May 2009

American Recovery and
Reinvestment Act Provides
New Federal Income Tax
Credit For Investments
In Advanced Energy Facilities

The following article was contributed by Paul Jones, a partner with Ice Miller LLP. Paul may be reached at 317-236-5959 or paul.jones@icemiller.com. © 2009 Ice Miller LLP. All Rights Reserved.

Who Qualifies?

So, what types of businesses might be eligible for this credit? Essentially, manufacturers of clean technology (including wind turbine gears, carbon sequestration property, solar panels, energy storage systems, etc.). Specifically, the term "qualifying advanced energy project" means a project which re-equips, expands, or establishes a manufacturing facility for the production of:

The new law also contains a "catch-all" provision that includes any portion of a qualified investment which is certified by the Secretary as eligible for the credit. The law specifically excludes, however, any portion of a project for the production of any property which is used in the refining or blending of any transportation fuel (other than renewable fuels).

What Qualifies?

All that said, what expenditures by the taxpayer are eligible for the credit? In general, the qualified investment is the taxpayer's basis in "eligible property" placed in service by the taxpayer during the tax year which is part of a qualifying advanced energy project. The amount of investment that qualifies is subject to certain limitations, including that the amount cannot exceed the amount designated by the Secretary as eligible for the credit. The term "eligible property" generally means any property:

In conference, the definition of eligible property was limited by the drafters to "tangible personal property," which means the credit cannot be claimed with respect to costs of a building or other real property related to a qualified manufacturing facility. However, the costs of machinery and other equipment can often constitute a significant portion of a manufacturing facility project. In such cases, the potential credit could be substantial. Although guidance from the Treasury Department regarding the program is required, specific language in the law raises questions of interpretation, such as what types of property will be considered "necessary" for production or what will be required to be "an integral part of" the facility? It is not entirely clear at this point whether the Treasury Department will address those issues in its guidance on the program. Lastly, double benefit is not allowed with respect to components of certain energy projects that are eligible for other credits under Code Sections 48 (e.g., certain energy facilities), 48A (e.g., qualifying advanced coal projects), or 48B (e.g., qualifying gasification projects).

How to Qualify?

Within 180 days of the act's enactment, the secretary, in consultation with the Secretary of Energy, is required to establish a qualifying advanced energy project program to consider and award certifications for qualified investments eligible for credits to qualifying advanced energy project sponsors. The total amount of credits that may be allocated under the program cannot exceed $2.3 billion. While the Treasury Department has of course not yet released any guidance on this program, general requirements of the program will include the following:

There are also provisions regarding the mandatory review of the program and the redistribution or reallocation of credits under certain circumstances. Upon certification, the Secretary is required to publicly disclose the identity of the applicant and the amount of the credit with respect to such applicant.

We will continue to monitor and await guidance from the Treasury Department on this program, but in the meantime, taxpayers with potentially eligible projects, should prepare to reserve a place in line (and apply) for these credits. With a limited allocation of $2.3 billion nationwide, it will be important to act swiftly once details of the program are announced.

For more information about this program or other tax provisions in the Act, please contact Paul Jones, partner in Ice Miller's Tax Practice Group and a member of the firm's Green Industries Initiative, at (317) 236-5959 or paul.jones@icemiller.com.

This article is intended for general information purposes only and does not and is not intended to constitute legal or tax advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

President Obama Proposes Making the R&D (R&E) Tax Credit Permanent

The following article was contributed by Karim Solanji, J.D., Director, and Mark Lauber, VP of Marketing, both with Paradigm Partners. Paradigm Partners is a national tax consulting firm specializing in the R&D Tax Credit. Mark's email is MLauber@ParadigmLP.com and his phone number is 281-558-7100 X-105. Visit Paradigm Partners online at www.ParadigmLP.com.

Currently the credit needs to be approved and extended yearly. In fact, in late October 2008, the R&D Tax Credit was approved retroactively for 2008 and extended through 2009 as part of the Emergency Economic Stabilization Act of 2008.

Background about the R&D Tax Credit

The Research and Development (R&D) tax credit was created by Congress as part of the Economic Recovery Tax Act of 1981 to encourage American industry to invest in research and development activities. The purpose of the credit was to stimulate R&D activities among businesses through tax incentives. However, due to the stringent requirements that existed under the provisions of the Credit, a vast majority of the small to mid-size companies were unable to reap the substantial benefits of the R&D credit.

Changes Enable SMBs to Benefit from R&D Tax Credit

Realizing that a majority of innovation in the U.S. was in fact transpiring from these small to mid-size firms, Congress in 2001 liberalized the statutory requirements to enable small and mid-size companies (SMBs) across the country to take advantage of the R&D benefits.

Specifically, the new regulations provided that companies were no longer required to maintain precise timesheets documenting every hour an employee spent conducting qualified R&D activities. Furthermore, the research no longer had to result in a product that was new to the industry; instead, the resulting product or process simply had to be new to the company that developed it.

These changes substantially increased the number of companies taking the credit. Additionally, for those companies that had not taken the credit, they can go back three open tax years and receive a refund from the IRS.

The following industries have benefited from taking the R&D Tax Credit:

Examples of Benefits

Here are a few examples of companies and their Net R&D Tax Credit:

As you can see, the R&D Tax Credit can be substantial for small and mid-size companies especially if you consider what revenue might be required to generate an equivalent profit.

How the Economy Will Benefit

It is very natural that the credit become permanent based on President Obama’s continued assertion that technical innovation is a way to create more jobs immediately and in the long term and also to allow us to compete globally.

In general, the jobs that are created from these types of activities are high-paying jobs and the workers will be here in the US.

How Can Your Company Benefit?

For those companies already taking the credit, it will help in budgeting and planning their employee levels from year to year knowing that the credit will be available for the coming year.

For those companies that have not taken the credit, this is an opportunity to get a cash refund from the IRS for overpaying taxes the three previous years. It does not matter if you are going to be profitable this year or not, you can still take advantage of the incentive if you were profitable and paying taxes in the three previous years. And if you are profitable this year, you take a dollar-for-dollar reduction in your current year tax liability.

Summary

Congress has passed their FY 2010 Budget Resolution which maintains the line item for a permanent R&D tax credit in the budget. This is the first hurdle of several hurdles in the legislative procedure to pass a permanent R&D tax credit. Now that the money is set aside for a permanent R&D, a bill authorizing the credit must now be passed and this must be done by fiscal year end September 30. This incentive will help increase employment in the short and long term with high paying American jobs and help companies that have not taken the credit receive a well needed cash refund from the IRS to invest in improving or expanding their business during these tough economic times.

IRS Lures Tax Evaders
to Report Offshore Income

The following article was contributed by Bob Webb and Chris Coffman of Frost Brown Todd LLC. Contact Bob Webb at bwebb@fbtlaw.com or 502-568-0313. Contact Chris Coffman at ccoffman@fbtlaw.com or 502-568-0373.

		On March 26, 2009, the IRS announced an Offshore Income Reporting Initiative to encourage taxpayers with undeclared offshore accounts and assets to come forward and participate in the IRS voluntary disclosure program. IRS Commissioner Doug
Shulman announced the new initiative by describing it as a way to establish “a predictable set of outcomes to encourage people to come forward and take advantage of [the IRS] voluntary disclosure practice while they still can.” The proverbial carrot that the IRS is using to encourage voluntary participation is the possibility that taxpayers who comply with the initiative may be able to avoid criminal prosecution and substantial civil penalties. The initiative only applies to voluntary disclosure requests related to offshore issues. The initiative applies to all such requests that have already been submitted to the IRS and that are not yet resolved, and it will remain in effect for six months from the effective date of March 23, 2009.

Brief History

Prior to the announcement of the new initiative, practitioners and commentators alike expressed uncertainty about the applicability of the IRS voluntary disclosure policy to U.S. taxpayers with undeclared offshore accounts and income. Some of this uncertainty resulted from the fact that it was unclear how the ongoing dispute between the IRS and Swiss-based UBS-AG over the disclosure of information regarding U.S. depositors holding foreign accounts and the increased information that the IRS has obtained from other jurisdictions and foreign banks would impact the applicability of the IRS voluntary disclosure policy to individual taxpayers. Further, there was concern that the IRS would impose substantial civil penalties on these taxpayers if they voluntarily came forward. The initiative, in large part, seems to alleviate much of this uncertainty and concern.

Who Qualifies?

To qualify for the new initiative, taxpayers must voluntarily and timely disclose their previously undisclosed foreign bank accounts. A voluntary disclosure occurs when the disclosure is truthful, timely, complete and when the taxpayer cooperates fully with the IRS and makes good faith arrangements with the IRS to pay in full any tax liability, interest and penalties.

Amount You Must Pay

Under the initiative, the IRS will assess all taxes and interest due as a result of the taxpayer’s offshore issues going back six years. Where an account or entity was formed or acquired during this six year look-back period, the IRS will assess taxes and interest starting with the earliest year in which an account was opened/acquired or entity formed. The taxpayer will be required to file or amend all returns, including information returns and Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly referred to as an “FBAR.”

Penalties Imposed

Moreover, the IRS will assess either an accuracy penalty or a delinquency penalty on all years within the six year look back period.

Finally, in lieu of all other penalties that may apply, such as the penalty for failure to file an FBAR (50 percent of the total account balance) or the civil fraud penalty (75 percent of the unpaid tax liability), the IRS will assess a penalty equal to 20 percent of the amount in the foreign bank account or entity in the year with the highest aggregate account/asset value.

No Criminal Charges

Although the establishment of a set civil penalty framework that is absent under the IRS voluntary disclosure practice is an important part of the initiative, the opportunity for taxpayers to avoid criminal prosecution is obviously the most critical piece of the initiative. Historically, the IRS voluntary disclosure practice afforded some comfort to disclosing taxpayers that they would most likely avoid criminal prosecution if they met all of the eligibility requirements. However, the language of the IRS voluntary disclosure practice was clear that a “voluntary disclosure will not automatically guarantee immunity from prosecution.” In contrast, in its public statements discussing the initiative, the IRS seems to be taking the position that taxpayers who participate in the initiative will not be criminally prosecuted. For example, Commissioner Shulman recently stated that the initiative will ensure that “those who hid money offshore pay a significant price, but also allow them to avoid criminal prosecution if they come in voluntarily.”

IRS Enforcement Plan

The announcement of the initiative is a significant part of the ongoing work of the IRS to increase enforcement efforts to detect and stop unlawful offshore tax avoidance. The IRS recently announced that it will undertake its most ambitious hiring initiative in recent years in order to increase enforcement efforts. Approximately 700 of the more than 3,500 enforcement employees that the IRS intends to hire under this initiative will be tasked to address international issues. Commissioner Shulman recently emphasized that this increased focus on undeclared offshore accounts and income “will only increase under [his] watch.” Thus, those who are unlawfully concealing assets “should come forward now under our voluntary disclosure practice and get right with the government.” Commissioner Shulman cautioned that for “taxpayers who continue to hide their head in the sand, the situation will only become more dire.” He has promised that in those cases where the taxpayer did not come in through the voluntary disclosure process, “the IRS will devote the time and resources needed to fully develop these cases, pursuing both civil and criminal avenues, as appropriate, and will consider all available penalties.”

IMA Meeting Calendar

OSHA 10-Hour Certification Course
June 9-10, 2009
Plymouth

Natural Gas Outlook 2009
June 11, 2009
Online Webinar

IMA/IMPAC
Golf Outing
June 24, 2009
Trophy Club, Lebanon

OSHA 30-Hour Certification Course
July 14-16, 2009
Plymouth

Regulations Unwrapped: What's New in Land and Water
July 15, 2009
Barnes & Thornburg Offices

OSHA 10-Hour Certification Course
Aug. 5-6, 2009
IMA Conf. Center, Indianapolis

OSHA 10-Hour Certification Course
Sept. 15-16, 2009
Hampton Inn SW
Fort Wayne

OSHA 30-Hour Certification Course
Oct. 6-8, 2009
Swan Lake Resort, Plymouth

OSHA 10-Hour Certification Course
Nov. 4-5, 2009
IMA Conf. Center,
Indianapolis

OSHA 10-Hour Certification Course
Dec. 2-3, 2009
IMA Conf. Center, Indianapolis

To register for any IMA conference, click the link and register online; or contact IMA at 317-632-2474 or 800-462-7762. Additional information is available by contacting Angie Glass at the above numbers or at aglass@imaweb.com.

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