Rob Salazar

CPA

Tax Credits & Incentives

What is a T ax Credit & Incentive? Benefit Available for Economic Activity

Dollar per Dollar Reduction – Tax

Cash/Credits/Grants

What if I have a loss or loss carryover? Carryover Forward/Carryback

Are Tax Credits Non-Discretionary? Statutory Benefits, Federal & State, Geographically Based, Industry Specific

What are Discretionary Tax Incentives Negotiated Benefits

Tax Credits & Incentives

WHY DO I NEED TAX CREDITS

Unexpected Benefit

Available with Some Effort

Competitive Advantage

Human Resource Function

Tax Credits & Incentives

WHY SHOULD I EXPEND THE EFFORT Can Make a Significant Difference

It’s Not All About Sales

It’s Not All About Expenses

Human Resource Function

Tax Credits & Incentives

Rental Business

Bad News: 1. Most credits & incentives are directed toward Manufacturers

Good News: 1. Federal Work Opportunity Tax Credit (WOTC) 2. Many States Adopt Mirror WOTC Credits (piggyback) 3. Many States Have Hiring Specific Credits 4. Many states are consistently adding benefits to attract & keep employers

Tax Credits & Incentives

Tax Credits & Incentives

FEDERAL WOTC

WORK OPPORTUNITY TAX CREDIT is a federal hiring incentive that provides a tax credit over $10,000 if

your company is hiring from any of the following groups:

A member of a family that is a Qualified Food Stamp Recipient

A member of a family that is a Qualified Aid to Families with Dependent Children (AFDC) Recipient

Qualified Veterans

Qualified Ex-Felons, Pardoned, Paroled or Work Release Individuals

Vocational Rehabilitation Referrals

Qualified Social Security Income(SSI) Recipients

Qualified Individuals living within an Empowerment Zone, Renewal Community, Enterprise Community or Rural Renewal Community

Long Term Family Assistance Recipient (TANF)- Formerly known as Welfare to Work

Tax Credits & Incentives

I Don’t Hire These Type of Employees

Yes, you do

6%-25% of hires will fall into these categories

Some agencies pre-qualify hires

Tax Credits & Incentives

Tax Credits – ENTERPRISE ZONES • California • Texas • Colorado • Florida • North Carolina • South Carolina • New Mexico

Tax Credits & Incentives

California Enterprise Zones / New Employment Credit Hiring Credit Up to $37,440 per Qualified Employee

5-Year Credit

Qualification Process/Application Process

Retroactive – Amended Returns

Sales Tax Credit Sales Tax Paid – Credit for Qualified Assets

Entire sales tax paid on Qualified Equipment

Equipment used within the manufacturing and processing functions

Data processing and communication equipment

Tax Credits & Incentives California New Employment Hire Credit

Tax Credits &

Incentives

What Is the Process? 1. Employee Applies for Job & is Hired 2. Employee Submits Tax Credit Interview (Questions) 3. Eligibility is Determined (Federal/State) 4. Federal & State Forms are Submitted for Approval 5. Vouchers are Secured – Vouchering Agency 6. End of Year Payroll Information Provided to CPA/Consultant 7. Tax Credit Reduces Tax Obligation – Federal / State

Tax Credits &

Incentives

Process? Employee Completes Job Application & Hired

Employee Provides The Employer Data Regarding Employment History

Employer Completes & Submits Paperwork • IRS Form 8859 • IRS Form 9061 • State Forms

WOTC Center/State Agency Provides Employer Voucher or Credit Allocation

Tax Credits & Incentives

Federal & State Incentives

1. Many States Have Piggyback Federal WOTC credits

i.e., Texas, California, New Mexico, N. Carolina, S. Carolina, Colorado

2. Many States Have Own Version of Employment Based Credits

3. Legislation is Consistently Being Modified to Keep & Attract Business

Tax Credits & Incentives

WHO WILL DO THE WORK? I. It should be part of the HR department process II. Recommendation:

1. Find a Service Provider Who Specializes in Credits & Incentives a. They are adept at maximizing these benefits b. Keep abreast of new legislation c. Work with your CPA d. Generally work on a contingency basis

• No credit/No Benefit = No Fee e. On-Line Software Process/Turn-Key

Tax Credits & Incentives

Q&A?

Tax Credits & Incentives

How to Avoid The 2014 Tax Hit

Dave Fowler Tax Partner

Agenda

• Highlighted Tax Changes

• Bonus Depreciation And Its Impact On Car Rental Companies

• Like-Kind Exchange Benefits

• LKE Process

• Tax Reform

• Q&A

Highlighted Tax Changes

• Changes in individual tax rates

• Election to expense depreciable business assets (Section 179 property)

2003 through 2013 $500,000 2014 and later years $ 25,000

• Expiration of bonus depreciation at the end of 2013

Joint Filing Marginal Tax Rates 2012 2013

$18,000 - $72,000 15% 15%

$72,000 - $145,000 25% 25%

$145,000 - $220,000 28% 28%

$220,000 - $390,000 33% 33%

$390,000 - $450,000 35% 35%

$450,000 - 35% 39.6%

Bonus Depreciation

• Enacted after 9/11 to spur capital spending

• Reinstated in 2008 with recession

• Expired on 12.31.2013

Pr

e 9/

11/2

001

9/11

/200

1 - 0

5/05

/200

35/

6/20

03 -

12/3

1/20

04

1/1/

2005

- 12

/31/

2007

1/1/

2008

- 9/

9/20

10

9/10

/201

0 - 1

2/31

/201

11/

1/20

12 -

12/3

1/20

13

2014

and

Aft

er

Bonus % 0% 30% 50% 0% 50% 100% 50% 0%

Bonus Depreciation is a Short Term Loan from the Government

• Depreciation is required to be recaptured as assets are sold for a tax gain

• Depreciation Recapture results in Ordinary Income not Capital Gain

• Example: Taxpayer with $60,000 in taxable income and a 35% tax rate, purchases an additional $100,000 of vehicles that are sold for $90,000 one year later

Assets Purchased – 2013 $100,000 Assets Sold – 2014 $90,000

No-Bonus Bonus

Depreciation Allowed

Bonus in Acquisition 50.00% $0 $50,000

MACRS 2013 20.00% $20,000 $10,000

MACRS (1) 1/2 year depr in year of sale 2014 18.00% $18,000 $9,000(1)

Tax Basis $62,000 $31,000

Tax Gain on Sale $28,000 $59,000

Bonus Depreciation is a Short Term Loan from the Government

Effect of Bonus on Taxes Paid in Year of Sale

Pre-Bonus Bonus

Taxable Income Before Sale $60,000 $60,000

MACRS Depreciation on Asset (1/2 year) ($18,000) ($9,000)

Gain on Sale of Asset $28,000 $59,000

Taxable Income after Sale $70,000 $110,000

Tax at 35% $24,500 $38,500

Decrease in Cash Available due to Bonus ($14,000)

Effect of Bonus on Taxes Paid in Year of Purchase

Pre-Bonus Bonus

Taxable Income Before

Purchase $60,000 $60,000

Bonus Depreciation at 50% $0 $50,000

MACRS Depreciation at 20% $20,000 $10,000

Taxable Income after Purchase $40,000 $0

Tax at 35% $14,000 $0

Increase in Cash Available due to Bonus $14,000

Loan

Payment

Continued Example: Taxpayer with $60,000 in taxable income and a 35% tax rate, purchases an additional $100,000 of vehicles that are sold for $90,000 one year later.

Like-Kind Exchange (LKE) Preserves The Benefits of Bonus Depreciation

• Same tax treatment as trade ins and part of tax code since 1922

• Provides “continuous” deferral of tax gains on the sale of vehicles

• Continued Example: Taxpayer with $60,000 in taxable income and 35% tax rate, purchases an additional $100,000 of vehicles that are sold for $90,000 one years later

Without LKE With LKE

Taxable Income Before Sale $60,000 $60,000

MACRS Depreciation on Asset

(1/2 of 32% without LKE;

32% with LKE) ($8,000) ($16,000)

Gain on Sale of Asset $59,000 $0

MACRS Depreciation on $100,000

Replacement Asset ($20,000) ($2,000)

Taxable Income after Sale $91,000 $42,000

Tax at 35% $31,850 $14,700

Increase in Available Cash due to LKE $17,150

LKE Benefit Example – 100 Vehicle Fleet Bonus Depreciation

Assumptions

• Annual Sales of Rental Vehicles: $2.25 Million

• Average Residual Value: 90%

• Average Hold Time: 1 year

• Tax Depreciation: 5-Yr MACRS

• Annual Inflation Rate: 2%

• Annual Growth of Rental Fleet: 5%

• Bonus Depreciation: Yes

• Marginal Tax Rate: 40%

5-year Cumulative LKE Tax Deferral : $.71 Million

$0.48 $0.54

$0.59 $0.65

$0.71

2014 2015 2016 2017 2018

Cumulative Net Cash Flow Benefit - 5 Years

Mill

ion

s

$0.24

$0.40

$0.50

$0.63

$0.71

2014 2015 2016 2017 2018

Cumulative Net Cash Flow Benefit - 5 Years Assumptions • Annual Sales of Rental Vehicles: $2.25 Million

• Average Residual Value: 90%

• Average Hold Time: 1 year

• Tax Depreciation: 5-Yr MACRS

• Annual Inflation Rate: 2%

• Annual Growth of Rental Fleet: 5%

• Bonus Depreciation: No

• Marginal Tax Rate: 40%

LKE Benefit Example – 100 Vehicle Fleet No Bonus Depreciation

5-year Cumulative LKE Tax Deferral : $.71 Million

Mill

ion

s

LKE Benefit – Lower Borrowing Cost

Many tax payers pay down debt with LKE cash flow

• Lower total debt

• Favorable impact on bank ratios, covenants & APR

• Lower total borrowing cost

• Similar to a bank loan, deferred taxes may have to be repaid with a decline in the rental fleet

LKE Impact On Car Rental Company 500 Vehicle Fleet

• Gross Annual Income: $6.6 Million 500 vehicles x $1,100 per month = $550,000 x 12 months = $6.6 Million

• Net Income: $528,000 $6.6 Million x 8% pre-tax margin = $528,000

• Reduction In Borrowing Costs From LKE: $140,000 5-year cumulative LKE tax savings for 500 vehicles = $3.5 million

Assume Tax Payer pays down debt costing 4% APR: $3.5 million x 4% = $140,000

LKE Timeline Date of

sale

Avoid receipt of

sales proceeds

Replacement Property

Identification Procedures

Seller Notification and

Replacement Property

Acquisition

Procedures

Buyer notification

procedures

Day

45

End of

exchange period

Finalize matching

& gain deferral

File

Return Day

180 Day 0

Assign sales

rights to QI

Tax Reform

• Max Baucus (D-Mont) Proposal Replace MACRS depreciation with a new pooling system that is intended to better approximate economic

depreciation based on estimates provided by the Congressional Budget Office.

• Dave Camp (R-MI) Proposal Replace MACRS depreciation with the Alternative Depreciation System (ADS), which would generally

mean longer asset lives and straight-line depreciation.

• Congress faces significant objectives for tax reform, election year concerns, and changes in leadership

• It’s unlikely significant action on tax reform will be undertaken by Congress this year

• Likelihood for extenders

Q&A

Contact

David Fowler

Tax Partner, PwC

Columbus, OH

(614) 225-8736

david.fowler@us.pwc.com

This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. The views expressed in this presentation should not be relied on as accounting, auditing or tax advice. The outcome of any independent situation depends on the specific facts and circumstances in which the issue arises and on the interpretation of US GAAP, IFRS and other relevant literature in effect at the time.