
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.
| On February 17, 2009, President Obama signed
the American Recovery and Reinvestment Act (the act), which adds a new investment tax
credit to the Internal Revenue Code called the "qualifying advanced energy project
credit." The credit for any tax year generally is an amount equal to 30
percent of the qualified investment for such tax year with respect to any
qualifying advanced energy project of the taxpayer. |
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Paul Jones
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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:
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property designed
to be used to produce energy from the sun, wind, geothermal deposits, or other renewable
resources; |
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fuel cells,
microturbines, or an energy storage system for use with electric or hybrid-electric motor
vehicles; |
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electric grids to
support the transmission of intermittent sources of renewable energy, including storage of
such energy; |
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property designed
to capture and sequester carbon dioxide emissions; |
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property designed
to refine or blend renewable fuels or to produce energy conservation technologies
(including energy-conserving lighting technologies and smart grid technologies); |
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new qualified
plug-in electric drive motor vehicles, qualified plug-in electric vehicles, or components
which are designed specifically for use with such vehicles, including electric motors,
generators, and power control units; or |
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other advanced
energy property designed to reduce greenhouse gas emissions as may be determined by the
Secretary of Treasury (secretary). |
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:
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which is necessary
for the production of property described above; |
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which is tangible
personal property, or other tangible property (not including a building or its structural
components), but only if such property is used as an integral part of the qualified
investment credit facility; and |
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with respect to
which depreciation (or amortization in lieu of depreciation) is allowable. |
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:
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Applicants must
submit an application containing required information during the two-year period beginning
on the date the Secretary establishes the program. |
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Applicants will
have one year from the date of acceptance by the Secretary of the application during which
to provide to the Secretary evidence that the requirements of the certification have been
met. |
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An applicant which
receives a certification will have three years from the date of issuance of the
certification in order to place the project in service, and if such project is not placed
in service by that time period, then the certification shall no longer be valid. |
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The certification
process appears to be a competitive one, in which the Treasury Department is required to
consider certain factors in determining which qualifying advanced energy projects to
certify, such as the extent to which: |
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there is a
reasonable expectation of commercial viability; and |
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such projects:
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will provide the
greatest domestic job creation (both direct and indirect) during the credit period; |
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will provide the
greatest net impact in avoiding or reducing air pollutants or anthropogenic emissions of
greenhouse gases; |
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have the greatest
potential for technological innovation and commercial deployment; |
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have the lowest
levelized cost of generated or stored energy, or of measured reduction in energy
consumption or greenhouse gas emission (based on costs of the full supply chain); and |
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have the shortest
project time from certification to completion. |
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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.
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In an effort to spur innovation and
stimulate an increase of jobs in the U.S., President Obama has included the cost of making
the R&D (R&E) Tax Credit permanent in his budget proposal for Fiscal Year 2010. |
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:
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Manufacturing |
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Fabrication |
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Engineering |
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Software Development |
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Architecture |
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Tool and Die Machine Shops |
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Electronics |
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Biotechnology |
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Pharmaceutical |
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Food Sciences & Agro-Business |
Examples of Benefits
Here are a few examples of companies and their Net R&D Tax Credit:
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Tool &
Die Shop |
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Average Four-Year Payroll of
$3.5 Million |
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Net Credit Benefit for 2004
thru 2007 tax years:
$200,000 |
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Foam
Products Manufacturer |
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Average Four-Year Payroll of
$19.5 Million |
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Net Credit Benefit for 2004
thru 2007 tax years:
$1,200,000 |
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Software
Company |
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Average Four-Year
Payroll of $6.5 Million |
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Net Credit Benefit
for 2004 thru 2007 tax years: $500,000 |
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Custom
Plastics Products Manufacturer |
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Average Four-Year Payroll of
$11.5 Million |
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Net Credit Benefit for 2004
thru 2007 tax years: $700,000 |
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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 Obamas
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.
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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
taxpayers 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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