Managing wealth can be a taxing job

April 9, 2012
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The old adage about the taxman giveth and the taxman taketh away still applies — and maybe even more so this year.

First, the giveth part. This year marks the first year in decades that almost all business owners in Michigan will not be subject to double taxation at the state level because of Lansing’s move to the 6 percent corporate tax, which only applies to the state’s largest companies. According to John Nixon, the state’s budget director, businesses will pay $1.8 billion less in taxes this year, while individuals will fork over $1.47 billion more on next year’s returns. So this year, many business owners may have a little more wealth to manage.

Now, the taketh away part. One of the most popular and claimed federal business tax credits has expired. The provision known as the “tax credit for doing research and experimentation,” more commonly called the R&D credit, met its scheduled death Dec. 31, and Congress hasn’t revived it.

“That’s the credit for doing research activities. Mostly, it’s related to the expenses and salaries of their employees who do research activities,” said Bill Roth, a partner in the BDO USA office in Grand Rapids.

“Typically, it gets renewed all the time. It’s really a credit for all businesses to take for increasing their research activities. They typically extend it for two-year increments. Then it expires and they re-up it again.”

However, the last time Congress extended the R&D credit, the extension period was closer to a year, rather than the normal two years. The credit expired at the end of 2009, and lawmakers didn’t extend it until 2010 was nearly over. That extension was for two years, when all of 2010 is included. But from when it was extended, the time was closer to a one-year period, which was last year.

“It’s one of those that everyone feels ought to be renewed, but like anything in Washington, is there any guarantee of anything anymore?” said Roth.

Roth raises a good point. 2011 was the 30th year the R&D credit was in play. It entered into the IRS system as part of the Economic Recovery Tax Act of 1981. It was first set to expire at the end of 1985. Over its lifetime, it has expired eight times and was renewed 13 times before last year.

The R&D credit was intended to act as an economic stimulus and encourage domestic business investment.

Although the credit hasn’t been extended, bills in both the U.S. House and Senate have been introduced that would make the incentive permanent. Both also would increase the basic credit from 14 percent to 20 percent.

According to an Ernst & Young study in 2006, 17,700 companies claimed $6.6 billion in R&D credits in 2005. Businesses claiming the credit ranged in size from $1 million or less in total assets to more than $25 million in total assets. Most interestingly, the study showed the smallest asset group claimed the largest share of credits that year at 29 percent.

“That is a big one that affects businesses,” said Roth.

Provisions set to expire at the end of this year are the credits employers receive for providing child care and for educational assistance, although the latter may become permanent. The payroll tax cut ends Dec. 31. Another on the cutting table is the first-year depreciation for qualified property that was purchased after 2007 and put in play before 2013. The depreciation amount allowed is an additional 50 percent for the first year.

“A number of provisions (set to expire) affect depreciation and things, along with 100 percent expensing for fixed-asset purchases. That went back to 50 percent this year and may revert back to a lower number. In the future, though, I know there are a number of proposals to hike it back up again,” said Roth.

“Where all this is going to go, no one knows for sure, sometimes,” he added.

Of course, the income tax cut that Congress passed during the Bush administration is scheduled to go away at the end of this year. That reduction lowered the top individual rate in 2001 from 39.6 percent to 35 percent.

The 15 percent capital gains tax for dividends is also set to end Dec. 31, unless Congress acts by then on that provision, too.

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