Two primary pieces of legislation passed in 2010 that, in combination, are intended to jump start corporate America and will have lingering benefits for years to come. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 passed in December 2010 followed closely on the heels of another business boosting measure, the Small Business Jobs Act of 2010.

Several of these provisions are temporary in nature and should be acted on quickly.  For example, the section 179 expensing election and 100% bonus depreciation provisions are reduced or eliminated in 2012. 

The research credit has been temporarily extended through 2011 and should always be claimed if the company is performing qualified activities.  On certain occasions, the IRS has interpreted the failure to claim the credit as an indication of a lack of qualified R&D activities. Furthermore, it is easier and more appropriate to determine the research credit on a timely, contemporaneous perspective.

There is speculation that a number of these provisions will continue to be available in the future, but there is no guarantee.  The research Credit has been extended 14 times so far

In an article from the Journal of Accountancy (March 2011), the authors Douglas M. Sayuk, Matthew H. Fricke and Shamen R. Dugger looked closely at the patchwork of lucrative tax benefits, including IRC § 179 expensing, bonus depreciation and tax credits. The authors provided a side-by-side analysis of the acts, which is reproduced below.  For the full text of the article, see http://www.journalofaccountancy.com/Issues/2011/Mar/20103698 .

If small businesses are truly the engine for growth, any effort by Congress at corporate tax reform must specifically factor in tax breaks for small businesses to keep the economic recovery on track. Congress’ prior efforts at corporate tax reform, and efforts to help small businesses specifically, have often fallen short because they do not extend to non-corporate entities.  Efforts to reduce the corporate income tax rate and other corporate provisions are unlikely to substantially help non-corporate entities, and therefore most small businesses.

As Congress continues to debate corporate tax reform, the House Ways and Means Subcommittee on Select Revenue Measures heard testimony on the special burdens that the tax code imposes on small businesses, and the need for comprehensive tax reform to address these problems. As the IRS has liberalized the rules for S-corporations, and more businesses are being formed as limited liability corporations, the number of businesses operating under a flow-through structure has increased significantly in the last decade. As a result, more small businesses are paying taxes under the individual income tax rates as pass-through entities.

Congress’ focus so far on corporate reform – including corporate tax rate reductions – would generally not extend to small businesses.  Subcommittee Chairman Pat Tiberi, R-Ohio, noted that reforming corporate taxes alone means reforming only about 10 percent of federal revenues.  “The last thing we want to do as a part of tax reform is create a situation where we are putting small businesses at a competitive disadvantage,” he said.

Corporate tax reform must include small business reform provisions to cover the bulk of businesses that actually generate revenue in the U.S. Speaking before the committee, Patricia Thompson, chair of the AICPA’s Tax Executive Committee, indicated that the complexity of the current tax code is particularly burdensome for small businesses with regard to, for example, depreciation. She urged Congress to consider the expansion of corporate provisions to help non-corporate entities, something Congress has failed to take into account as recently as with the passage of the Small Business Jobs Act. While the Act expanded an existing provision to allow 100 percent gain exclusion on the sale of small business stock under certain conditions, Thompson noted that the provision benefit only corporations, thereby excluding many of the small businesses that are conducted as sole proprietors or pass-through entities.  Ongoing efforts, however, to repeal 1099 reporting requirements would be, she said, a step in the right direction for small business tax reform.

A new federal 100% bonus rule may affect how companies use IRS 1031 tax-free exchanges, or like-kind exchanges (LKE), in the short term. Since 1921, companies have relied on LKEs to defer tax bills indefinitely from the sale and purchase of replacement assets. Tax deferrals of up to 40% of the sale price of the asset improve cash flow.

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act increased the bonus depreciation deduction from 50% to 100% for qualifying property acquired and placed into service after September 8, 2010 through December 31, 2011. In addition, Section 179 of the IRS tax code increased the depreciation levels of qualifying capital assets acquired during the tax year to $500,000 with a limit of $2,000,000. The 100% bonus depreciation applies once the $500,000 limit is reached.

Depreciation reduces a company’s income tax and represents an incentive to acquire qualifying capital assets. Both the bonus depreciation rule and Section 179 help businesses acquire equipment, such as business vehicles, computers, software, office furniture and equipment, manufacturing equipment and tangible personal property. Bonus depreciation does not apply to used assets, or commercial and residential real estate property with a recovery period in excess of 20 years.

The 2011 bonus depreciation rule may alter the use of 1031 exchanges in the short-term because the cost of the new capital assets can be deducted from income rather than be depreciated over the years. If a company sells a fully-depreciated piece of equipment for $500,000 and buys a new one for $500,000, the company would have no federal tax obligation for the gain from the sale under this bonus depreciation rule.

Brent Abrahm, president and CEO of Accruit, says companies can take advantage of the short-term benefits of the 100% bonus depreciation period while retaining the long-term benefits of LKE programs. Because the 100% bonus rule expires within the year, a company’s tax basis in its fixed assets will be reduced to zero by 2012, which ultimately will lead to large tax gains unless deferred through an LKE program.

In addition, LKE programs can be used to minimize state tax obligations in states that do not follow Federal depreciation rules. Many state taxing authorities have decoupled from the Federal rule. As a result, companies may still be required to pay taxes on the gain at the state level, reducing the actual benefit of the full deduction at state level. “In states that have decoupled from the Federal bonus depreciation rules, the suspension of a company’s LKE program could result in an additional 2011 state tax liability equal to the company’s forgone LKE deferral multiplied by the state’s highest marginal tax rate,” he says. “Depending on the state, that tax bill could amount to as much as 11% of the foregone LKE deferral.”

Abrahm points out that there are a number of additional considerations for continuing to support LKE programs, which include:

• A reduction in state taxes can also reduce the alternative minimum tax (”AMT”) for owners of closely held companies.
• In addition, some states have suspended or eliminated net operating loss (NOL) carryback and carryforward provisions. The impact of bonus depreciation on taxable income should be considered in light of NOL restrictions
• If a taxpayer suspends its LKE program, its state tax liability will increase and possibly result in additional AMT that may not be recouped in future years.
• Used property does not qualify for bonus depreciation. LKE allows used property to be used as replacement property to complete an exchange.

As companies are considering LKE programs or striving to understand the implications of 100% bonus depreciation to ongoing LKE programs, Abrahm would advise companies to consult with their service providers to determine the most favorable path to maximize the benefits of LKE programs and avoid potential negative tax consequences that might result from discontinuing an LKE program.

For additional questions regarding 1031 exchanges, contact Brent Abrahm, president and CEO at Accruit, LLC. Brent can be reached at 303.865.7301 or brenta@accruit.com .

TaxOps welcomes Chris Stroh to the team. With Chris’ legal, tax, and business background, he will be providing tax minimization solutions for a growing list of clients, particularly in research and development (R&D) credits.

Chris is currently on an engagement with a Fortune 400 client. In his role with the client, Chris will be largely managing R&D studies – reviewing contracts, conducting the interview process, and calculating credits.

Chris’ on-site presence elevates the relationship, allowing him to work directly with client counterparts to manage the R&D project closely and focus resources where they provide the most value. Already, Chris says he sees a difference in the level of value in the TaxOps approach. “We bring a deeper bench to the R&D process than is generally afforded to companies by Big Four competitors,” he says.

Prior to joining TaxOps, Chris provided international tax consulting services for Ernst & Young LLP and institutional fixed income broker services for a number of firms, including D.A. Davidson & Co., and Wedbush Morgan. Chris is a graduate of the University of Denver where he earned his Master of Laws in Taxation in the graduate tax program, Juris Doctor from the Sturm College of Law, and Masters in Business Administration from the Daniels College of Business.

TaxOps is also pleased to welcome Jacqueline Coronado to the Lakewood office, where Jackie is providing administrative support and tax processing services for the Lakewood and Englewood offices. She comes to TaxOps from Grant Thornton LLP, where she provided administrative support to senior-level partners and team members. Prior to Grant Thornton, Jackie held a similar role with Ernst & Young LLP, where she worked with several of TaxOps current directors and managers. “I feel I already know the TaxOps people and the job,” she says. “So I can concentrate on making improvements that matter.”

Earlier this month, the House of Representatives pushed 1099 repeal forward by passing the chamber’s version of a bill that would eliminate information reporting requirements mandated by last year’s health care legislation. IRS form 1099 expands reporting requirements for all vendor purchases over $600. The House bill would also repeal reporting requirements imposed on taxpayers who receive rental income. Widespread legislative support for the repeal of 1099 is due to the significant compliance burdens that businesses and rental property owners are expected to face if the expanded 1099 reporting provisions are not repealed.

The Senate has already passed its own bill to roll back 1099 requirements. Unlike the House, the Senate version does not repeal the rental property 1099 requirements. The two chambers also differ on how to offset the revenue loss from repealing 1099 reporting requirements. The Senate proposes to rescind $44 billion of discretionary government spending; the House would increase the amount of the new IRC section 36B health care credit that is subject to recapture.

White House opposition to the revenue offsets contained in both bills makes the road to final passage unclear. The fate of the 1099 repeal now rests in the hands of the Senate, which will re-deliberate the fine print to see if a settlement between the two chambers and the Oval Office can be reached before the reporting requirements are slated to kick in on Jan. 1, 2012.

The Emerging Company Award acknowledges companies with annual sales of less than $100 million, which have demonstrated steady growth for three consecutive years.

A Closer Look at Accounting for Income Taxes

Qualified personal service corporations cannot use these graduated tax rates…

Chris Becze has joined TaxOps as the Director of Strategic Relationships. To this new role, Chris brings an extensive legal, taxation, and business development skill set. He plans to use his background and experience to assist corporations and professionals in meeting their tax planning, operations, and tax minimization needs. He is based out of the firm’s Lakewood office.

“Chris brings an energy and deep understanding of our industry and business that will increase our capacity to communicate effectively with our current and prospective clients,” said Brian Amann, managing director of TaxOps.

Chris served in the U.S. Navy for four years prior to completing his professional education. In 2004, Chris joined KPMG to oversee business relationships for multi-national clients. At KPMG, he advised clients on various international and domestic transactions, including due diligence for cross-border corporate acquisitions and entity restructurings. After four years at KPMG, Chris joined LandAmerica Financial Group to develop the commercial and residential real property exchange market in Colorado. In 2009, Chris took a position with Kforce, a national professional staffing company, to lead business development efforts for strategic level consultants.

He comes to TaxOps with the same goal – to lead business development efforts, this time on behalf of corporate clients. Chris says he is looking forward to working closely with existing clients and strategic partners to strengthen relationships and ensure that TaxOps solutions are being delivered with the highest level of client satisfaction.

What drew Chris to TaxOps is the relationship-driven approach that keeps partners and staff open minded to client needs. “We do not walk into initial client meetings with a boilerplate plan,” he says. “We have to listen to our clients, learn what is needed, and leverage what is there to build a solution that is right for the client,” he says. He also appreciates the fixed fee model that he believes gives TaxOps advisors the ability to work closely with and be more attentive to client needs. “It is nice that clients are not afraid to call us up and ask us questions without worrying about what it will cost them,” he says.

Chris also comes to TaxOps as an educator, having presented tax classes for the Colorado Bar Association and numerous other organizations. He is an active member of the Colorado Bar Association and Denver Bar Association. He graduated from Colorado State University in 2000 with a B.A. in Political Science and received his Juris Doctorate and Master’s of Law in Taxation from the University of Denver Sturm College of Law.

To reach Chris, please call 720-227-0059 or e-mail him at cbecze@taxops.com

As a starting point for budget negotiations, the White House has proposed putting more agents on the ground to enforce tax collection and financial compliance priorities, despite towering budget deficits. More IRS agents are intended to bridge federal funding gaps by roping in more revenue.

According to the Wall Street Journal, Obama’s fiscal 2012 budget includes a 5% increase in staff, or an additional 5,100 agents next year. That would put the agency’s total manpower at just over 100,000 people supported by a total budget of $13.28 billion, including a proposed 9.4% raise for 2012.

With more agents chasing down tax dollars at companies of all sizes and across all industries, a greater number of corporate taxpayers may see auditors at the door. Should the budget proposal pass, corporate taxpayers will need to put greater effort into ensuring returns are accurate and timely, and audit triggers are minimized, to help prevent audits from occurring.

Greater enforcement through more agents appears to be a White House priority for 2012. Obama’s budget plan also calls for increasing the number of financial and consumer protection agents to enforce the 2010 Dodd-Frank Act. The projected cost to taxpayers would come in at about $4.8 billion. Among the agencies singled out for additional hires are:

Consumer Financial Protection Bureau (new)                      1,225 hires
U.S. Securities and Exchange Commission                             600 hires
Federal Deposit Insurance Corporation                               1,700 hires
Financial Services Oversight Council &                                  192 hires
Office of Financial Research
Office of the Comptroller of the Currency                               875 hires

Response to Obama’s budget has been mixed, with some opponents saying that greater punitive enforcement and onerous tax burdens when businesses profits are down is a poor investment in the future. Separately, Obama has vowed to push initiatives ranging from trade deals to corporate tax reform, proving that he is not beyond using the carrot and the stick.