The president signed a last-minute compromise bill on Jan. 3 that settled nearly all of the unresolved fiscal cliff tax issues. The income tax rate changes will primarily affect businesses operated as pass-through entities such as S Corporations and LLCs.
Tax changes in fiscal cliff legislation:
» Makes permanent the 2001/2003 tax cuts on income under $400,000/ $450,000 for joint filers
» Top rates of 39.6 percent for ordinary income and 20 percent for capital gains/dividends
» Reinstate phase-outs for exemptions and itemized deductions
» Permanently indexes the Alternative Minimum Tax
» Permanent extension of $5 million gift and estate tax exemption
» Extension of 50 percent bonus depreciation and rules for equipment expensing under Section 179 of the IRS code
» Extension of research credit
While the U.S. corporate tax rate is one of the highest in the industrialized world, both Republicans and Democrats appear to support tax reform for businesses operating as C Corporations. While these businesses currently pay up to a 35 percent federal income tax rate, there is support for an across-the-board rate reduction to something around 28 percent. However, this could be dampened by a reduction in tax incentives available to manufacturers and the topic will likely be addressed later in 2013.
Corporate income tax reform changes:
» Lower income tax rates
» Elimination of bonus depreciation and favorable limits on capital expenditures under Section 179
» Potential reductions to last in, first out inventory; research and development credit; and domestic production deduction benefits
Manufacturers should claim the research credit for 2012, which was extended in the legislation. Businesses will be able to benefit from other recent law changes. All manufacturers can expense 50 percent of the cost of new equipment placed in service in 2012 under bonus depreciation. In addition, Section 179 provides an opportunity to expense 100 percent of new and used equipment placed in service in 2012, up to $500,000, subject to phase-outs.
Also, in December 2011, the U.S. Treasury issued new regulations known as the Tangible Property/Repair regulations. While these regulations contain both good and bad, they are not effective until tax years beginning in 2014, while providing manufacturers the opportunity to adopt the favorable aspects of these rules for 2012. The most significant opportunity in these regulations relates to real property – namely buildings and leasehold improvements. At a high level, the opportunity is to retroactively expense your remaining tax basis of prior years’ qualifying repairs, remodels and renovations to real property.
Tax deductions for repairs made in 2012:
» Roof repairs
» Parking lot repairs
» Other remodels and renovations to buildings
The rules are complex and revolve around whether a project resulted in a betterment or restoration to the underlying business system or unit of property. But, thousands of manufacturers have already determined that their prior capitalization policies provide an opportunity for catch-up deductions in 2012, spurring a flood of paperwork to the IRS for this change in tax accounting method.
The state of Wisconsin also has enacted legislation including a tax credit for production activities in Wisconsin, which goes into effect this year. The manufacturers and agricultural credit, once fully phased in, will be 7.5 percent of Wisconsin manufacturing (and agricultural) based income. This credit will be phased in beginning this year when the credit rate is 1.875 percent, and rises to 7.5 percent for taxable years beginning in 2016. The Wisconsin facilities must be properly classified for property tax purposes as either manufacturing facilities or agricultural in use in order to qualify for this credit. The credit is phased-in as follows:
» Tax years beginning this year: 1.875 percent
» Tax years beginning in 2014: 3.75 percent
» Tax years beginning in 2015: 5.526 percent
» Tax years beginning in 2016: 7.5 percent
The state also has a program that provides tax credits for companies that are expanding their workforce, facilities, and training offered to employees. The key to obtaining these incentives is to work with your representative from the Wisconsin Economic Development Corporation early in the planning stage of any job creation project. In addition, there is a job creation income tax deduction that is either $2,000 or $4,000 per employee depending on gross receipts.
Wisconsin continues to provide credits for research and development. The credits available are: expense credit, super research and development credit, facilities credit, and, effective Jan. 1, 2012, a sales tax exemption for purchases of tangible personal property used by companies primarily engaged in manufacturing and biotechnology.
It is anticipated that Gov. Scott Walker will introduce tax reforms as part of his 2013-2015 biennial budget because it appears that Wisconsin’s current biennial budget ending June 30 could have a budget surplus between $125 million and $500 million. These reforms could include reductions in the income tax rates, among other items.
Rick Stezenski is a CPA and federal tax services partner at Grant Thornton’s Appleton office. He can be reached at (920) 968-6722 or [email protected] Steven Koritzinsky is a CPA, state and local tax director, in Grant Thornton’s Milwaukee office. He can be reached at (414) 277-6410 or [email protected]