Senate tax writers agree on extensions of important expired tax provisions

Republicans and Democrats on the Senate tax-writing committee reached an agreement just before the August recess that would extend many key tax provisions that expired at the end of 2011. The agreement brings both good and bad news for manufacturing companies, though it is still a work in progress.

The Family and Business Tax Cut Certainty Act of 2012 would address dozens of tax provisions expired at the end of 2011. These provisions are often called "extenders" because they are not permanent, but instead have been extended repeatedly by Congress on a short-term basis. Many of these provisions provide crucial benefits for manufacturers, including the research credit.

The agreement reached by Republicans and Democrats would extend the research credit and several other important tax benefits for manufacturers, including:

  • the alternative fuel credit, which offers manufacturers a tax break on the propane used in forklifts (the bill would limit the refundability of the separate alternative fuel mixture credit);
  • the look-through treatment under Subpart F for payments between related controlled foreign corporations, an important provision for companies with international subsidiaries; and
  • the energy-efficient appliance credit, which provides a valuable incentive to manufacturers of washers, dishwashers, refrigerators and other appliances.

The bill would extend these provisions retroactively for all of 2012 and prospectively through the end of 2013. In addition, it would increase the maximum amount of property that can be expensed under Section 179 to $250,000 for tax years beginning in 2012 and 2013. The current limit is $125,000 in 2012 and is set to revert to $25,000 in 2013. The Section 179 phaseout threshold would also be increased to $800,000, up from $500,000 currently.

But there's bad news too. Republicans left many expired provisions out of the legislation. The bill would not extend 100 percent bonus depreciation, which allowed manufacturers and other taxpayers to fully expense all eligible equipment placed in service in 2011. Taxpayers can still use 50 percent bonus depreciation for eligible property placed in service in 2012, but many had hoped Congress would extend 100 percent bonus depreciation for one more year.

What's worse, bonus depreciation is scheduled to expire altogether in 2013 (long-production-period property such as airplanes have alternative expiration dates). The current agreement would not revive 100 percent bonus depreciation in 2012 or offer 50 percent bonus depreciation in 2013.

This agreement is not the last word. The Senate was in recess for the month of August and may not even bring the bill to the floor when it returns. The House still has not offered its own package, and lawmakers are instead expected to address all of these provisions after the election, when they negotiate a potential extension of the 2001 and 2003 tax cuts. Those tax cuts -including the 15 percent rate on capital gains and dividends - are scheduled to expire at the end of the year.

If a final agreement on tax legislation is reached after the election, it will likely omit some of the expired provisions in the current Senate bill and add others that were not included. But the Senate Finance Committee approved its bill in a bipartisan 19-5 vote, indicating which provisions have the most support in Congress. Provisions that were not included - such as bonus depreciation -likely face an uphill battle.

Law changes provide estate and gift tax planning opportunities in 2012

Estate tax can be a significant burden on manufacturing companies and their owners. The current economic conditions and transfer tax rules may provide a unique opportunity in 2012 for individual taxpayers to consider estate and gift tax planning strategies.

Legislation has dramatically changed transfer tax rules repeatedly over the past several years, complicating tax planning and adding uncertainty. Fortunately, the estate, gift and generation-skipping transfer (GST) taxes all offer lower rates and larger exemptions in 2012 than any time in recent years. Unfortunately, without legislative action, these rates and exemptions are set to expire at the end of the year and give way to much less favorable rules in 2013.

There will be legislative efforts to amend the transfer tax rules for 2013 and beyond, but the outlook is unclear. Given the legislative uncertainty and the current economic conditions, 2012 may provide a unique window for estate and gift tax planning. Interest rates are at near-historic lows, and values of property and other assets have declined because of past economic conditions, which now appear to be improving. When both of these conditions exist, property transfer is almost always beneficial, even if gift tax is incurred.

To leverage the current favorable tax rules and economic conditions, taxpayers can use many estate planning techniques including grantor retained annuity trusts, family limited partnerships, charitable lead trusts and sales to family trusts.

The following table outlines recent changes in estate and gift tax and highlights current opportunities:

Much 'to do' about something - the new repair regs will affect manufacturers

The newly issued repair regulations seem to be all the buzz. After much anticipation, new regulations regarding tangible property were released, replacing both the proposed regulations (issued in 2008) and the long-standing current regulations. These new temporary regulations, effective for taxable years beginning on or after Jan. 1, 2012, update the prior rules and serve to codify a previously unclear area of tax law.

Before diving in head first, consider not only the immediate implications of the new temporary regulations, but also the potential areas of manufacturing organizations that these rules may affect. These rules will likely require a deep dive into fixed asset documentation and records. Many of these same records contain source documentation influencing not only capitalization decisions, but property and sales tax positions as well. Therefore, a thorough and comprehensive review could ease some of the compliance burden by providing the potential for deductions outside of simply the area of capitalization.

The new temporary regulations significantly differ from both the current regulations and the proposed regulations. Additionally, these new rules include a surprise: They not only provide the expected guidance on amounts paid to acquire or produce tangible property, but also offer unanticipated new guidance regarding the disposition of real property. The revenue procedures providing guidance on these rules contain 19 new automatic accounting method changes (Rev. Procs. 2012-19 and 2012-20). Of these 19, there are four or five that almost all taxpayers will want to consider. These relate to depreciation changes, dispositions, the general asset category, capitalization of items that were previously deducted and the de minimis rule. Here are some of the key points from the regulations.

Unit of property teams up with building systems/components The unit of property is still the building, but now you analyze betterments based on building systems including HVAC, plumbing, electrical, building sub-systems, and major building and structural components.

Dispositions come out of nowhere For tax years beginning on or after Jan. 1, 2012, a loss on disposition must be calculated and recognized when each and every building component is removed from a building. The requirement is burdensome because this level of documentation is so uncommon. In addition, the restoration rules require the capitalization of any replacement of an item on which a loss on disposition is taken. Pay very close attention to the general asset election!

General asset election saves the day The IRS has given taxpayers two years to file a retroactive late general asset account election. By placing assets into general asset accounts, the "must" rule of dispositions turns into a "may" option. With this flexibility, you can determine when items meet the repairs standard and therefore become deductible. If capitalization is required, however, you can determine if you will compute a loss on disposition for a particular renovation/improvement.

Doing nothing is doing something If you do not address these rules, you will have in effect chosen to be subject to disposition calculations on the removal of all building components in 2014 and beyond ( for calendar year taxpayers). The first time you have a disposition, a method change is required. In addition, that will likely trigger an unfavorable repairs method change. Remember, you can't take dispositions and repairs on the same tax return unless you made the retroactive general asset account method change. In 2014, if you do nothing, you will have lost the ability to file for this automatic change, so you will have actually done something!

State corporate tax trends affecting manufacturers

Much has been made of three recent state corporate tax trends affecting manufacturers and other companies:

1. The change from net income to a gross receipts or gross profits base in some of the larger states imposing corporate-level taxes

2. The focus of many states in taxing companies based on customer location rather than plant and facility locations

3. Sourcing receipts earned on intangibles and services to customer location

Manufacturers that use captive financing and leases, provide services related to their product, and receive royalties from licenses or patents need to understand the implications of these recent trends.

These developments have increased overall state effective tax rates for book and cash taxes, and increased the complexity in understanding risks opportunities and projection of effective tax rates for future reporting periods. Uncertain tax positions are increasing as well, as the states and taxpayers attempt to comply with these developments, causing controversies.

In response to the trends, taxpayers have filed lawsuits in Michigan, California and Texas, seeking relief from the increase in taxes. Corporate taxpayers, including IBM, Nestle and Gillette, have filed cases in 2010 and 2011, and continue to litigate select issues. We have also seen legislative changes concerning elections, technical corrections and filing methods, with a particular emphasis on manufacturers. For example, the Michigan Senate just passed technical corrections to the Michigan business tax for the 2008 to 2011 tax periods that will heavily affect manufacturers' tax bases retroactively. Virginia enacted law that allows manufacturers to elect to source income using the sales factor only, and New Jersey is moving to a mandatory single-weighted sales apportionment factor.

To mitigate the increase in effective tax rate and cash taxes stemming from these trends, manufacturers should consider:

  • traditional planning, such as a consideration of exemptions from taxation for manufacturers selling product into states where they do not have a physical presence;
  • a "nexus" review (including P.L. 86-272);
  • identification of statutory credits; and
  • incentives for expansion and retention

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.