Post by Sapphire Capital on Jul 23, 2008 22:19:52 GMT 4
The Investment Tax Credit
The investment tax credit is a credit against your federal income tax. Currently, it's made up of three components: the rehabilitation credit, the energy credit, and the reforestation credit. The investment tax credit is itself one of the components of the general business credit and is subject to the limitations, carryback and carryforward rules, etc. that apply to all the other components of that "umbrella" credit. The investment credit is claimed on Form 3468, Investment Credit.
Basis adjustment. When you claim an investment tax credit for a business asset, you must generally reduce the depreciable tax basis of the property. The basis reduction would be equal to 100 percent of the rehabilitation credit you claimed, and 50 percent of the reforestation and energy credits.
Recapture of investment tax credits. If you stop using in your business any assets on which you've already claimed an investment tax credit, you may have to "pay back" to the IRS some or all of the credit you've received. In tax-speak, the credit is "recaptured." This is done by adding a percentage of the credit back to your current year's tax liability. Most commonly, recapture will occur if you sell the property, convert it to personal use, give it away, or lose it through a casualty or theft, within five years of claiming the credit.
Credits for Certain Investments
A small number of tax credits remain for investments that are not necessarily targeted toward the disadvantaged or the environment. The credits include the rehabilitation credit for real estate, the research and development (R&E) credit, and the orphan drug credit.
Research and experimentation (R&E) credit. The research and experimentation (R&E) credit encourages businesses to increase the amounts they spend on scientific research. The credit applies to qualified research expenses paid or incurred before January 1, 2008.
The credit generally equals 20 percent of the amount by which your research expenses for the year are higher than your "base amount," which is a figure based on the percentage of gross receipts you spent on research for 1984 through 1988. New companies' base amounts are set by a formula in the law.
To qualify for the credit, the research must be done for an existing business, and must be technological in nature (not research in the social sciences, arts, or humanities). It must relate to a new or improved function, performance, reliability, or quality. Qualified expenses includes in-house research, 65 percent of the cost of research done by a person other than an employee of the taxpayer, and 75 percent of the costs paid to a qualified scientific research consortium.
The rates used to calculate the three tiers of the alternative incremental credit are increased, for tax years ending after December 31, 2006, to:
• three percent of the portion of the qualified research expenses that exceed one percent, but not more than 1.5 percent of the average annual gross receipts for the four preceding tax years;
• four percent of the portion of the qualified research expenses that exceed 1.5 percent, but not more than two percent of the average annual gross receipts for the four preceding tax years; and
• five percent of the portion of the qualified research expenses that exceed two percent of the average annual gross receipts for the four preceding tax years.
Under a transitional rule for fiscal year taxpayers, the amount of the alternative incremental credit for 2007-2008 fiscal year taxpayers is computed by adding (1) the credit calculated as if it were extended but the rates not increased, and multiplied by a fraction that is the number of days in the tax year before January 1, 2008, over the total number of days in the tax year and (2) the credit calculated using the increased rates and multiplied by a fraction that is the number of days in the tax year after December 31, 2007, over the total number of days in the tax year.
The Tax Relief and Reconciliation Acts of 2006 allows taxpayers, at their election, to compute the research credit under a third method, the alternative simplified credit. Under the alternative simplified credit, a taxpayer can claim an amount equal to 12 percent of the amount by which the qualified research expenses exceeds 50 percent of the average qualified research expenses for the three preceding tax years. If the taxpayer has no qualified research expenses for any of the preceding three tax years, then the credit is equal to six percent of the qualified research expenses for the current tax year. As with the alternative incremental credit, an election to calculate the research credit using the alternative simplified credit is effective for all succeeding tax years unless revoked with the consent of the IRS.
The R&E credit is claimed on Form 6765, Credit for Increasing Research Activities, and is part of the general business credit.
Orphan drug credit. The orphan drug credit is designed to encourage development of drugs for rare diseases and conditions, the occurrences of which are so infrequent that drug development would otherwise be economically unfeasible. The credit expired at the end of 1994, but was permanently reinstated for qualified testing expenses paid or incurred after July 1, 1996.
The credit is equal to 50 percent of the qualified clinical testing expenses for the year. The orphan drug credit operates in much the same fashion as the R&D credit, except that there is no requirement that expenses exceed a base amount. Where the same expenses would qualify for both the orphan drug credit and the R&D credit, you must choose between them — the same expenses can't be claimed as a credit twice. The orphan drug credit is claimed on Form 8820, Orphan Drug Credit.
Rehabilitation credit. This tax credit is designed to encourage the rehabilitation of older real estate or certified historic buildings. It allows you to take a tax credit for the expenses you have for renovating, restoring, or rehabilitating (but not enlarging or adding new construction to) certain structures. The percentage of expenses you can take as a credit is 10 percent for buildings originally placed in service before 1936, and 20 percent for buildings listed in the National Register of Historic Places. The credit is further limited to the tax paid on $25,000 and is phased out for taxpayers with adjusted gross incomes between $200,000 and $250,000.
If a project involves both rehabilitation and enlargement, only the costs allocated toward rehabilitation are eligible for the credit. Furthermore, if you claim this credit, you must reduce the depreciable tax basis of the property by the amount of the credit.
To be eligible for the credit the rehabilitation expenditures must be for nonresidential real property. An exception to this rule applies to certified historic structures, which may be used as residential rental property. The building must be "substantially rehabilitated;" that is, the expenses in some 24-month period must be more than the greater of $5,000 or your adjusted basis in the building. Also, unless the building is a certified historic structure, at least 75 percent of the external walls must be retained, with 50 percent or more kept in place as external walls, and at least 75 percent of the existing internal structural framework of the building must be retained in place.
The rehabilitation credit is part of the investment tax credit, and can be recaptured (paid back to the IRS) if the qualifying property is sold or disposed of within five years of the time it's placed in service. The credit is claimed on Form 3468, Investment Tax Credit.
Retirement plan start-up credit. In order to stimulate greater retirement saving, small employers who establish new retirement plans are now entitled to a tax credit for doing so. The credit is only available to employers with 100 employees or less who have not maintained a qualified retirement plan during the three-year period immediately before the first effective year of the new plan. This credit is set to expire for tax years beginning after 2010.
The credit amounts to 50 percent of the costs incurred in creating or maintaining a new qualified plan, up to a maximum of $500 in each of the first three years the plan is effective. Essentially, this means that you have to spend at least $1,000 per year to get the full credit. Any set-up and administration costs not offset by the tax credit (i.e. those above $1,000 in the first three years and those incurred after the first three years) are deductible as ordinary and necessary business expenses.
Employer-provided child care credit. For tax years beginning before 2011, small, as well as middle-sized, businesses will be eligible for a tax credit of 25 percent of the qualified child care expenses they provide and 10 percent of the cost of qualified child care resource and referral services they offer. The employer-provided credit is capped at $150,000 per tax year.
Expenses eligible for the credit include payments under a contract with a qualified child care facility to provide child care services to the business's employees. Qualified childcare expenses also include the amounts paid or incurred by the employer to acquire, construct, establish, and operate a qualified child care facility for employees. The facility itself must meet any state and local government laws and regulations, like licensing requirements, that may apply for its location.
The investment tax credit is a credit against your federal income tax. Currently, it's made up of three components: the rehabilitation credit, the energy credit, and the reforestation credit. The investment tax credit is itself one of the components of the general business credit and is subject to the limitations, carryback and carryforward rules, etc. that apply to all the other components of that "umbrella" credit. The investment credit is claimed on Form 3468, Investment Credit.
Basis adjustment. When you claim an investment tax credit for a business asset, you must generally reduce the depreciable tax basis of the property. The basis reduction would be equal to 100 percent of the rehabilitation credit you claimed, and 50 percent of the reforestation and energy credits.
Recapture of investment tax credits. If you stop using in your business any assets on which you've already claimed an investment tax credit, you may have to "pay back" to the IRS some or all of the credit you've received. In tax-speak, the credit is "recaptured." This is done by adding a percentage of the credit back to your current year's tax liability. Most commonly, recapture will occur if you sell the property, convert it to personal use, give it away, or lose it through a casualty or theft, within five years of claiming the credit.
Credits for Certain Investments
A small number of tax credits remain for investments that are not necessarily targeted toward the disadvantaged or the environment. The credits include the rehabilitation credit for real estate, the research and development (R&E) credit, and the orphan drug credit.
Research and experimentation (R&E) credit. The research and experimentation (R&E) credit encourages businesses to increase the amounts they spend on scientific research. The credit applies to qualified research expenses paid or incurred before January 1, 2008.
The credit generally equals 20 percent of the amount by which your research expenses for the year are higher than your "base amount," which is a figure based on the percentage of gross receipts you spent on research for 1984 through 1988. New companies' base amounts are set by a formula in the law.
To qualify for the credit, the research must be done for an existing business, and must be technological in nature (not research in the social sciences, arts, or humanities). It must relate to a new or improved function, performance, reliability, or quality. Qualified expenses includes in-house research, 65 percent of the cost of research done by a person other than an employee of the taxpayer, and 75 percent of the costs paid to a qualified scientific research consortium.
The rates used to calculate the three tiers of the alternative incremental credit are increased, for tax years ending after December 31, 2006, to:
• three percent of the portion of the qualified research expenses that exceed one percent, but not more than 1.5 percent of the average annual gross receipts for the four preceding tax years;
• four percent of the portion of the qualified research expenses that exceed 1.5 percent, but not more than two percent of the average annual gross receipts for the four preceding tax years; and
• five percent of the portion of the qualified research expenses that exceed two percent of the average annual gross receipts for the four preceding tax years.
Under a transitional rule for fiscal year taxpayers, the amount of the alternative incremental credit for 2007-2008 fiscal year taxpayers is computed by adding (1) the credit calculated as if it were extended but the rates not increased, and multiplied by a fraction that is the number of days in the tax year before January 1, 2008, over the total number of days in the tax year and (2) the credit calculated using the increased rates and multiplied by a fraction that is the number of days in the tax year after December 31, 2007, over the total number of days in the tax year.
The Tax Relief and Reconciliation Acts of 2006 allows taxpayers, at their election, to compute the research credit under a third method, the alternative simplified credit. Under the alternative simplified credit, a taxpayer can claim an amount equal to 12 percent of the amount by which the qualified research expenses exceeds 50 percent of the average qualified research expenses for the three preceding tax years. If the taxpayer has no qualified research expenses for any of the preceding three tax years, then the credit is equal to six percent of the qualified research expenses for the current tax year. As with the alternative incremental credit, an election to calculate the research credit using the alternative simplified credit is effective for all succeeding tax years unless revoked with the consent of the IRS.
The R&E credit is claimed on Form 6765, Credit for Increasing Research Activities, and is part of the general business credit.
Orphan drug credit. The orphan drug credit is designed to encourage development of drugs for rare diseases and conditions, the occurrences of which are so infrequent that drug development would otherwise be economically unfeasible. The credit expired at the end of 1994, but was permanently reinstated for qualified testing expenses paid or incurred after July 1, 1996.
The credit is equal to 50 percent of the qualified clinical testing expenses for the year. The orphan drug credit operates in much the same fashion as the R&D credit, except that there is no requirement that expenses exceed a base amount. Where the same expenses would qualify for both the orphan drug credit and the R&D credit, you must choose between them — the same expenses can't be claimed as a credit twice. The orphan drug credit is claimed on Form 8820, Orphan Drug Credit.
Rehabilitation credit. This tax credit is designed to encourage the rehabilitation of older real estate or certified historic buildings. It allows you to take a tax credit for the expenses you have for renovating, restoring, or rehabilitating (but not enlarging or adding new construction to) certain structures. The percentage of expenses you can take as a credit is 10 percent for buildings originally placed in service before 1936, and 20 percent for buildings listed in the National Register of Historic Places. The credit is further limited to the tax paid on $25,000 and is phased out for taxpayers with adjusted gross incomes between $200,000 and $250,000.
If a project involves both rehabilitation and enlargement, only the costs allocated toward rehabilitation are eligible for the credit. Furthermore, if you claim this credit, you must reduce the depreciable tax basis of the property by the amount of the credit.
To be eligible for the credit the rehabilitation expenditures must be for nonresidential real property. An exception to this rule applies to certified historic structures, which may be used as residential rental property. The building must be "substantially rehabilitated;" that is, the expenses in some 24-month period must be more than the greater of $5,000 or your adjusted basis in the building. Also, unless the building is a certified historic structure, at least 75 percent of the external walls must be retained, with 50 percent or more kept in place as external walls, and at least 75 percent of the existing internal structural framework of the building must be retained in place.
The rehabilitation credit is part of the investment tax credit, and can be recaptured (paid back to the IRS) if the qualifying property is sold or disposed of within five years of the time it's placed in service. The credit is claimed on Form 3468, Investment Tax Credit.
Retirement plan start-up credit. In order to stimulate greater retirement saving, small employers who establish new retirement plans are now entitled to a tax credit for doing so. The credit is only available to employers with 100 employees or less who have not maintained a qualified retirement plan during the three-year period immediately before the first effective year of the new plan. This credit is set to expire for tax years beginning after 2010.
The credit amounts to 50 percent of the costs incurred in creating or maintaining a new qualified plan, up to a maximum of $500 in each of the first three years the plan is effective. Essentially, this means that you have to spend at least $1,000 per year to get the full credit. Any set-up and administration costs not offset by the tax credit (i.e. those above $1,000 in the first three years and those incurred after the first three years) are deductible as ordinary and necessary business expenses.
Employer-provided child care credit. For tax years beginning before 2011, small, as well as middle-sized, businesses will be eligible for a tax credit of 25 percent of the qualified child care expenses they provide and 10 percent of the cost of qualified child care resource and referral services they offer. The employer-provided credit is capped at $150,000 per tax year.
Expenses eligible for the credit include payments under a contract with a qualified child care facility to provide child care services to the business's employees. Qualified childcare expenses also include the amounts paid or incurred by the employer to acquire, construct, establish, and operate a qualified child care facility for employees. The facility itself must meet any state and local government laws and regulations, like licensing requirements, that may apply for its location.