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Manufacturing and Wholesale Distribution - The New Tax Act Explained: What the New Tax Provisions Mean to You

In his economic overview of the new tax provisions that Congress agreed on before the clock struck 12:00, Patrick J. O’Keefe, CohnReznick’s Director of Economic Research, says that the “American Tax Relief Act of 2012 (ATRA) adds some level of certainty to the tax code. Many of ATRA’s policy changes permanently extend what had been temporary exemptions or fixes. Some of these changes accompany tax increases while others provide systemic relief. There is a real benefit from the longer-term stability implicit in these ‘permanent’ fixes: By giving businesses and households added confidence, it should bolster their willingness to invest and spend.”
As a manufacturer or wholesale distributor, you are likely wondering how the recently enacted ATRA provisions will specifically affect you. In fact, ATRA will have a significant impact on you and your business, not only for purposes of tax planning but for business growth strategy as well. You will be interested in learning about the opportunities and challenges that lie ahead – including the impact of ATRA’s new tax rates, installment sales nuances, the state of the Alternative Minimum Tax and ATRA’s extension of 50 percent bonus depreciation.

Individual Income Tax Rates
The Act permanently extends all of the individual tax rates that were passed in 2001 and 2003. The Act also adds a top rate of 39.6% on taxable income above $400,000 for single filers and $450,000 for married joint filers.

Impact: These permanent rate changes will impact business owners who have their operations set up in flow-through entities such as partnerships and S corporations.

Capital Gains and Dividend Rates
The Act raises the top rate for capital gains and dividends from 15% to 20% for individuals with income in the top tax bracket ($400,000 for single filers, $450,000 for married joint filers). The 0% capital gains rate for taxpayers in the 10% and 15% brackets was retained. All other taxpayers will continue to be taxed at the 15% rate. Qualified dividends, which are dividends from a domestic corporation or certain foreign corporations, are taxed at the capital gains rate.

Impact: Some manufacturers have had dividend pay-out provisions in place during the past few years to take advantage of reduced rates. As the rates remain the same for most individuals, businesses can continue to pay out dividends as their businesses continue to grow.

Business Tax Credit Extenders

The Act extended a number of business tax provisions that impact the industry. These include:

  • The Research and Development Tax Credit was extended through the end of 2013. This credit allows companies that perform “technological research” in the United States to receive a credit on certain costs associated with the research. The research tax credit is equal to 20% of the amount by which a taxpayer’s qualified research expenses for a taxable year exceed its base amount; as an alternative, a simplified tax credit of 14% can be taken. With the ability to take the R&D tax credit, certain taxpayers will have an opportunity to amend their 2011 returns to claim expenditures incurred in 2012, and also claim the tax credit in 2012.  The Production Tax Credit was extended through the end of 2013. This credit applies to facilities that produce energy using wind power. Please click here to read CohnReznick’s more in-depth analysis of ATRA’s renewable energy provisions.
  • The alternative fuel vehicle refueling property credit was extended through the end of 2013.
  • The work opportunity tax credit, which provides a tax credit to employers who hire individuals from certain targeted groups (such as qualified veterans or certain groups receiving public assistance), was extended through 2013.
  • The look-through rule for related controlled foreign corporations was extended through 2013.

Impact: These credits and provisions allow manufacturers to stay competitive by developing and improving products and processes, hiring workers and “going green” with renewable energy projects.

Please note: If your business will receive a beneficial effect from the revival of the R&D credit, the Financial Accounting Standards Board has ruled that this benefit cannot be reported on a financial statement until the first quarter of 2013, not in 2012.

Business Depreciation Extenders
The Act extended 50% bonus depreciation through the end of 2013 for property placed in service after December 31, 2011 and before January 1, 2014. The Act also increased Section 179 expensing amounts to $500,000 of total expense deduction, with a $2,000,000 asset investment limit.

Impact: These changes are huge tax benefits that allow profitable companies to write off large capital expenditures immediately. Please click here (mobile users, click here) for CohnReznick’s more detailed analysis of ATRA’s  depreciation provisions.

Estate and Gift Tax Provisions
The Act increases the estate and gift tax rates from 35% to 40%. The $5,000,000 lifetime exclusion for estate and gift tax was retained permanently and adjusted to inflation as well.

Impact: These new provisions allow business owners to focus on business succession planning.

Other New Tax Provisions
In addition to the Act’s new provisions, the Affordable Care Act levies two new taxes that could impact you and your business. For employees who earn more than $200,000 (single filers) or $250,000 (married joint filers), there is an additional 0.9% Medicare withholding tax that is added to the 1.45%  current employee portion. There is no increase in the employer portion. The 0.9% additional Medicare tax also applies to self-employment income.

The Affordable Care Act also added a 3.8% tax on net investment income for these taxpayers. Net investment income includes income from interest, dividends, royalties, annuities, rents and net gain from disposition of non-business property. Net investment income also includes income from a trade or business that is “passive.”

Impact: Manufacturing and distribution owners who do not materially participate in their businesses will be subject to the 3.8% net investment income tax. Also, business owners earning more than $200,000 or $250,000, whether through salaries or through self-employment income, will be responsible for the additional 0.9% Medicare tax.

For more information, please visit our Manufacturing and Wholesale Distribution website and contact Alan Wolfson, Manufacturing and Wholesale Distribution Practice Leader, at 646-254-7416, or Doug Finkle, Senior Manager , at 973-364-7832.


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