Rob Salazar CPA - uploads.bobitexpos.com · Rob Salazar CPA . Tax Credits ... • Example: Taxpayer...
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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
Contact
David Fowler
Tax Partner, PwC
Columbus, OH
(614) 225-8736
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.