According to the Columbus Dispatch report, a Delaware EMS study shows how much the Delaware County pays for services. To read more and see how H&M provided assistance to this initiative, please follow this link to the Columbus Dispatch:
Domestic Production Activity Deduction – Don’t miss out!
What is it?
The Domestic Production Activity Deduction (“DPAD”) has rattled around in Congress since 2004. It was first passed in 2004, then amended retroactively in 2005, and then amended again in 2006. The DPAD encourages domestic production activities through a tax deduction benefiting businesses and individual taxpayers who engage in those production activities.
Commencing with 2005, businesses engaging in domestic production activities may deduct an applicable percentage of their qualified production activities income (as defined below, “QPAI”). As with most tax benefits, the DPAD suffers from various qualifications and limitations, which may limit/preclude the deduction’s size or availability. The most critical limitation ties the DPAD’s size to paid wages which ensures that most of the DPAD’s benefit goes to businesses either creating and maintaining jobs.
When did the DPAD start?
The DPAD is effective for corporations and individuals for taxable years beginning after December 31, 2004. It is available to partnership and S corporation owners for entity taxable years also beginning after December 31, 2004. Collectively, corporations, partnership and S corporation owners and individuals are referred to as “qualifying businesses”, subject to the law’s definitions briefly discussed below.
How does the DPAD work?
Qualifying businesses deduct a percentage of their QPAI from taxable income (for corporations) or adjusted gross income (for individuals).
Tax Year: Applicable Percentage of QPAI:
2005-6 3%
2007-9 6%
2010— 9%
For instance in 2010, the DPAD is equivalent to a 3% tax rate reduction for qualifying income, assuming a corporate tax rate of 34%.
The DPAD may be effective for state tax purposes too, although some states may “decouple” from the federal deduction to avoid business tax revenue losses.
Who/what qualifies?
What products qualify?
DPAD qualifying production property includes: (1) “tangible personal property”, (2) computer software, and (3) sound recordings; but does not include: (a) prepared food and beverages sold at a retail establishment, (b) leased, rented, licensed, sold or exchanged land, and (c) any property leased, licensed or rented to a related party. So, in most general terms this seems to encompass traditional manufacturing activities, the production of agricultural products, and the traditional extractive industries.
“Tangible personal property” means any tangible property (including any gas, other than natural gas, chemicals, steam, oxygen, hydrogen, and nitrogen), other than land and certain real property, computer software, sound recordings, qualified films, and utilities.
Property is produced “in whole or significant part in the United States” if the incurred US direct labor and overhead costs are at least 20% of the property’s total cost of goods sold. In transactions without cost of goods sold (i.e., lease, rental, or license), the US incurred direct labor and overhead must be at least 20% of the taxpayer’s unadjusted depreciable basis in the property.
There’s a maze of rules regarding allocations of receipts and expenses to domestic production activities within the IRS regulations. Your H&M tax consultant can guide you through them.
What businesses or activities qualify?
DPAD qualification largely depends on the nature of the business as its underlying theme is the encouragement of U.S. job formation. As with many legislative pieces “favored sons” exist. Their qualification is made relatively simple. These businesses are: (1) film production where at least 50% of the compensation is paid for services performed in the United States; (2) the sale (but not transmission or distribution) of electricity, natural gas, or potable water produced in the United States; (3) construction of real property in the United States; and (4) engineering and architectural services performed in connection with U.S. real property construction.
The economic activities qualifying for the DPAD should benefit most businesses. These “activities” include the lease, rental, license, sale, exchange or other disposition of “qualifying production property”; provided, that, it’s manufactured, produced, grown, or extracted by the taxpayer “in whole or significant part in the United States”.
As one can imagine, these defined terms are fraught with complexity in the IRS regulations; if you have questions you should consult your H&M tax consultant for clarification.
How is the DPAD calculated?
Once a business and its activities qualify, its “qualified domestic production receipts” are reduced by: (1) cost of goods sold; and (2) other expenses, losses, and deductions (other than the deduction for domestic production activities) that are, in each case, allocable to those receipts. The result is the taxpayer’s qualified production activities income (“QPAI”), to which the taxpayer applies the applicable percentage to determine its DPAD; provided, however, the actual DPAD may not exceed 50% of the taxpayer’s W-2 wages for the taxable year. However, for tax years beginning after May 17, 2006, this wage limitation is modified so only W-2 wages properly allocable to qualified domestic production receipts are considered in such limitation. Thus, businesses relying primarily on contractors, or requiring only a small employee base, may have a decidedly smaller DPAD than anticipated.
Where to start?
The DPAD and its related provisions contain numerous traps for the unwary, and place a premium on planning/organizing your production activities for both DPAD qualification and maximization. Your safest bet is to involve your H&M tax consultant at the earliest stage possible.
To learn more about the Domestic Production Activity Deduction and how it could be applied to your business, contact Stephen C. Smith or your Holbrook & Manter representative. We have facilitated tax savings for a number of growth-minded clients.
The Energy Policy Act of 2005 introduced a tax incentive directed at improving commercial building energy efficiencies. The Energy Efficient Commercial Building Deduction, codified as IRC § 179D, (the “Deduction”) encourages building owners and companies to improve facilities’ energy usage. Hence, “Going Green” not only saves on utility bills, but it can also save taxes!
The Deduction also provides tangential benefits in the form of rebates from utility providers such as American Electric Power and low interest financing sponsored by the Ohio Department of Development.
Regrettably, this deduction is used by only about ten percent (10%) of otherwise qualifying projects. And, it is probably even less frequently considered in the cost/benefit analyses of most renovation projects. Don’t have regrets; save money and taxes!
How Does the Deduction Work?
The Deduction can reward companies and building owners who make qualifying improvements to a building’s envelope (the “Envelope”), the HVAC/hot water systems (collectively, the “HVAC”), and the interior lighting systems (“Lighting”). You should bear in mind that this Deduction is a source of ordinary income for recapture purposes on the disposition of depreciable personal and real property.
The technical standards for the Deduction are beyond the scope of this piece. However, in general terms, if these building system improvements result in a fifty percent (50%) reduction in the building’s energy/power costs (when compared to a “reference building”) this Federal tax deduction can equal as much as the product of $1.80 per square foot (or $ 0.60 per square foot for each system {i.e. the Envelope, HVAC and the Lighting}) and the building’s floor area.
Analysis suggests that this makes energy improvements made in building with areas of 20,000 square feet or more quite attractive. Although, both larger and smaller building do qualify, and therefore the Deduction should be seriously considered wherever renovations touch on the Deduction’s areas of interest.
Each system has its system specific energy targets (at least until regulations are promulgated).
As for Lighting, the lighting power density must be reduced forty percent (40%) (or fifty percent (50%) in the case of warehouses). Also, if the new Lighting reduces its power density by twenty-five percent (25%) the Deduction is equal to $ 0.30 per square foot with the rate prorated for power density reductions between 25% and 40%.
The Deduction is allowed for both new construction and remodeling and these improvements must be placed in service between 2006 through 2013.
Note that this Federal tax incentive is a “deduction” rather than a “tax credit”, meaning that the cash benefit is calculated by multiplying the deduction times the tax rate. We can assist you to compute your estimate your tax savings.
Examples of Energy-Efficient Building Materials and Systems:
Claiming the Deduction:
How Can H&M Help?
As with most governmental incentive programs, this Deduction provides many obstacles that frustrate taxpayers’ full utilization of it. H&M can assist you through:
To learn more about the Energy Efficient Commercial Building Deduction and how it could be applied to your business, contact Stephen C. Smith or your Holbrook & Manter representative. We have facilitated tax savings for a number of growth-minded clients.
Emerging technologies and markets make worldwide trade more accessible and attractive than ever. What’s often overlooked is a tax incentive for companies to think globally: the Interest Charge-Domestic International Sales Corporation (“IC-DISC”). IC-DISCs were designed to provide a valuable tax break for exporters of US sourced goods and services.
Currently, IC-DISCs can provide up to a 20 percent tax advantage on qualifying export income. And, IC-DISCs are not very difficult to set up and maintain. If you export U.S.-made products, you should give an IC-DISC serious consideration.
IC-DISCs are essentially a “special purpose corporation” whose principal purpose avails exporters a statutorily mandated tax incentive by (1) not taxing the IC-DISC (2) allowing the related exporter to deduct its IC-DISC payments and (3) taxing IC-DISC owners at a 15% rate on distributions.
The tax savings/incentive can equal 20% if the exporter pays federal income taxes at the 35% and its deductible payments to the IC-DISC are distributed to its owners who are taxed at a 15%. Obviously if tax changes affect the relationship between corporate rates and individual dividend rates this incentive may reduce or disappear.
IC-DISC Requirements:
An IC-DISC is not required to (a) perform services, (b) hire employees or (c) have any tangible assets. But IC-DISCs must maintain their own financial and accounting records, and must file a federal tax return.
The export company can be a C Corporation, S Corporation, LLC or partnership, and the IC-DISC shareholders can be individuals, corporations, trusts or a combination. However, IC-DISCs can only be C Corporations.
At least 95 percent of the IC-DISC’s income and assets must be related to export activity, and the exported product must be comprised of at least 50 percent U.S. content. However, there is an exception for architects and engineers who work on projects that will be constructed outside the U.S.
The other IC-DISC requirements include:
Operating as an IC-DISC:
Once the IC-DISC has been created and IRS approved, the export company can begin to see financial benefits, but not before.
The export company pays a commission to the IC-DISC equal to no more than the greatest of: (i) 4 percent of the gross receipts from all qualified export sales, (ii) 50 percent of net income from all qualified export sales or (iii) a commission acceptable under traditional related party pricing rules.
Other considerations:
It is worth noting that the shareholders of the IC-DISC do not need to match the shareholders of the parent company. In certain estate-planning circumstances, it can be helpful to structure ownership of the IC-DISC different from the parent company.
IC-DISC shareholders are able to defer tax on commissions by paying a small interest charge at the T-bill rate, which recently has been less than 1 percent.
As with any tax incentive, there are complex regulations that you must always be aware of. However at its core, an IC-DISC is a valuable boost for American companies that wish to compete on a global stage.
To learn more about IC-DISC and how it could be applied to your business, contact Stephen C. Smith or your Holbrook & Manter representative. We have facilitated tax savings for a number of growth-minded clients.
If research and innovation are part of your business culture, you should consider securing R&D Credits.
The President is lobbying to both expand and extend the “research and experimentation tax credit” (the “R&D Credit”). A noble effort, but the irony is many qualified small businesses aren’t availing themselves of it. Manufacturers, contractors, architects, engineers, software developers and other innovators are leaving millions, perhaps more than a billion, dollars on the table annually. Similarly, use of the “research and development” deduction has been avoided due to its status as a tax preference under the alternative minimum tax, subject to elections beyond the scope of this piece.
Historical overview – The R&D Credit was a Reagan Administration initiative encouraging private sector innovation and keeping pace with foreign competitors. The Bush Administration expanded the R&D Credit’s application to a wider range of businesses, and the Obama Administration has proposed both making it permanent as well as expanding its application. The R&D Credit, although couched as a “temporary tax feature,” has been extended 14 times. It expired at 2011’s end.
Even with this underutilization, $9 billion in R&D Credits were claimed in 2008 (the most recent tax year for which data is available). Did your business participate?
In 2008, agricultural companies claimed more than $5 million, real estate companies claimed more than $7 million, management companies claimed more than $60 million, wholesale and retail companies claimed $430 million, and transportation equipment manufacturers claimed more than $1 billion.
Unfortunately, as a Bloomberg Government study concludes, large companies claim a disproportionate share R&D Credits because many small businesses either find it too difficult to file the IRS required information or are unaware they qualify for R&D Credits.
According to Bloomberg’s study, small businesses account for 40 percent of private-industry research but received only 23 percent of R&D Credits in recent years. Bloomberg’s study found a few common reasons for businesses not taking full advantage of R&D Credits:
Tax credits usually mean more to profitable companies, but as R&D Credits can be claimed for all open tax years (generally meaning the current year and the past open tax years) and those credits carry forward for up to 20 years, R&D Credits may be valuable even to companies currently operating at a loss.
Defining ‘R & D’
Time, money and other resources devoted to improving a product or process could result in a R&D Credit for your business. If you devoted resources are directed at:
Hence, developing a lighter or more flexible tool, designing a unique electrical system for a new building, testing new materials, applying for a patent or streamlining an internal process can deliver an R&D Credit to your business.
R&D Credits cover employee wages directly contributing to R&D, supplies and software used in R&D activity, and contracted R&D services. There are two alternative measures of the R&D Credits:
Frequently, small businesses find it challenging to segregate normal business expenses from those that result in R&D Credits. R&D specialists can assist in that segregation process and often return R&D Credits far in excess of the specialist’s fees.
Proposed simplification to R& D Credits
The Obama Administration has proposed two revisions that (a) raises the simple R&D Credit measurement to 17 percent and (b) makes the R&D Credit permanent.
Regardless of the Obama Administration initiatives success, there are short-term savings and long-term implications which make current pursuit of R&D Credits for forward looking companies desirable.
To learn more about R&D Credits and how they may favorably impact your business, contact Stephen C. Smith, or your Holbrook & Manter representative before attempting to take full advantage of R&D Credits. We facilitate R&D Credits for growth-minded clients.
