It’s the time of year when companies and individuals throughout the United States deal with their federal and state tax compliance obligations. As part of that process, taxpayers continue to analyze statutory tax incentives available to offset potential income tax liability.

 

Many incentives offered by the U.S. government via the Internal Revenue Code, such as the Research & Development (R&D) Tax Credit, Work Opportunity Tax Credit and bonus depreciation, have been offered for decades through a plethora of temporary extensions, amounting to billions of dollars in savings on an annual basis. States that impose an income tax using federal taxable income as a starting point naturally benefit from these programs; moreover, many states either rd-tax-credits.jpgpiggyback on these benefits or enhance them.

 

Over the past several years we have seen many prevalent tax credit programs expire and go into hiatus with a lack of direction on how to comply during gaps in coverage. However, the Protecting Americans from Tax Hikes Act of 2015 and the Consolidated Appropriations Act, 2016, was signed into law by President Obama on Dec. 18, providing extender provisions.

 

There is a multitude of federal tax credits, thus, the chart below shows various selected tax credits and how the above legislation affected them:

 

Major Expired Tax Credits
Status
 
Research & Experimentation Tax Credit Permanently extended
 
Bonus Depreciation Extended, with a phased out:
50% in 2015-2017;
40% in 2018;
30% in 2019; and
Sunset as of January 1, 2020
 
Production Tax Credit (for wind facilities)

Extended, but phased out:
100% for projects that begin construction by Dec. 31, 2016;
80% for construction beginning in calendar year

2017;
60% for calendar year 2018;
40% for calendar year 2019; and
Sunset thereafter.

 
Production Tax Credit (for non-wind facilities) Extended for projects that begin construction by Dec. 31, 2016.
 
Investment Tax Credit in lieu of Production Tax Credit (for wind facilities) Extended, but phased out:
30% if construction begins before 2017;
24% if begun in calendar year 2017;
18% for calendar year 2018;
12% for calendar year 2019; and
Sunset thereafter.
 
Investment Tax Credit in lieu of Production Tax Credit (for non-wind facilities) Extended at 30% for projects that begin construction before Jan. 1, 2017
 
Work Opportunity Tax Credit Extended through 2019
 
Indian Employment Credit Extended through 12/31/16
 
New Markets Tax Credit Extend through 2019


Federal Empowerment Zone Credits


Deduction for state and local general sales tax

Earned Income Tax Credit

Child Tax Credit

American Opportunity Tax Credit

Above-the line Deduction for qualified
tuition and related expenses


Medical Device Excise Tax


Extended through 12/31/16


Extended permanently


Extended permanently


Extended permanently


Extended permanently


Extended through 12/31/16



Suspended for sales in 2016 - 2017

 

Aside from the federal income tax credit and deduction provisions above, many states offer their own equivalent of statutory credits (e.g., Texas franchise tax credit/sales tax exemption related to R&D).  Oftentimes, state level credits may differ in terms of eligibility, amount, or both. Some other key state-level statutory tax credits to look for are:

  • Job tax credits - Including hiring special categories of employees (veterans, enterprise zone, WOTC, etc.)

  • Investment tax credits - Including making investments in favored properties/locations (e.g., historic tax credit, brownfield tax credit)

  • Credits for various taxes paid

  • Training credit/deduction

Annually evaluating a company’s ability to capture credits is important not only in reducing potential tax liability, but also for accurately and timely being able to carry forward any credits which may not be utilized in the current year. In addition, some credits may be refundable, transferable and/or saleable.

 

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