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2013 U.S. Budget Proposes Enhanced Tax Incentives

By:
11. September 2012

President Obama’s 2013 Budget Proposal outlines a few major—but positive—changes for small- to medium-sized business owners, according to Brian Cameron of Paradigm Partners, an international consulting firm specializing in complex federal and state tax and funding incentives across a host of industries.
 
Included in this proposal are changes to the R&D Tax Credit, adding a new job creation incentive, increasing the Domestic Production Deduction (DPD) as well as introducing the “Buffet Rule” as an alternative to the Alternative Minimum Tax (AMT).
 
“Most small- to medium-sized business owners will be able to take advantage of most, if not all, of these proposed enhanced tax incentives,” Cameron says.
 
R&D Tax Credit
 
The R&D Tax Credit, also known as the Research Tax Credit, provides an incentive to companies and their owners for performing activities called Qualifying Research Expenditures (QREs). The budget proposes to make the credit permanent, thus eliminating the uncertainty that companies face when making a commitment to perform ongoing research and development.
 
“The President has also requested that the credit be simplified and that the rate of the Alternative Simplified Credit be increased from 14 to 17 percent,” says Cameron. He adds that the R&D tax credit has been around since 1981, yet many business owners have never heard of it or, worse, falsely think they do not qualify.
 
“Unlike a tax deduction, the R&D tax credit is a dollar-for-dollar reduction of a company’s tax liability,” he says. “In addition to the current year’s tax savings, a business can claim the credit back up to three open tax years and receive back any ‘overpaid’ taxes with interest.”
 
Tax Credit for New Jobs and Wage Increases
 
A tax credit for new-job creation and wage increases is proposed for qualified employers and will be available for just one year, beginning January 1, 2012. Cameron says the credit would be equal to 10 percent of the increase in eligible wages for 2012 over the employer’s wages in 2011. The credit tops out at $500,000 because the maximum amount of the increase in eligible wages is $5 million per employer.
 
Cameron says another aspect of the President’s overall plan is to increase U.S. manufacturing.
 
“He is targeting the domestic production incentive, also known as the Domestic Production Deduction, which provides an incentive to companies that manufacture here in the United States,” he says. “The Administration is proposing to reform the current deduction for domestic production by more narrowly focusing it on manufacturing activities—for example, removing coverage of oil production.”
 
Cameron says the savings derived from eliminating some previously covered activities would be used to expand the deduction for manufacturers, as well as increase the DPD from its current level of 9 percent to 18 percent for advanced manufacturing technologies.
 
The “Buffet Rule”
 
The budget characterizes the Buffet Rule as: “No household making over $1 million annually should pay a smaller share of its income in taxes than middle class families pay.” Its name is derived from Warren Buffet’s observation that his effective tax rate is lower than his secretary’s.
 
Cameron says the budget proposes that those making more than $1 million should pay at least 30 percent of their income in tax.
 
“The President is proposing that this Buffet Rule replace the current AMT,” Cameron says. “The elimination of the AMT could provide an opportunity for many taxpayers to take advantage of tax incentives previously unavailable to them, including the R&D Tax Credit.”
 
The Senate rejected Obama’s Buffett Rule legislation in April, but Cameron says that this will be a very hot topic during the election campaign and, if the President is re-elected, will be introduced again.
 
Summary
 
According to Cameron, many manufacturing groups hope the incentives remain part of the budget when passed. From an R&D Tax Credit perspective, he says many more companies will be able to add staff and commit other resources to research and development activities with the knowledge that the credit is now a permanent fixture in the tax code.
 
“The Buffet Rule could potentially open up the credit to tens of thousands of taxpayers of small- to medium-sized businesses,” Cameron sats. “As general tax credits are unable to reduce AMT, replacing the AMT with the Buffet Rule will enable small business owners to take advantage of many more tax incentives, including the R&D Tax Credit.”
 
Cameron says that the proposed increase in the DPD should help increase U.S. manufacturing and add new employees needed to support the increased manufacturing.
 
Brian Cameron is Chief Executive Officer for Paradigm Partners. He can be reached at BCameron@Paradigmlp.com

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