The LEAN Accountants

Pennsylvania Tax Update

  A few weeks ago, Governor Tom Corbett made good on two of his campaign promises—an on-time budget and no tax increases.  This was the first on-time budget in nine years and even more impressive was the fact that it was balanced without having to increase the tax base or tax rates.  To make this work, there were significant cuts in spending, most notably education.  Both Pre K-12 and Higher Education will see reduced funding in 2011-2012 compared to 2010-2011, but not as much as originally proposed by Corbett.  Education spending was reduced by the one-time Federal stimulus funding and is on par with the 2009-2010 budget before Federal stimulus was taken into account.  Overall, the budget was 4.1% less than 2010-2011, which marked the first time since the 2002-2003 fiscal year that spending was reduced from the prior fiscal year. 

A few of the highlights of the Pennsylvania budget and related bills are as follows: 

• Sales & Use Tax “Fix” -  Businesses that had sales and use tax liabilities of $25,000 or greater in the third quarter of 2010 were required to remit sales tax on a semi-monthly basis beginning after May 31, 2011.  For the businesses that this applies to, both a prepayment equal to 50% of the liability for the same month in the prior year and the true-up for the prior month are due on the 20^th of each month.  However, a separate filing and separate payment were due resulting in two separate filings and payments.  In order to reduce the administrative burden for businesses that fall under this category, the legislators amended the fiscal code to allow for just one combined filing and one payment to cover both the prepayment and prior month true-up.
• Tax Credits - The R&D Tax Credit was increased from $40 million to $55 million.  Both the Job Creation Tax Credit ($22.5 million to $10.1 million) and the Film Production Tax Credit ($75 million to $60 million) were reduced. 
• Capital Stock and Foreign Franchise Tax – The current phase-out that was implemented in the budget two years ago remains in effect.  The 2011 rate will continue at 2.89 mills and will be reduced by 1 mill in each of the next two years until it is completely eliminated in 2014.
• Department of Revenue Computer System Modernization – Despite a number of spending decreases in this year’s budget, the Pennsylvania Department of Revenue received an increase in funding for the modernization of their computer system.  The Department’s current computer system has been outdated for many years and has often been described as “archaic.”  This has lead to numerous inefficiencies, unnecessary notices being mailed out, and an inability to enact certain changes to the tax law.  This project has received overwhelming support from the Department, practitioners and many businesses over the past few years.  With a more modern operating system, the Department will be able to more readily discover delinquent taxpayers which will undoubtedly increase revenue, while practitioners will be able to more easily resolve client tax issues with the Department. 

Despite the General Fund collections being 2.9% more than expected in the 2010-2011 fiscal year, there are still a large amount of outstanding debt and other funding issues including: the state pension plan, unemployment compensation trust fund, and roads & bridges.  With that in mind, the Pennsylvania Tax Code could be opened up in the fall session and several issues that have been recently debated may be brought back into the discussion.  

The most prominent debate has been whether to implement a tax or fee on the Marcellus Shale natural gas extraction.  There is bipartisan support in the Pennsylvania legislature for enacting one or the other as a number of neighboring states have a similar fee.  Another proposal that has been gaining support in recent years is the addressing of Delaware Holding Companies that receive royalties and other intangible income from related companies that operate in Pennsylvania.  Pennsylvania has also been considering requiring large online sellers that have affiliates located in Pennsylvania, to either collect and remit Pennsylvania sales tax on sales to Pennsylvania  buyers or require these sellers to provide the Department of Revenue with a list of Pennsylvania buyers to ensure that use tax was paid by the buyer.  There have also been discussions about implementing a Commercial Activities Tax, reducing the Corporate Net Income Tax rate and removing or lessening the restriction associated with the Net Operating Loss (NOL) cap. 

As a member of the State and Local Tax Committee and Legislative Committee of the Pennsylvania Institute of Certified Public Accountants (PICPA), we continue to evaluate proposed tax legislation and work with the legislators in determining the best course to take.  We greatly welcome your thoughts, suggestions, or concerns that you might have with any future proposed Pennsylvania tax legislation. 

For more information please contact the LEAN Accountants of McKonly and Asbury, LLP.

Now is a Good Time To Consider Buying New Equipment and Vehicles

The IRS has issued some much needed guidance on how the new business depreciation tax breaks work and the options available to taxpayers. (IRS Revenue Procedure 2011-26)

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act included a favorable provision that allows 100 percent first-year bonus depreciation for qualified new assets. The new IRS guidance includes rules clarifying the deduction as well as rules about a retroactive extension of 50 percent bonus depreciation for part of last year.

Here is a quick summary of the key points in IRS Revenue Procedure 2011-26.

What Is Qualified Property?

To be eligible for 100 percent bonus depreciation, an asset must meet all three of the following requirements:

1. It must be qualified property, which includes personal property with an MACRS depreciation period of 20 years or less, certain leasehold improvement property, and certain water utility property. Software that is not required to be amortized over 15 years also qualifies.

2. It must be acquired between September 9, 2010 and December 31, 2011. However, the acquisition and placed-in-service deadlines are extended to December 31, 2012 for certain assets with longer production periods, such as transportation equipment and aircraft. (Under the extended deadline deal, only the portion of an asset's basis that is allocable to costs that are incurred by December 31, 2012 is eligible for 100 percent bonus depreciation.)

3. The original use of the property must begin by no later than December 31, 2011 or by December 31, 2012 for certain property with longer production periods. In other words, the property must be new rather than used when it is placed in service.

Wage and Hour Investigations - Tips to Help You through An Investigation

Wage and hour laws are some of the most frequently violated in the manufacturing and distribution industry. They can be hard to understand and there's a large discretionary component in their enforcement.

Investigations are done by the Wage and Hour division of either the federal or state Department of Labor. If you get a letter seeking records to document violations of wage and hour policy, prepare for what can be an expensive result.

If an investigation finds your company in violation, the price can escalate quickly. The department has the right to go back as long as four years, locating employees who no longer even work for your company and demanding that you make the wrongs right, and also pay penalties.

Here are some considerations if your business is facing a wage and hour investigation:

Know the rules. Wage and hour laws can be deceptively simple but they trip up a lot of business owners. Consult with a human resources adviser and follow the rules. Most investigations are triggered by complaints. All it takes is one disgruntled employee or ex-employee who picks up the phone.

Tread lightly. The Department of Labor has been promoting its compliance assistance program. The agency will send representatives to workplaces or business group meetings to provide seminars and answer questions. But be skeptical. You don't want to invite trouble into your building. In the end, it may be cheaper to hire a consultant who can offer a more balanced business approach.

Pennsylvania Unemployment Compensation Update

This is the time of year that many Pennsylvania businesses receive their new Unemployment Compensation (UC) Contribution Rate notices from the Pennsylvania Department of Labor (DOL).  Some businesses may notice an increase in their employer contribution rates this year and wonder what the reason for this increase is.  It is necessary to understand how the different factors that make up this rate are calculated.  This is an example of a contribution rate schedule:

 

RESERVE RATIO FACTOR		.000
BENEFIT RATIO FACTOR	+	.080
STATE ADJUSTMENT FACTOR	+	.0150
BASIC RATE	=	.0650
INCREASE FOR UC DELINQUENCY	+	.0000
SURCHARGE ADJUSTMENT	+	.003770
ADDITIONAL CONTRIBUTIONS	+	.0065
RESERVE ACCOUNT TAX RATE	=	.075270
INTEREST FACTOR	+	.0044
TOTAL CONTRIBUTION RATE	=	.079670

 

To start off, several of the factors are calculated by the DOL each year and are the same for every business, and they cannot be appealed.  These factors for 2011 include the State Adjustment Factor (.015), the Surcharge Adjustment (5.8% multiplied by the basic rate), Additional Contributions (.0065) and the Interest Factor (.0044).  The Interest Factor has been implemented this year to cover the interest expense on borrowed Federal money used to fill a depleted Pennsylvania UC Trust Fund.

 

New Legislation for 2011 Impacting Renewable Energy

Congress passed groundbreaking new legislation that extended numerous provisions that will substantially impact the businesses that invest in renewable energy. The proposed legislation indicates a continued desire to invest within the renewable energy industry and assist businesses that choose to help our environment by implementing clean energy in their business processes.

The new legislation includes the following key tax relief programs for renewable energy:

• Section 1603 Cash In Lieu of Tax Credits - The cash in lieu of tax credits program, established under Section 1603 of the American Recovery and Reinvestment Act, has been extended for another year. This program allows for up to a 30% cash grant for qualifying renewable energy projects that are placed in service before December 31, 2011.
  • Numerous variations on the extension had been proposed, with Congress settling on perhaps the simplest and most straightforward method of all - simply extending the program expiration date from December 31, 2010 to December 31, 2011.
  • As of now, since the only change was to add "2011" to the program expiration, all other requirements and characteristics of the 1603 program remain the same, including:
    • The due date for the application to the Treasury- October 11, 2011
    • Project in-service dates
    • Beginning of construction requirements (effective now for December 31, 2011 rather than December 31, 2010)

R & D Credit Extended Through 2011

On Friday, December 17th, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.  Among a myriad of tax provisions, the Federal Research and Development Tax Credit was retroactively extended through 12/31/11.

This extension, coupled with the elimination of the AMT restriction on business credits for 2010 makes 2010 a very good year for US Manufacturers to claim the Research Credit. 

Unfortunately, the current Administration was unable to pass an increase of the Alternative Simplified Credit to the anticipated 17% level, nor was the Credit made permanent, as expected.

With this extension, the R&D Credit continues to be the best tax incentive for US Manufacturers, and will most likely be a hot topic in the presidental election debates in 2012.

For more information on the Research and Development Tax Credit, contact the LEAN Accountants of McKonly and Asbury, LLP.

Domestice Production Activities Deduction - Can You Benefit?

For qualified businesses, the Domestic Production Activities Deduction (DPAD) is one of the most lucrative tax breaks manufacturers can claim today -- having doubled in value in 2007. It increased even more in 2010.

Although the deduction has been available since 2005, many companies are still not aware of its significant benefits. Designed to stimulate domestic production and create jobs in the United States, the DPAD is extremely complex. To maximize the tax savings, your business needs to plan ahead.

To assist you in navigating the maze, here are some answers to frequently asked questions about the DPAD. Keep in mind that if your business did not claim the deduction in prior years, there may be an opportunity to file an amended return and claim a refund.

Q.

 Who is eligible for the Domestic Production Activities Deduction under Section 199?

A.

The deduction provides tax savings to a much larger group of businesses than you might think.

Starting with the 2005 tax year, the DPAD became available to manufacturers who derive gross receipts from the lease, rental, license, sale, exchange, or other disposition of qualified production property.

Obviously, the deduction is available to traditional manufacturers of clothing, goods and food, as well as farmers. However, it can also be claimed by businesses engaged in a wide variety of other domestic production activities including:
 

• Certain real property construction,

• Music recordings and film production,

• Electricity, natural gas and water,

• Engineering and architecture services for the construction of real property, and

• Software development.

The deduction can be claimed by all types of business entities, including C corporations, S corporations, limited liability companies, partnerships and sole proprietorships. (Trusts, estates and their beneficiaries may also be able to benefit.)

 

Small Business Jobs and Credit Act - What's in it for Manufacturers?

After several failed attempts to arrive at a consensus, Congress finally passed the Small Business Jobs and Credit Act. This vital new legislation, which President Obama signed on September 27, 2010, provides various tax incentives targeted to small business owners.  

Here are several key provisions in the new law:

More Stimulus for Job Creation     The Small Business Jobs and Credit Act aims to create as many as 500,000 jobs through a $30 billion fund that will provide local community banks with capital to lend small business owners.     The idea is to provide capital to start-up businesses and small enterprises that want to expand and hire new workers. Currently, large banks generally are not lending to small businesses, which create many of America's jobs.     The law includes provisions to: Boost the Small Business Administration (SBA) maximum amount available to help start a business or help cover short-term capital requirements. Increase to 90 percent from 75 percent the amount of the loans that the SBA will guarantee. If a small business owner defaults, the bank that lent the money would take a maximum hit of 10 percent. This is aimed at encouraging local banks to lend to businesses that may be in trouble. Extend the elimination of SBA fees charged to originate loans.    To help ensure that the money helps generate employment, the program will be overseen by Congress, the U.S. Accountability Office and the Inspector General.    Even if a business appears small, it may not qualify for the loans. The definition of a small business is determined by annual sales, number of employees and the company's industry. To see if an enterprise qualifies, click here to go to the SBA's table of standards.    While most business organizations applauded the new law, some are criticizing it. Critics argue the money will go to more mature businesses that aren't hiring rather than start ups and enterprises that want to grow. They note that while the law gives access to capital, it doesn't require banks to lend and in the current economic climate, many small businesses don't want to borrow or hire.

Revenue-Raisers: How Did Congress Pay for the New Law?      To offset the cost of the tax incentives in the Small Business Jobs Act, the new law imposes several revenue-raisers, including: New information reporting requirements on rental real estate activities for annual payments of $600 or more made after December 31, 2010. In other words, landlords will have to file 1099 forms for service providers, such as plumbers, painters and landscapers. Increased failure-to-file penalties on information returns. Allowing levies to be issued against federal contractors prior to a collections due process hearing. Treatment of debt guarantees by certain foreign entities as U.S. source income. Increased estimated tax penalties in 2015 for large corporations.

Enhanced Section 179 depreciation deductions: Under Section 179 of the Internal Revenue Code, a business can currently deduct the cost of qualified property placed in service during the year, within an annual limit. Prior to the new law, the limit for 2010 was $250,000, although the maximum deduction was subject to a phase-out for annual purchases above $800,000. The new law increases the maximum deduction to $500,000 for 2010 and 2011 with a phase-out threshold of $2 million. Eligible assets include computers, office equipment, and furniture. Certain real estate improvement costs now qualify for Section 179 deductions of up to $250,000.

"Bonus depreciation" is back for 2010: The new law also restores the bonus depreciation tax break, which expired after 2009. A business may claim a deduction equal to 50 percent of the cost of qualified assets, which include vehicles. (An additional year of bonus depreciation through 2011 is allowed for property with a cost recovery period of ten years or longer and certain transportation property.)

Qualifying new assets must be placed in service by December 31, 2010.

Note:There is a tax-saving opportunity for businesses that are able to take advantage of both the Section 179 deduction and 50 percent first-year bonus depreciation. These two breaks can be combined to offset a large part, or perhaps all, of a company's major acquisitions for the year. While larger businesses may be ineligible for the Section 179 deduction, 50 percent first-year bonus depreciation is available to any business regardless of size.

S corporation disposition rules are eased: After a C corporation converts to S corporation status, it may be liable for the "built-in gains" (BIG) tax if it sells or otherwise disposes of appreciated property within a specified time period. The normal recognition period of ten years was shortened to seven years for dispositions in tax years beginning in 2009 and 2010. The new law reduces this period still further to only five years for dispositions in tax years beginning in 2011.

Start-up expense deductions increase: Prior to the new law, a taxpayer could deduct up to $5,000 of qualified business start-up expenditures for new ventures just getting off the ground. The maximum $5,000 deduction was phased out for expenses over $50,000. The new law doubles the maximum deduction for 2010 to $10,000 with a $60,000 phase-out threshold. Note that these figures are scheduled to revert to their prior amounts in 2011.

Restrictions on business credits removed: With limited exceptions, general business credits cannot be used to offset a taxpayer's alternative minimum tax (AMT) liability. The new law removes this restriction for "eligible small businesses." To qualify, average annual gross receipts of a non-public corporation, partnership or small proprietorship for the prior three years can't exceed $50 million. In addition, beginning in 2010, an eligible small business may carry back general business credits for five years instead of one year.

Qualified small business stock gets better tax treatment: Assuming certain requirements are met, an investor in "qualified small business stock" may exclude part of the gain from the sale of the stock after a five-year holding period. Normally, the tax exclusion is 50 percent for QSBS which is taxed at the 28 percent rate, but the 2009 stimulus law increased the exclusion to 75 percent for acquisitions after February 17, 2009 and before January 1, 2011. Now the new law allows a 100 percent exclusion for acquisitions from the date of enactment through December 31, 2010.

Cell phone recordkeeping is less burdensome: Previously, cell phones were treated as "listed property" for tax purposes, therefore triggering the same strict substantiation rules that apply to business use of vehicles. In other words, in order to claim deductions, you had to track your business and personal use. The new law removes these requirements for cell phones and similar communication devices and treats employer-provided devices as tax-free fringe benefits.

Self-employed taxpayers get a break on health insurance costs: A self-employed individual must pay self-employment tax comparable to the Social Security tax paid on employee wages. For 2010, eligible self employed people can deduct health insurance premiums from the self-employment income subject to employment tax. This tax break is a limited one-year window of opportunity.

Contributions to Roth accounts are made easier for some taxpayers: Roth IRAs provide tax-free treatment for qualified distributions. Beginning in 2011, participants in state and local government-operated 457 plans (other than employees of nonprofits) can contribute deferred amounts to designated Roth accounts. Participants in 401(k) and 403(b) plans already have this ability. Also, participants in 401(k), 403(b) and 457 plans can roll over account balances to a Roth, subject to tax on pre-tax contributions and earnings. This provision takes effect on the date of enactment. For rollovers in 2010, you can opt to have the taxable income split between 2011 and 2012.

Businesses and individuals may want to take action before the end of the year based on these significant new law changes. To learn more about this new law and how it impacts your company, please contact the LEAN Accountants at McKonly and Asbury, LLP.