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.

The new notice (Notice 2005-38) provides additional guidance on the amount of dividends that qualify for the dividends received deduction. Further, Treasury and the IRS announced their intention to issue a third notice that will address the impact of section 965 on a corporation's computation of its tax liability.

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 percent 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 are 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, 2007, and has been extended 12 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. An alternative simplified credit method currently 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 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% 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 alternative simplified credit was added in 2006 for tax years beginning after December 31, 2006.

The Bacus-Hatch bill is supported by eight other Senators, all serving on the Finance Committee.

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