Federal Incentives The American Jobs Creation Act 2004 introduced a major incentive program.

Until 2004 there were few if any general-purpose inward investment incentives at Federal level, although there are a number of support programs aimed at particular sectors of the economy, eg oil and gas.

However, the American Jobs Creation Act, passed in late 2004, introduced a tax break for domestic manufacturing operations. In January, 2005, the Treasury Department and IRS issued guidance on the then newly enacted deduction, which generally equals 3% of income from domestic production activities for 2005, rising to 9% by 2010.

The activities eligible for the deduction include the manufacture of personal property such as clothing, goods, and food, in addition to software development, film and music production, electricity generation, natural gas production, water supply, construction, engineering and architectural services.

The domestic production activities deduction provides a tax saving on profits from production activities in the United States. It is based on a portion of the taxpayer's profits and increases proportionally as those profits increase. "This provision has widespread impact across our complex economy," commented IRS Commissioner at the time, Mark W. Everson. "The guidance strikes a balance. It provides clear practical guidelines that are administrable both from the taxpayers' and the IRS' point of view,” he added.

In addition, the AJCA offered a temporary reduction of taxation of repatriated foreign dividends. In January 2005, Treasury and IRS issued a notice (Notice 2005-10) that provided guidance to companies on the domestic reinvestment plan requirement under the new provision. The notice specified permitted investments in the United States for which the repatriated funds may be used under this provision.

A copy of the regulations can be accessed at: http://www.ustreas.gov/press/releases/reports/n200538.pdf

In May, 2005, the Treasury Department and IRS announced the second in a series of notices that provided detailed guidance for US companies that elect to repatriate earnings from foreign subsidiaries subject to the temporary reduced tax rate.

The notice provided guidance to companies on what constitutes a qualifying dividend, the impact of mergers and acquisitions and issues related to the section 78 gross-up.

Internal Revenue Code section 965, enacted as part of the AJCA in October 2004, was a temporary provision that allows a US company to repatriate earnings from its foreign subsidiaries at a reduced effective tax rate provided that specified conditions and restrictions are satisfied. Section 965 provided that a US company may elect, for one taxable year, an 85 percent dividends received deduction for eligible dividends from its foreign subsidiaries, giving it an effective 5.25% tax rate on qualifying dividends.

In October, 2005, the Treasury Department released new guidelines clarifying the scope of the aforementioned tax break on manufacturing income passed as part of the AJCA, although somewhat controversially, software purchased online was omitted from the regulations.

The provision in question, expected to be worth $76.5 billion over the decade following its introduction, created a deduction rising from 3% to 9% for qualifying US firms for domestic manufacturing activities, effectively reducing their corporate tax rate initially to 32% from 35% through 2010. The new rules sought to build and expand upon the initial guidance (see above) issued by the Treasury Department in January.

The deduction applies to goods manufactured, grown or extracted in the United States and includes architectural services, construction, engineering, film development, and utilities.

The rules also encompassed software development, although somewhat controversially, they only applied to software which can be physically purchased by consumers on a medium such as a disc, and did not apply to software downloaded to a personal computer. However, Treasury spokesman Taylor Griffin stated that the department has asked firms for additional comments on the new rules, and is still "open to ideas for better ways to draw the line".

Defense contractors and other businesses engaged in contract work for the government were to be allowed to participate in the tax break under the new guidance, as were manufacturers of certain components of a product.

The rules also contained guidance on how home builders should treat the cost of land in determining the value of their tax break from home sales. The regulations were effective for taxable years beginning after December 31, 2004.

In May, 2006, the US Treasury Department performed a U-turn over software services by including them in final regulations governing the application of the AJCA manufacturing tax deduction.

The Treasury revealed that in response to more than eighty comment letters received regarding the proposed regulations, the final regulations provide many additional comprehensive rules, definitions, simplifying conventions, and examples to ease the administrative burden on taxpayers.

The R&D tax credit is available for qualified research and development expenditures incurred only in the United States. The credit expired most recently on 31st December, 2009, and has been extended 14 times since originally enacted into law in 1981. The credit gives a deduction equal to 20% of R&D expenditure over the previous base amount. Nearly 18,000 companies, including S corporations, claimed USD6.6bn of the R&D tax credit in 2005, the latest year for which data is available. Since 2006, an alternative simplified credit method allows taxpayers to forego the traditional research credit in favor of a simplified version equal to 12% of qualified research expenses exceeding half of their average qualified research expenses over last 3 years.

In June, 2009, a bipartisan group of United States Senators introduced new legislation to improve and simplify the research and development (R&D) tax credit. Under current law, 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.

The new proposal would have allowed the traditional credit to expire in 2010 and increase the alternative simplified credit, which is currently set at 14% of qualifying expenses, to 20% of qualifying expenses. 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 simplified credit.

“In this global economy, research and development by American companies is critical to our economic recovery and the long-term global competitiveness of our country,” said Finance Committee Chairman Max Baucus, a Montana Democrat. “Much of our economic vitality comes from the innovation, research, and intellectual property stemming from this tax credit. Our bill would make it easier to access the benefit, making the credit work even more effectively and continue to lead the way to new technologies, domestic job growth and, ultimately, a stronger US economy.”

“Research and development is clearly the lifeblood of not only Utah’s, but the nation’s economy,” commented Orin Hatch, a Utah Republican. “And as we increase productivity through research and innovation, we will be in a better position to deal with our looming budgetary challenges. We need a strong and permanent research credit to encourage the kind of growth that will create these good jobs in Utah and elsewhere across the nation.”

First enacted in 1981, the Senators said that the R&D tax credit has been a “powerful and effective incentive for firms to increase research spending.” If enacted, Baucus and Hatch believe their bill would extend the credit, and provide a stronger alternative simplified credit that addresses changes in business models and economic circumstances that currently prevent some businesses from getting full benefit of the credit.

The 2009 proposal fell victim to the general paralysis of tax legislation which has dogged the Congress ever since President Obama came into power, and as of late 2010 it is unclear whether even the existing R&D credit will be renewed for 2010, let alone later years.

In March, 2010, the HIRE Act was passed into law. The HIRE Act offers an exemption from Social Security payroll taxes for every worker hired after February 3, 2010, and before January 1, 2011, who has been unemployed for 60 days or longer. The maximum value of the credit is equal to 6.2% of wages up to USD106,800, which is the Federal Insurance Contributions Act wage cap. There is also an additional USD1,000 income tax credit for every new employee retained for 52 weeks, to be taken on the employer’s 2011 income tax return.

In October, 2010, the United States Department of the Treasury released an updated report on the number of newly-hired workers who are eligible for tax credits under the Hiring Incentives to Restore Employment (HIRE) Act, passed in March this year.

Comprehensive data from the Internal Revenue Service on the use of the HIRE Act will not be available until after employers file tax returns in 2011. In the interim, the Treasury Department’s Office of Economic Policy has, however, provided estimates of the number of newly-hired workers whose employers potentially qualify for the HIRE Act tax exemption.

The report shows that from February to August 2010, businesses have hired an estimated 8.1m new workers who had been unemployed for 60 days or longer, making those businesses eligible to receive the HIRE Act tax exemptions and credits for hiring long-term unemployed workers.

Newly hired workers whose employers are eligible for the HIRE Act payroll tax exemption constitute 11.7% of all workers who were unemployed for eight weeks or longer since the law took effect in February 2010. In other words, about one in eight workers who have been unemployed for eight weeks or longer are hired in the subsequent month.

The Treasury's report contains new state-by-state estimates of the number of eligible hires under the HIRE Act. Many states hit with high unemployment rates have large numbers of potentially eligible new hires, including California with more than 1.1m, Ohio with nearly 350,000, and Michigan with more than 260,000.

The updated report also includes data on the industries in which the newly hired workers were employed prior to their period of unemployment and the industries in which these workers found jobs. So far, about one fifth of newly hired exemption-eligible workers were previously employed in the construction industry. Similarly, employers in the construction industry have hired the largest share of exemption-eligible workers since February 2010.

"Targeted programs like the HIRE Act tax credit provide an incentive for private-sector employers to hire new workers sooner than they otherwise would," said Alan B. Krueger, Assistant Secretary for Economic Policy and Chief Economist at the Treasury Department. "Since it's only in effect through the end of the year, the HIRE Act encourages businesses to accelerate hiring in order to get the maximum benefit from this temporary tax credit."

Federal Incentives The American Jobs Creation Act 2004 introduced a major incentive program.