The Tax Increase Prevention and Reconciliation Act of 2005

In May, 2006, after an extended legislative process, tax cuts first enacted in 2003 were extended. Although the headline measures in the Act were aimed at individuals, a number of provisions affected corporations.

The tax bill was set to extend the life of the 15 percent rate of tax on most capital gains and qualifying dividends for two years until the end of 2010, preventing a tax increase at the start of 2009. The rate would be reduced to zero in 2008 for taxpayers in the 10- and 15-percent tax brackets. These proposals were expected to cost $20.551 billion over 5 years and $50.783 billion over 10 years.

Alternative Minimum Tax provisions extended the exemption levels though the end of 2006 but at a higher level - $62,550 (married) and $42,500 (other). The proposal is expected to cost $31.047 billion over 5 years. A further AMT patch was approved in late 2007.

Other key provisions included: increased expensing for small business allowing small firms to expense $100,000 (from $25,000) through 2009, expected to cost $7.274 billion over 5 years; and exception under subpart F for active financing and insurance income extended for two years, until the end of 2008 costing an expected $4.796 billion over 5 years.

In addition, then Senate Majority Leader Bill Frist secured two provisions in the legislation increasing the tax code’s fairness for songwriters. The first allows songwriters to claim the capital gains tax rate on music sales and will reduce songwriters’ taxes by up to 35 percent. Individual songwriters can pay up to 50 percent in income and self-employment taxes on their music under current law, while their corporate partners just pay 15 percent in capital gains taxes.

The second songwriter provision simplifies the accounting process for advances paid to songwriters. Songwriting advances can now be calculated according to a straight-line, three-year depreciation schedule.

"I applaud the Senate for passing important tax relief that will help keep our economy strong and growing," commented President Bush, who for many weeks had been pressuring lawmakers to arrive at a deal which included the investment tax cuts, despite their cost in terms of revenues.

"This legislation prevents an enormous tax hike that the American people do not want and would not welcome. The bill will extend policies that have helped our economy flourish," he added.

Additional provisions which did not make the final bill, but may be enacted separately, include the extension of R&D credits, and some employment tax credits.

The main components of the Act which are of interest to businesses were as follows:

Not making it into the Act were an extension to the R&D tax credit and various proposals to penalize companies who move their headquarters to an offshore location, in one case by denying their shareholders access to the concessionary 15% dividend tax rate.

The R&D credit was later extended, and is currently in force until the end of 2009. See below.

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The American Recovery And Reinvestment Act of 2009

United States President Barack Obama signed into law the USD787bn American Recovery and Reinvestment Act in Denver on February 17, 2009, cementing into place approximately USD220bn in tax cuts designed to boost business investment and consumer spending.

"What I am signing is a balanced plan with a mix of tax cuts and investments," Obama remarked before putting his signature to the legislation at the Denver Museum of Science and Nature. "It is a plan that’s been put together without earmarks or the usual pork barrel spending. And it is a plan that will be implemented with an unprecedented level of transparency and accountability."

Most Republicans, however, would disagree, and several tax provisions, mainly targeting businesses, had to be stripped from the legislation at the conference stage in an effort to keep its price tag below USD800bn. But this still failed to win round GOP lawmakers, who voted overwhelmingly against the stimulus plan, mainly over what they considered to be reckless spending provisions rather than irresponsible tax cuts.

Alongside the individual and business tax cuts, the legislation also seeks to boost growth in the renewable energy industries, and makes provision for new and improved tax credits such as the long-term extension of the Renewable Energy Production Tax Credit.

Below is a summary of the tax relief measures aimed at businesses in the final version of the legislation signed by Obama.

Business Incentives

Extension of Bonus Depreciation. In 2008, Congress temporarily allowed businesses to recover the costs of capital expenditures made in 2008 faster than the ordinary depreciation schedule would allow by permitting these businesses to immediately write-off 50% of the cost of depreciable property (e.g., equipment, tractors, wind turbines, solar panels, and computers) acquired in 2008 for use in the United States. The Act extends this temporary benefit for capital expenditures incurred in 2009.

Election to Accelerate Recognition of Historic AMT/R&D Credits. Inn 2008, Congress temporarily allowed businesses to accelerate the recognition of a portion of their historic AMT or research and development (R&D) credits in lieu of bonus depreciation. The amount that taxpayers may accelerate is calculated based on the amount that each taxpayer invests in property that would otherwise qualify for bonus depreciation. This amount is capped at the lesser of 6% of historic AMT and R&D credits or USD30m. The Act extends this temporary benefit through 2009.

Extension of Enhanced Small Business Expensing. In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write-off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Until the end of 2010, small business taxpayers are allowed to write-off up to USD125,000 (indexed for inflation) of capital expenditures subject to a phase-out once capital expenditures exceed USD500,000 (indexed for inflation). Last year, Congress temporarily increased the amount that small businesses could write-off for capital expenditures incurred in 2008 to USD250,000 and increased the phase-out threshold for 2008 to USD800,000. TheAct extends these temporary increases for capital expenditures incurred in 2009.

5-Year Carryback of Net Operating Losses for Small Businesses. Under previous law, net operating losses (NOLs) may be carried back to the two taxable years before the year that the loss arises (the NOL carryback period) and carried forward to each of the succeeding twenty taxable years after the year that the loss arises. For 2008, the Act extends the maximum NOL carryback period from two years to five years for small businesses with gross receipts of USD15m or less.

Delayed Recognition of Certain Cancellation of Debt Income. Under previous law, a taxpayer generally has income where the taxpayer cancels or repurchases its debt for an amount less than its adjusted issue price. The amount of cancellation of debt income (CODI) is the excess of the old debt’s adjusted issue price over the repurchase price. Certain businesses will be allowed to recognize CODI over 10 years (defer tax on CODI for the first four or five years and recognize this income ratably over the following five taxable years) for specified types of business debt repurchased by the business after December 31, 2008 and before January 1, 2011.

Incentives to Hire Unemployed Veterans and Disconnected Youth. Under previous law, businesses are allowed to claim a work opportunity tax credit equal to 40% of the first USD6,000 of wages paid to employees of one of nine targeted groups. The Act creates two new targeted groups of prospective employees: unemployed veterans; and disconnected youth.

Small Business Capital Gains. Under previous law, Section 1202 provides a 50% exclusion for the gain from the sale of certain small business stock held for more than five years. The amount of gain eligible for the exclusion is limited to the greater of 10 times the taxpayer’s basis in the stock, or USD10 million gain from stock in that small business corporation. The provision allows a 75% exclusion for individuals on the gain from the sale of certain small business stock held for more than five years. This change is for stock issued after the date of enactment and before January 1, 2011.

Temporary Small Business Estimated Tax Payment Relief. The Act reduces the 2009 required estimated tax payments for certain small businesses.

Temporary Reduction of S Corporation Built-In Gains Holding Period from 10 Years to 7 Years. Under previous law, if a taxable corporation converts into an S corporation, the conversion is not a taxable event. However, following such a conversion, an S corporation must hold its assets for ten years in order to avoid a tax on any built-in gains that existed at the time of the conversion. The Act temporarily reduces this holding period from ten years to seven years for sales occurring in 2009 and 2010.

Repeal of Treasury Section 382 Notice. Last year, the Treasury Department issued Notice 2008-83, which liberalized rules in the tax code that are intended to prevent taxpayers that acquire companies from claiming losses that were incurred by the acquired company prior to the taxpayer’s ownership of the company. The Act repeals this Notice.

Treatment of Certain Ownership Changes. The Act clarifies the application of section 382 to certain companies restructuring pursuant to the Emergency Economic Stabilization Act of 2008.

Hundreds of companies and business organizations from across the United States are urging Congress to approve legislation to strengthen and make permanent the research and development (R&D) tax credit before it expires on December 31, 2009.

The R&D Tax Credit

First enacted in 1981, the R&D provision is composed of two credits – a traditional credit and the alternative simplified credit – both of which provide US firms a tax credit for incremental qualifying research expenses, such as labor and equipment costs. However, Congress in its wisdom failed to make the provision permanent, meaning that the credit needs to be extended regularly. This usually happens on an annual basis, but on occasions the credit has been extended retrospectively after the previous legislative patch has expired. As the corporate lobby points out, this situation makes it difficult for businesses to plan their future investments in R&D. This is what happened in 2007.

In October, 2009, in a letter sent to every member of Congress and signed by more than 400 companies, the R&D Credit Coalition, a group of more than 100 trade and professional associations and businesses of varying size, warn that failure to enact a permanent and strengthened credit will have "significant negative consequences for the US economy" and could cause the plug to be pulled on investment in important areas of research such as renewable energy and energy efficiency technologies.

"The R&D tax credit encourages businesses of all sizes to undertake cutting-edge research projects in the United States," the letter, dated October 20, states. "R&D is the very lifeblood of our knowledge economy. At a time when the American economy is weak, research and development across industry sectors makes it possible to create and maintain good, high-paying jobs at home and sharpens the ability of companies to compete in the global marketplace."

"Businesses need certainty to make long-term, high risk investments in the US. Furthermore, a strengthened credit will be more competitive with incentives provided by other countries that are vying for research investment dollars," the letter adds.

The coalition laments the fact that Congress has stood by and watched the US R&D credit reduce in competitiveness relative to similar research incentives since introduced in other countries. "When the R&D Credit was first created, the US had the distinction of providing the most generous tax treatment for research among all OECD nations," the coalition says. "Today, that is not the case because the credit has been whittled away over the years due to our global competitors such as Canada, China, Japan and others that offer more aggressive R&D incentives. In fact, the US has fallen out of the top 10 globally when measuring government incentives for private sector R&D and now measures 17th."

A permanent extension to the R&D tax credit is supported by President Obama, who has said that the credit returns two dollars for every dollar spent and should "no longer fall prey to the whims of politics and partisanship."

The companies that signed the letter want Congress to approve legislation for a permanent and strengthened R&D credit as proposed in bills introduced into the House of Representatives by Reps. Kendrick Meek and Kevin Brady, and into the Senate by Sens. Max Baucus and Orin Hatch.

In summary, the new proposals would allow the traditional credit to expire in 2010 and increase the alternative simplified credit, which is currently set at 14% of qualifying expenses, to 20% and, importantly, make the simplified credit permanent. Companies would be given the option to claim the credit under current law in 2009 and 2010 in order to have time to adjust their accounting and effectively shift to the new, improved credit.