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.
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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.
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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
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General Business Credit (slide 1 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 1 year, then
forward 20 years
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General Business Credit (slide 2 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
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General Business Credit (slide 2 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
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Rehabilitation Expenditure Credit
(slide 1 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
7
Rehabilitation Expenditure Credit
(slide 2 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 do not include
the cost of the building and related facilities or
cost of enlarging existing building
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Rehabilitation Expenditure Credit
(slide 3 of 3)
• Basis in structure is reduced by the credit
amount
• Subject to recapture if rehabilitated property
held less than 5 years or ceases to be
qualifying property
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The Big Picture - Example 4
Tax Credit For Rehabilitation Expenditures (slide 1 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).
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The Big Picture - Example 4
Tax Credit For Rehabilitation Expenditures (slide 2 of 2)
• If the building were a historic structure,
– The credit allowed would be $12,000 (20% X
$60,000), and
– The building’s depreciable basis would increase by
$48,000.
• $60,000 (rehabilitation expenditures) - $12,000 (credit
allowed).
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Work Opportunity Tax Credit
(slide 1 of 2)
• Applies to first 12 months of wages paid to
individuals falling within target groups
– Credit limited to a percentage of first $6,000
wages paid per eligible employee
• 40% if employee has completed at least 400 hours of
service to employer
• 25% if at least 120 hours of service
– Deduction for wages is reduced by credit amount
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Work Opportunity Tax Credit
(slide 2 of 2)
• Targeted individuals generally subject to high
rates of unemployment, including
– Qualified ex-felons, high-risk youths, food stamp
recipients, veterans, summer youth employees, and
long-term family assistance recipients
• Summer youth employees: Only first $3,000 of wages
paid for work during 90-day period between May 1 and
September 15 qualify for credit
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The Big Picture - Example 6
Work Opportunity Tax Credit
• Return to the facts of The Big Picture on p. 17-1.
• In January 2015, Progress Corporation hires 4
members of a qualifying targeted group.
– Each employee works 1,000 hours and is paid wages of
$8,000 during the year.
• Progress’s work opportunity credit is $9,600
– ($6,000 X 40%) X 4 employees.
– If the tax credit is taken, Progress reduces its deduction for
wages paid by $9,600.
• No credit is available for wages paid to these
employees after their first year of employment
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Work Opportunity Tax Credit: Long-Term
Family Assistance Recipient (slide 1 of 2)
• Applies to first 24 months of wages paid to
individuals who have been long-term
recipients of family assistance welfare benefits
– Long-term is at least an 18 month period ending on
hiring date
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Work Opportunity Tax Credit: Long-Term
Family Assistance Recipient (slide 2 of 2)
• Maximum credit is a percentage of first
$10,000 qualified wages paid in first and
second year of employment
– 40% in first year
– 50% in second year
• Maximum credit per qualified employee is
$9,000
– Deduction for wages is reduced by credit amount
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Research Activities Credit
(slide 1 of 5)
• Comprised of three parts
– Incremental research activities credit
– Basic research credit
– Energy research credit
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Research Activities Credit
(slide 2 of 5)
• Incremental research activities credit
– Credit amount = 20% × (qualified expenditures – base
amount)
• Expenditures qualify if research relates to discovery
of technological info intended for use in developing a
new or improved business component for taxpayer
– Expenditures qualify fully if research done in-house
– Only 65% qualifies if research conducted by outside party
(under contract)
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Research Activities Credit
(slide 3 of 5)
• Tax treatment of R&E expenditures
– Full credit and reduce expense deduction by credit
amount
– Full expense deduction and reduce credit by
(100% × credit × max. corp. tax rate)
– Full credit and capitalize research expenses and
amortize over 60 months or more
• Amount capitalized is reduced by full amount of credit
only if the credit exceeds the amount allowable as a
deduction
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Research Activities Credit
(slide 4 of 5)
• Basic research credit
– Additional 20% credit is allowed on basic research
payments in excess of a base amount
• Basic research payments - amounts paid in cash to a qualified basic
research organization, such as a college or university or a taxexempt organization operated primarily to conduct scientific
research
– Basic research is any original investigation for the
advancement of scientific knowledge not having a specific
commercial objective
• The definition excludes basic research conducted outside the
United States and basic research in the social sciences, arts, or
humanities
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Research Activities Credit
(slide 5 of 5)
• Energy Research Credit –
– This credit is intended to stimulate additional
energy research
– Credit amount = 20% of amounts paid or incurred
by a taxpayer to an energy research consortium for
energy research
21
Disabled Access Credit
• Credit available for eligible access expenditures
made by small businesses
– Includes amounts paid to remove barriers that would
otherwise make a business inaccessible to disabled and
handicapped individuals
– Facility qualifies if placed in service before November
6, 1990
• Credit amount
– 50% × expenditures that exceed $250 but not in excess
of $10,250
• Thus, max. credit is $5,000
– Basis in asset is reduced by credit amount
22
Disabled Access Credit
• Credit available for eligible access expenditures
made by small businesses
– Includes amounts paid to remove barriers that would
otherwise make a business inaccessible to disabled and
handicapped individuals
– Facility qualifies if placed in service before November
6, 1990
• Credit amount
– 50% × expenditures that exceed $250 but not in excess
of $10,250
• Thus, max. credit is $5,000
– Basis in asset is reduced by credit amount
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Credit For Pension
Plan Startup Costs
• Small businesses can claim nonrefundable tax credit
for admin costs of establishing and maintaining a
qualified retirement plan
– Small business has < 100 employees who have earned at
least $5,000 of compensation
• Credit amount = 50% of qualified startup costs
limited to max credit of $500 per year for 3 years
– Deduction for startup costs is reduced by amount of credit
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Credit For Employer-Provided Child Care
(slide 1 of 2)
• Employers can claim a credit for providing
child care facilities to their employees during
normal working hours
– Limited to $150,000 per year
• Credit amount:
– 25% of qualified child care expenses
– 10% of qualified child care resource and referral
services
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Credit For Employer-Provided Child Care
(slide 2 of 2)
• Deductible qualifying expenses must be
reduced by the credit amount
• Basis of qualifying property must be reduced
by credit amount
• Credit may be subject to recapture if child
care facility ceases to be used for qualifying
purpose within 10 years of being placed in
service
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The Big Picture - Example 13
Credit For Employer-provided Child Care
(slide 1 of 2)
• Return to the facts of The Big Picture on p. 17-1.
• During the year, Progress Corporation
constructs a child care facility for $400,000 to
be used by its employees’ preschool-aged
children.
– In addition, Progress incurs $100,000 in salaries
and other administrative costs associated with the
facility.
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The Big Picture - Example 13
Credit For Employer-provided Child Care
(slide 2 of 2)
• As a result, Progress’s credit for employerprovided child care is $125,000.
– ($400,000 + $100,000) X 25%.
• The basis of the facility is reduced to $300,000
($400,000 - $100,000), and
• The deduction for salaries and administrative
costs is reduced to $75,000 ($100,000 $25,000).
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Foreign Tax Credit
(slide 1 of 2)
• The purpose of the foreign tax credit (FTC) is
to mitigate double taxation since income
earned in a foreign country is subject to both
U.S. and foreign taxes
– Credit applies to both individuals and corporations
that pay foreign income taxes
– Instead of claiming a credit, a deduction may be
claimed for the taxes paid
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Foreign Tax Credit
(slide 2 of 2)
• Amount of the credit allowed is the lesser of:
– The foreign taxes imposed, or
– The overall limitation determined using the following formula:
Foreign-source TI × U.S. tax before credit
Worldwide TI
= Overall FTC limitation
• For individual taxpayers, worldwide taxable income is
determined before personal and dependency exemptions
• Unused FTCs can be carried back 1 year and forward 10
years
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Alternative Minimum Tax (slide 1 of 2)
• Designed to ensure that corporations with
substantial economic income pay at least a
minimum amount of federal taxes
• Essentially, a separate tax system with a quasiflat tax rate applied to a corporation’s
economic income
31
Alternative Minimum Tax (slide 2 of 2)
• If tentative alternative minimum tax > regular
corporate income tax, corporation must pay
regular tax plus the excess, the alternative
minimum tax (AMT)
32
Small Corporation Exemption
(slide 1 of 2)
• For tax years beginning after 1997, many small
corporations are not subject to AMT
• A corporation initially qualifies as a small
corporation in its first tax year in existence
regardless of its gross receipts.
• After the initial year, the exemption applies if
the corp. meets two requirements
Small Corporation Exemption
(slide 2 of 2)
• The exemption applies if these 2 requirements are
met:
– The corp. was treated as a small corporation exempt from
the AMT for all prior years beginning after 1997
– Annual average gross receipts for the 3 year period ending
before its current tax year did not exceed $7.5 million
• $5 million if the corporation had only one prior tax year
• This provision exempts up to 95% of all C corps from
the AMT
AMT Formula for Corporations
35
Tax Preference Items
• Percentage depletion in excess of the adjusted
basis of property
• Tax-exempt interest on “private activity
bonds”
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Adjustments for AMT
(slide 1 of 2)
• Adjustments for AMT:
– A portion of depreciation on property placed in
service after 1986
– A portion of amortization claimed on certified
pollution control facilities
– Difference between percentage of completion and
completed contract income
– Difference between gain (loss) on sale of property
for regular tax and AMT purposes
37
Adjustments for AMT
(slide 1 of 2)
• Adjustments for AMT:
– A portion of depreciation on property placed in
service after 1986
– A portion of amortization claimed on certified
pollution control facilities
– Difference between percentage of completion and
completed contract income
– Difference between gain (loss) on sale of property
for regular tax and AMT purposes
38
Adjustments for AMT
(slide 1 of 2)
• Adjustments for AMT:
– A portion of depreciation on property placed in
service after 1986
– A portion of amortization claimed on certified
pollution control facilities
– Difference between percentage of completion and
completed contract income
– Difference between gain (loss) on sale of property
for regular tax and AMT purposes
39
Adjustments for AMT
(slide 1 of 2)
• Adjustments for AMT:
– A portion of depreciation on property placed in
service after 1986
– A portion of amortization claimed on certified
pollution control facilities
– Difference between percentage of completion and
completed contract income
– Difference between gain (loss) on sale of property
for regular tax and AMT purposes
40
Adjustments for AMT
(slide 2 of 2)
• Adjustments for AMT (cont’d):
– Passive activity losses of certain closely held
corporations and personal service corporations
– A portion of the difference between “ACE” and
“AMTI”
41
ACE Adjustment
(slide 1 of 2)
• Ace adjustment = 75% of difference between
unadjusted AMTI and ACE
– Can be positive or negative
– Negative adjustment is limited to aggregate
positive adjustments less previous negative
adjustments
42
ACE Adjustment
(slide 2 of 2)
• Starting point for determining ACE is AMTI
– AMTI is defined as regular taxable income after
AMT adjustments and tax preferences (other than
the NOL and ACE adjustments)
43
Impact of Certain Transactions on ACE
and E & P (slide 1 of 2)
44
Impact of Certain Transactions on ACE
and E & P (slide 2 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
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AMT Example
(slide 1 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.
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AMT Example
(slide 2 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
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AMT Example
(slide 3 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
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AMT Example
(slide 4 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
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Individual AMT
(slide 1 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 2 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 3 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 1 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 2 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 3 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 4 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.
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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.
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