employment. i) There will be an immediate increase in demand for new equipment. This will increase employment at the US equipment manufactures and US equipment sellers. ii) The TBE will enable start-ups to be created more easily because the cash cost of new equipment by selling the new depreciation deductions will be less than otherwise required. This will immediately increase employment at new start-up small businesses. iii) The TBE will enable existing small businesses to grow through the purchase of less costly new equipment. The cost of the new equipment will be reduced through the sale of new depreciation deductions. As small businesses grow, the need for labor and employment increases. Further, employment will increase because new equipment needs to be installed, operated and maintained.Q6. How will the TBE be administered by the Internal Revenue Service (IRS)?August 11, 2011 P 1 of 2
  2. 2. A. The TBE will send a 1099 form for every transaction to the IRS, seller and buyer. Further, the IRS will create a one page form to be signed by the seller and buyer. The form contains i) description of the property whose depreciation is being sold, ii) a copy of the purchase order for the equipment iii) addresses of the seller and buyer, and iv) the tax ID numbers for the seller and buyer. Both seller and the buyer must attach a copy of this new one page form to their respective tax returns for the year of the sale of new depreciation deductions.Q7. Will the seller have to report gain or loss on the sale of new depreciation deductions? A. No. Since the seller is not selling the property, it will not report gain or loss on the transaction. However, the seller will make a basis adjustment to zero as if the asset is fully depreciated for tax purposes. Gain, loss, recapture would then follow existing tax rules. There is no change of cost basis for book purposes.Q8. Why isn’t the use of the proceeds strictly tied to job creation? A. There are already a small amount of credits linked directly to increases in employment which have not worked. A few years ago, Congress passed a one-time repatriation of foreign earnings at 8% if the money was used to increase jobs and this legislation was a failure for various reasons. On the other hand, the reason the 1982-1983 tax benefit sale legislation was so successful was that it did not limit the use of the funds received on the sale. Jobs come from small businesses and businesses supplying equipment to small businesses. Small businesses should decide where to use the money instead of government micro managing the small business. If business expands, they will employ more people.Q9. Why not tie small businesses’ ability to sell their tax depreciation deductions based on the salaries of employees hired with funds gained from the auction? A. Limiting the sale of depreciation deductions to reinvestment in jobs is difficult for the IRS to administer. Tracing the funds received on the sale of depreciation deductions to see if jobs are created would require a significant increase in the IRS’s budget to avoid the prospect of fraud. In addition, the tying of salaries to deductions would result in an auction process that would create uncertainty in the mind of the buyer. Thus, the buyer either would (i) not buy or (ii) require an indemnity from a small business which is not practical or (iii) require a substantial discount from the seller thereby making the sale uneconomical for the seller.Q10. What is the next step to implement the TBE? When will it happen? A. Congress must change the tax law to permit the sale of new depreciation deductions. Currently, Rep. Dave Camp of Michigan, Sen. Kirsten Gillibrand of New York, Reps. John Larson and Jim Himes of Connecticut have reviewed the proposal and are working on getting the proposal on the table. In fact Rep. Jim Himes has written on June 27, 2011, “I believe that in these difficult economic times, all ideas must be on the table. Your proposal to allow businesses to sell unused tax credits [deductions] to other businesses to fund capital investments is quite interesting…” Favorable press includes Crains New York Business and other publications. We are creating an internet movement to push the House Ways and Means Committee and Senate Finance Committee to implement this novel approach to jump start the small business economy and increase US employment. Also driving this tax law change is the 2012 election campaign which demands real job solutions. We expect passed legislation by Nov 2012. TMVi Tax Benefit Exchange is ready to go now.August 11, 2011 P 2 of 2