Although it’s only August, taxpayers are well-advised to consider how to make the most of tax breaks that are available this year but may not be around next year, or may survive only in diluted form. Given the wrenching political battle that played out in July over deficits and the debt ceiling, many tax provisions expiring at the end of this year may not be given another lease on life. Those provisions that aid a particular industry or group of taxpayers could be the most at risk. This article, the first of a multi-part series on year-end planning, reviews the tax breaks for businesses that are available right now but may sunset on Dec. 31, 2011.
Tax Credits
Research credit.
The research credit only applies for amounts paid or accrued before Jan. 1, 2012. In general, the research credit equals the sum of: (1) 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount, (unless the taxpayer elected an alternative simplified research credit); (2) the university basic research credit (i.e., 20% of the basic research payments); (3) 20% of the taxpayer’s expenditures on qualified energy research undertaken by an energy research consortium.
Work Opportunity Tax Credit (WOTC).
The WOTC allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($12,000 for qualified veterans; and $3,000 for qualified summer youth employees). Where the employee is a long-term family assistance (LTFA) recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages; it’s 25% for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. For LTFA recipients, it includes an additional 50% of qualified second-year wages. The term “wages” for WOTC purposes doesn’t include any amount paid or incurred for an individual who begins work after Dec. 31, 2011.
New markets tax credit.
Under Code Sec. 45D , a taxpayer who holds a qualified equity investment in a qualified community development entity (CDE) may be entitled to a NMTC. The credit is 39% of the qualified equity investment during a 7-year credit period. The investor may claim 5% in each of the first 3 years and 6% in each of the final 4 years. There is a national, annual limitation on the amount designated under Code Sec. 45D . Under current law, the last NMTC dollar limitation is for 2011.
Differential wage payment credit for employers.
Under Code Sec. 45P , eligible small business employers that pay differential wages can claim a credit equal to 20% of up to $20,000 of differential pay made to an employee during the tax year. Differential wages are payments to employees for periods that they are called to active duty with the U.S. uniformed services (for more than 30 days) that represent all or part of the wages that they would have otherwise received from the employer. An eligible small business employer is one that: (1) employed on average less than 50 employees on business days during the tax year; and (2) under a written plan, provides eligible differential wage payments to each of its qualified employees. A qualified employee is one who has been an employee for the 91-day period immediately preceding the period for which any differential wage payment is made. This credit won’t be available for differential wages paid after Dec. 31, 2011.
New energy efficient home credit.
An eligible contractor can claim a credit of $2,000 or $1,000 for each qualified new energy efficient home either constructed by the contractor or acquired by a person from the contractor for use as a residence during the tax year. The credit won’t apply to homes acquired after Dec. 31, 2011.
If you have any questions regarding this newsletter or any other recent tax issues, please call us at (636) 498-1900 or (573) 756-6400
Sincerely,
Your Professional Team
Rackers & Fernandez, LLC
