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Technology and Life Sciences How will the New Tax Act Impact 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 technology and life sciences business, you are likely wondering how the recently enacted ATRA provisions will specifically affect you. In fact, ATRA will have a significant impact on technology and life sciences businesses 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 last week. 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 business.

Implications for Technology and Life Sciences Businesses:

  • 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.
  • 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; 3) 15-year depreciation recovery period on certain real property such as for qualifying leasehold improvements; and 4) Cellulosic biofuel plant property. Please click here to read CohnReznick’s analysis of this ARTA provision and how you may benefit from its extension.
  • Provisions for U.S. Companies with International Operations – Two provisions were extended that permit a deferral of items resulting from international operations of controlled foreign corporations (CFCs) through 2013 that would otherwise be included in U.S. income, including:  1) Exception for Active Financing Income, which generally allows an entity to defer payment of U.S. income tax on qualified income earned by CFCs, mainly applicable to financial institutions; and  2) CFC Look-through Provision of Subpart F – Defers the treatment of dividend, interest, rents and royalty payments between related CFCs.
  • Hiring & Employment Credits – Both the work opportunity credit and empowerment zone tax incentives were extended through 2013.


Implications for Technology and Life Sciences Business Owners/Investors:

  • 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 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.


State Tax Implications:

At this time, the response of states in adopting the extended provisions, such as accelerated depreciation, the treatment of subpart F items and other items which may be relying on the promulgated federal law is not certain and should also be considered when reviewing the tax impact of the American Taxpayer Relief Act of 2012.

CohnReznick will continue to provide analysis on the impact of the provisions and any changes as Congress takes further action.

Contact:

Please visit the CohnReznick website for our Technology webpage and Life Sciences webpage and contact the following CohnReznick Partner for more information:

Alex Castelli, Life Sciences and Technology Industry - Practice Leader, at 703-744-6708.


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

 

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