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The New Tax Act: What Retail and Consumer Products Companies Will Want to Know


In his economic overview (mobile users, click here) 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 retail and consumer products business, you are likely wondering how the recently enacted ATRA provisions will specifically affect you. In fact, ATRA will have a significant impact on retail and consumer companies for tax planning purposes – and the window to act on these provisions may be limited. You may be interested in learning about the opportunities and challenges that lie ahead as a result of President Obama signing into law “The American Taxpayer Relief Act of 2012” this month. Accordingly, the following discussion is aimed at helping you navigate these provisions to gain a better understanding of the impact they may have on you and your retail business.

While ATRA includes over 80 tax provisions, two of the more significant provisions impacting retail and consumer products companies are depreciation and the research and development credit:

  • Accelerated Depreciation of Certain Fixed Assets – The accelerated depreciation of certain qualifying capital expenditures was extended through December 31, 2013, with the requirement that such assets are placed in service before January 1, 2014. Qualifying assets include: 1) IRC Section 179 increased spending limits; 2) Bonus depreciation on 50% of qualified asset purchases; and 3) 15-year depreciation recovery period on certain real property such as for qualifying leasehold improvements. Please click here to read CohnReznick’s analysis of this ATRA provision and how you may benefit from its extension.
  • Research and Development Tax Credit – Research tax credits for qualified research activities were extended through the end of 2013.  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.  For Financial Statement purposes, companies most likely will not see the benefit in their 2012 financial statements of the retroactive reinstatement to 1/1/12 of the research and development credit in the fiscal cliff tax legislation. For calendar year companies, the benefit of the research and development tax credit for 2012 will not be realized until the first quarter of 2013. This is because, for accounting purposes the period of enactment, which was in 2013, instead of the period in which changes to the tax law are effective (retroactively 1/1/12), are generally controlling.


ATRA provisions impacting individual taxpayers include:

  • Individual Tax Rates – For tax years beginning after 2012, the graduated tax rates will remain the same, except for higher income individuals with taxable income of $450,000 for joint filers and $400,000 for single filers where the rate will be 39.6% instead of the previous rate of 35%. Personal exemption deductions and itemized deductions will be phased out for those joint filers with adjusted gross income beginning at $300,000; $250,000 for single filers. As a result of these changes, taxpayers may want to consider adjusting their quarterly estimated income tax payments so that they are not subject to tax underpayment penalties and interest.
  • Capital Gains Tax Rate Increase – For retail business owners and investors looking to exercise their exit strategy, the increase in capital gains tax rates may have a significant impact.  Due to increase significantly from 15% to the individual taxpayer’s regular tax rate for transactions occurring subsequent to the December 31, 2012, the capital gains tax rate increase was mitigated and was increased from 15% to 20%.  In addition, the 3.8% surtax on investment-type income and capital gains is in effect for transactions occurring after December 31, 2012.  Therefore, the effective rate on both capital gains and interest income for higher income individuals will be 23.8%.
  • AMT Patch – The alternative minimum tax (AMT), which often comes into play for higher income individuals and for those individual investors selling an interest in a company, thresholds were $45,000 for joint filers and $33,750 for single filers for years beginning after 2011.  The thresholds were increased effective for 2012 and forward to align with inflationary adjustments to $78,750 for joint filers and $50,600 for single filers.  Further, certain nonrefundable individual credits can now be used to offset AMT.


Most tax legislation presents taxpayers with opportunities and challenges – and ATRA is no different. Savvy taxpayers will use the incentivized provisions of the Act by capitalizing on the opportunities and will otherwise incorporate tax planning strategies to safeguard the value of their assets from ATRA’s provisions which could result in unintended tax consequences. It is important that taxpayers take the appropriate tax planning measures – within regulatory time limits – to ensure that there are no surprises affecting their tax positions.

Contact:

Please visit the CohnReznick Retail and Consumer Products webpage or contact Richard Schurig, Partner and Retail and Consumer Products Industry Practice Director, at 973-364-6670, or A. George Sparacio, Tax Partner, at 973-618-6240.

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