For entities with a calendar year-end, it’s that time of year – time to calculate the second quarter income tax provision.  Income tax expense for interim periods is based on an estimated annual effective income tax rate multiplied by the year-to-date ordinary pretax book income.  To get your interim provision right the first time, remember the following:

• Ordinary pretax book income does not include significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect.  Such items include, but are not limited to, discontinued operations or the cumulative effect of a change in accounting principle. 
• Certain items are not included in the estimated annual effective tax rate.  Instead, these items are allocated 100% to the quarter in which they occur.  Such items include, but are not limited to, certain releases of a valuation allowance, certain changes in a liability for uncertain tax positions, the impact of a change in tax law and the true-up of the tax provision from the prior year.
• Just like the annual tax provision, the interim tax provision is based on enacted tax law.  As of June 30, 2010, the American Jobs and Closing Tax Loopholes Act of 2010 (a.k.a. the Extenders Bill) has not been signed into law by the President.   As such, it is not appropriate to include in the second quarter provision any benefit for Research Credits generated during 2010.   
• Jurisdictions in which a company is unable to recognize a tax benefit for losses (i.e. a full valuation allowance has been recorded) are excluded from the estimated annual effective income tax rate calculation. 

Sometimes it’s hard to tell the difference between the two.  Is what I’m experiencing truly the problem or is it a symptom of an underlying problem?  The terrible headache isn’t the problem, only a symptom resulting from a large brain tumor.  I’ve learned that whenever I think I’ve identified the problem, I need to dig deeper to determine if it is only a symptom.  We need to get to the root cause.

I was talking with a friend last week and he was frustrated with his sales results.  He had identified the problem; his sales force and channel partners were not being effective.  We talked about it for awhile and it became clear that the problem he identified was only a symptom.  The company had not clearly identified who its customer was.  Pretty tough to develop a go to market strategy when you haven’t identified who your market is.  He needed to dig deeper to diagnose the tumor.  To get to the root cause.

When I interview people about their public accounting experiences, I typically ask what they love and what they hate.  They typically love the people, the clients and the caliber of work.  They hate the problems; the long hours, tremendous stress, and lack of control over their schedules (along with plenty of others).  These are symptoms folks. 

Likewise, we’ve talked with hundreds of companies over the past years.  There is a common theme to the message we hear.  Most of the pains we hear about are symptoms stemming from the symptoms described in the previous paragraph.  The headache affects one’s ability to focus.

In order to be the professional service firm that provides better results to the people that work in it and the clients that benefit from it, we are digging deeper in order to tackle the root cause.

The Patient Protection and Affordable Care Act of 2010 provided for a Qualifying Therapeutic Discovery Project tax credit, targeted to therapeutic discovery projects that show a reasonable potential to:

• Result in new therapies to treat areas of unmet medical need or prevent, detect or treat chronic or acute diseases and conditions,
• Reduce the long-term growth of health care costs in the United States, or
• Significantly advance the goal of curing cancer within 30 years.

There are some limitations, such as the credit is only available to taxpayers with no more than 250 employees.  To apply, applicants must complete Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program, which was just released by the Internal Revenue Service.  Follow this link for additional information, and a link to the application form:  http://grants.nih.gov/grants/funding/QTDP_PIM/index.htm

The Research Credit, the Research and Experimentation (R&E) Credit, the Research and Development (R&D) Credit, and Credit for Increasing Research Activities are all different terms for the same Federal Tax Credit.   This Federal Credit is filed on Form 6765 – Credit for Increasing Research Activities.

Current Research Credit situation:        

The Research Credit currently expires after 12/31/2009.  So, no taxpayer can file for the Research Credit for a period beyond 12/31/2009.  Furthermore, no company can take the financial benefit (i.e. inclusion in tax provision) for any Research Credit beyond 12/31/2009.   If a company has a fiscal year ending in 2010, they can include the credit for the period within 2009 (and adjust their base accordingly).  But, they cannot qualify or include anything for 2010.

 Status on Extension:

The House passed the Extenders Bill of which the Research Credit is part of, called “the American Jobs and Closing Tax Loopholes Act of 2010” on May 28^th.  This Bill is currently being considered in the Senate, with a vote likely coming the week of June 14, 2010.   As part of the bill, the Research Credit would be extended exactly like it is currently in place for 2009 and the credit would be extended for just 12 months.

 Note: Upon Congress (both the House and the Senate) passing the Bill, the bill doesn’t become law until it is signed by the President of the United States.

For more information please see the previous blog titled “What happened to the extenders bill”.

We typically don’t comment on new legislation until it’s passed, but we’ve been receiving many questions on the status of the American Jobs and Closing Tax Loopholes Act of 2010 which was passed by the House of Representatives of May 28.

 On June 8, the Senate began its consideration of its substitute amendment to the bill and is expected to vote this week on its version of the extenders package (technically the Senate substitute amendment to the House amendment to the Senate amendment), and Senator Charles Schumer (D-NY) has predicted that the measure will pass.

 The bill before the Senate is very similar to the bill passed by the House. Both bills would retroactively reinstate and extend for one year a host of important tax breaks for businesses and individuals. And they both include many revenue raisers, such as a crackdown on carried interest, a crackdown on using certain S corporations as a way to minimize Medicare and Social Security taxes, and another assault on “foreign tax loopholes.” However, the Senate bill makes several important modifications to the tax provisions in the House-passed bill.  

• The Senate bill drops the House bill’s new rules for defined contribution plan fee disclosure requirements.
• The Senate bill keeps the House’s carried interest crackdown but modifies it to soften the blow
• The Senate bill would increase the Oil Spill Liability Trust Fund financing rate to 41 cents per barrel (up from 34 cents in the House version).

 We’ll update with all the details when the bill is passed.

In a new publication on its website, “Publication 4837 – Achieving Quality Examinations through Effective Planning, Execution and Resolution,” IRS has announced the implementation of the Quality Examination Process (QEP) – “a systematic approach for engaging and involving Large and Mid-Size Business (LMSB) taxpayers in the tax examination process, from the earliest planning stages through resolution of all issues.” It replaces IRS’s Audit Planning Process, and the LMSB Guide for Quality Examinations in Internal Revenue Manual § 4.46 is being updated to reflect this change.

 LMSB revenue agents will review the publication with taxpayers at the start of most new tax examinations. The publication outlines the LMSB examination process from start to finish, explaining that the new guidelines emphasize the importance of ongoing dialogue between the exam team and taxpayer throughout execution of the exam plan. IRS says timely, clear, and consistent communication between its examiners and the taxpayer during the process can directly influence the scope of the examination and the depth of the analysis for issues under audit.

Information on the new LMSB examination process can be found on the IRS website (http://www.irs.gov/businesses/article/0,,id=224139,00.html)