Death, taxes, and tax-law changes: Hre's what's different this year, say the bean-counters at Global Tax Management (GTM), Radnor. Theyve listed a string of U.S. and Pennsylvania business-tax-law revisions for the just-passed corporate deadline:
The federal Tax Law Extenders Bill (also known as H.R. 5771, "Tax Increase Prevention Act") expanded and extended a string of federal tax breaks; while Pennsylvania has changed the way it taxes businesses with income from more than one state, and clamped down on the use of Delaware holding companies to avoid taxes on patents, trademarks and other intellectual properties. Highlights:
1) Research & Development Credits - These tax breaks, based on a company's research spending under IRS guidelines, can save "significant dollars" for companies developing new products. The credits, which cut companies' federal income tax liability "on a dollar-for-dollar basis," have been extended through 2014. Companies should be "continually tracking, recording, and retaining contemporaneous documentation supporting research-related expenditures," according to Kevin Wilkes, Senior Tax Manager at GTM.
2) Bonus Depreciation Deduction - Taxpayers can deduct half the cost of assets acquired between the start of 2005 and the end of 2014. Compare this deduction to Section 179 depreciation, which applies to fewer purchases.
3) 100 Percent Exclusion of Stock Gains - Congress has agreed to exclude stock gains for the owners of small-business stock acquired in 2014, "dramatically reducing their tax liabilities."
4) Built-in Gains Tax for S Corporations - The IRS used to tax gains on shares of personal S-corporations for 10 years after they were converted from standard C-corporations, to discourage owners from reorganizing jus tto avoid taxes. But conferted firms that show value gains in 2011-14 don't have to pay the tax if at least five earlier tax years preceded the 2014 gain.
5) Reduced Tax Liabilities for Multinationals - The IRS used to tax dividends, interests, rents and royalties transferred between foreign units of U.S. companies, including "personal holding companies." Now, in some cases Congress's "look-thru rule" allows companies to make these transfers tax-free for 2014, says GTM President Dave Laurinaitis. "This rule can significantly reduce a U.S. multinational conglomerate's tax liability."
6) Pennsylvania multi-state income tax apportioning: Since 2014, "services revenue is now allocated to Pennsylvania if the service is delivered to a location within Pennsylvania," GTM says. Businesses deriving th significant services revenue, this legal change could significantly modify their Pennsylvania taxable income," said Chau Tran, newly appointed director of GTM's State & Local Tax Practice Team.
"Services revenue is now allocated to Pennsylvania if the service is delivered to a location in Pennsylvania... Businesses (deriving) significant revenue from services delivered to Pennsylvania customers should be mindful that their Pennsylvania tax liabilities could materially increase... The opposite could be true of businesses that derive relatively little revenue from services delivered to customers located in Pennsylvania."
7) "Delaware Holding Companies" - Delaware doesn't tax "passive income" from patents, trademarks and other intellectual property. Big companies have long organized Delaware subsidiaries to collect intellectual property fees from locations in other states, reducing income taxes. But since Jan. 1, Pennsylvania is, generally, disallowing some "intercompany expenses attributable to intangible assets." Warns GTM: "Corporate groups with intangible assets housed within Delaware Holding Companies should be aware that the tax liability associated with such a structure is about to increase significantly."
What's next? "Although many tax practitioners and business owners believe that tax reform " is badly needed "at the federal level, progress appears unlikely in this arena given the current tone emanating from Washington DC," GTM says.
Also, despite support from both Republican legislative leaders and Pennsylvania's Democratic Gov. Tom Wolf, "Pennsylvania has yet to reduce its corporate tax rate, which is higher than many other states. Given the recent legislative changes in Pennsylvania, the hope among practitioners is that some favorable tax reforms will be enacted soon," Wilkes concluded.
Corporate accountants and their clients "would like Harrisburg to permit the Capital Stock Tax to expire and reduce the corporate income tax rate, given that it currently sits at 9.99 percent and is one of the highest rates. Given the government's issues associated with revenue management, whether favorable reforms are enacted remains to be seen, but appears remotely possible."