Essentials of taxation 2016 cengage chapter 17

Chapter 17 Business Tax Credits and Corporate Alternative Minimum Tax Essentials of Taxation © 2016 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part The Big Picture • Mike, the CEO of Progress Corporation, has committed to helping revitalize the downtown area in his hometown • Mike is considering expanding his business and purchasing an old office building in a historic section of downtown – The building will require substantial renovations – Mike has heard that there are tax credits that might help reduce his costs • He would also like to – Hire inner-city workers, and – Help working families by providing on-site child care for working families • He is interested in learning whether his company might take advantage of any other tax credits offered by the Federal government that might reduce his costs • Read the chapter and formulate your response Tax Credit VS Tax Deduction • Tax benefit received from a tax deduction depends on the marginal tax rate of the taxpayer – Tax benefit received from a tax credit is not affected by the taxpayer’s marginal tax rate • Example: $1,000 expenditure: tax benefit of 25% credit compared to tax deduction at various marginal tax rates MTR 0% 15% 35% Tax benefit if a 25% credit is allowed $250 $250 $250 Tax benefit if tax deduction is allowed –0– $150 $350 General Business Credit (slide of 2) • Comprised of a number of business credits combined into one amount • Limited to net income tax reduced by greater of: – Tentative minimum tax – 25% of net regular tax liability that exceeds $25,000 • Unused credit is carried back year, then forward 20 years General Business Credit (slide of 2) • Includes the following: – – – – – – Tax credit for rehabilitation expenditures Work opportunity tax credit Research activities credit Low-income housing credit Disabled access credit Credit for small employer pension plan startup costs – Credit for employer-provided child care General Business Credit (slide of 2) • Includes the following: – – – – – – Tax credit for rehabilitation expenditures Work opportunity tax credit Research activities credit Low-income housing credit Disabled access credit Credit for small employer pension plan startup costs – Credit for employer-provided child care Rehabilitation Expenditure Credit (slide of 3) • Credit is a percentage of expenditures made to substantially rehabilitate industrial and commercial buildings and certified historic structures • Credit rate – 20% for nonresidential and residential certified historic structures – 10% for other structures originally placed into service before 1936 Rehabilitation Expenditure Credit (slide of 3) • To qualify for credit, building must be substantially rehabilitated meaning qualified rehab expenditures exceed the greater of: – The adjusted basis of the property before the rehab expenditures, or – $5,000 • Qualified rehab expenditures not include the cost of the building and related facilities or cost of enlarging existing building Rehabilitation Expenditure Credit (slide of 3) • Basis in structure is reduced by the credit amount • Subject to recapture if rehabilitated property held less than years or ceases to be qualifying property The Big Picture - Example Tax Credit For Rehabilitation Expenditures (slide of 2) • Return to the facts of The Big Picture on p 17-1 • Assume that Progress spends $60,000 to rehabilitate a building (adjusted basis of $40,000) that had been placed in service in 1932 – Progress is allowed a credit of $6,000 (10% X $60,000) for rehabilitation expenditures – The corporation then increases the basis of the building by $54,000 • $60,000 (rehabilitation expenditures) - $6,000 (credit allowed) 10 Impact of Certain Transactions on ACE and E & P (slide of 2) 45 Exemption • Exemption amount for a corp = $40,000 – Reduced by 25% of excess of AMTI over $150,000 – Exemption is totally phased-out when AMTI reaches $310,000 46 Minimum Tax Credit • AMT paid in one year can be used as a credit against future regular tax liability that exceeds its tentative minimum tax – Indefinite carryforward – Cannot be carried back – Cannot offset any future minimum tax liability 47 AMT Example (slide of 4) • • • • • Moreland Co has the following income, etc in 2015: Taxable income $100,000 Depreciation adjustment 18,000 Installment gain (not on inventory sale) 80,000 Federal income tax provision on financial stmts 75,000 • Penalties and fines 2,000 • Private activity bond interest income (Issued 2007) 25,000 • Other tax-exempt interest 20,000 – The depreciation adjustment is an AMT adjustment and the private activity bond interest is a tax preference for AMTI 48 AMT Example (slide of 4) Calculation of AMTI before ACE: Taxable income Plus: private activity bond income Plus: depreciation adjustment AMTI $100,000 25,000 18,000 $143,000 49 AMT Example (slide of 4) Calculation of ACE Adjustment: AMTI before ACE Plus: deferred installment gain Plus: other tax-exempt income Adjusted current earnings Less: AMTI Base amount for Ace Adjustment Times rate: ACE Adjustment (positive) $143,000 80,000 20,000 $243,000 143,000 $100,000 75% $ 75,000 50 AMT Example (slide of 4) Calculation of AMT: AMTI before ACE $143,000 Plus: ACE Adjustment 75,000 AMTI $218,000 Less: Exemption 23,000 Alternative minimum tax base $195,000 20% rate × 20% Tentative minimum tax $ 39,000 Less: regular tax (22,250) AMT(TMT-Regular tax) $ 16,750 Total cash paid = Regular tax + AMT = $ 39,000 51 Individual AMT (slide of 3) • AMT applicable to individuals is similar to the corporate AMT with several important differences – The individual AMT rate is slightly progressive, with rates at 26% on first $185,400 ($92,700 for married, filing separately) of AMTI and at 28% on any additional AMTI – The alternative rate on net capital gain of 0% or 15% applies 52 Individual AMT (slide of 3) – The AMT exemption and phaseout amounts are tied to the individual’s filing status for the year – Individuals make no AMT adjustment for ACE – Taxes, misc itemized deductions subject to the 2% floor, the standard deduction and personal and dependency exemptions are not allowed – Medical expenses are allowed only to the extent that they exceed 10% of AGI (instead of a 7.5% for those at least age 65) 53 Individual AMT (slide of 3) – Interest expense deductions are limited to • Qualified residence interest • Interest on certain student loans, and • Investment interest (subject to limitations) – The 3% phaseout of itemized deductions for certain high-income taxpayers does not apply in computing the individual AMT – Determination of the minimum tax credit is more complex for individual taxpayers • The credit applies only to AMT generated as a result of timing differences 54 Refocus On The Big Picture (slide of 4) • Tax credits are used by the Federal government to promote certain social and economic objectives – Credits are dollar-for-dollar reductions in tax liability • Progress Corporation qualifies for the following tax credits – A 10% tax credit for rehabilitating a building placed in service before 1936 (see Example 4) – The work opportunity tax credit (see Example 6) – The credit for employer-provided child care, equal to 25% of qualified child care expenses (see Example 13) • Mike might also want to take advantage of the disabled access credit – Designed to encourage small businesses to make their facilities accessible to disabled individuals 55 Refocus On The Big Picture (slide of 4) What If? • Mike has heard horror stories about the alternative minimum tax (AMT) and is concerned about its potential impact on his company • What if Mikes company is subject to the AMT? 56 Refocus On The Big Picture (slide of 4) What If? • If Progress Corp is subject to the AMT, the company’s general business credits are limited to – Regular income tax, less the greater of • Tentative minimum tax, or • 25% X (regular income tax - $25,000) – Thus, much of the tax benefit may be lost or require a carryback or carryover to another tax year • Credits subject to this limit include – – – – The tax credit for rehabilitation expenditures, The work opportunity tax credit, The disabled access credit, and The credit for employer-provided child care 57 Refocus On The Big Picture (slide of 4) What If? • However, many small corporations are exempt from the AMT – Before Mike proceeds with his plans, his exposure to the AMT should be determined 58 If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact: Dr Donald R Trippeer, CPA trippedr@oneonta.edu SUNY Oneonta © 2016 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 59 ... Business Credit (slide of 2) • Comprised of a number of business credits combined into one amount • Limited to net income tax reduced by greater of: – Tentative minimum tax – 25% of net regular tax... Rehabilitation Expenditures (slide of 2) • Return to the facts of The Big Picture on p 17- 1 • Assume that Progress spends $60,000 to rehabilitate a building (adjusted basis of $40,000) that had been placed... of employment 14 Work Opportunity Tax Credit: Long-Term Family Assistance Recipient (slide of 2) • Applies to first 24 months of wages paid to individuals who have been long-term recipients of