President Obama’s 2013 Budget Proposal outlines a few major, but positive, changes for small- to medium-sized business owners, including 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).
Finishing shop owners will be able to take advantage of most, if not all, of these proposed enhanced tax incentives.
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 President is proposing 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 (ASC) be increased from 14 to 17 percent, effective January 1, 2012.
In an article titled “Finishing Shops Can Take Government R&D Tax Credits” in the January Issue of Product Finishing, it was shown that finishing shops can qualify for the R&D Tax Credit and benefit handsomely. The new recommendations would increase the benefit for those taking the credit.
Tax Credit for New Jobs and Wage Increases
A tax credit for new-job creation and wage increases is proposed for qualified employers. The credit will be available for just one year, beginning January 1, 2012.
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.
Domestic Production Deduction
Another aspect of the President’s overall plan is to increase U.S. manufacturing. As such, 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.
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. 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.
The budget proposes that those making more than $1 million should pay at least 30 percent of their income in tax. The budget’s introduction says that “[t]he Administration will work to ensure that this rule is implemented in a way that is equitable, including not disadvantaging individuals who make large charitable contributions,” but no specifics have been provided as of yet.
The president is proposing that this Buffet Rule replace the current AMT. 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.
On April 16, 2012, the Senate rejected President Obama’s Buffett Rule legislation. No doubt this will be a very hot topic during the election campaign and if the President is re-elected will be introduced again.
Our hope is that these incentives remain part of the budget when passed. From an R&D Tax Credit perspective, finishing shops 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. 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.
The proposed increase in the DPD will help increase U.S. manufacturing and add new employees needed to support the increased manufacturing.
Lastly, as the economy picks up, the proposed tax credit for new jobs and wage increases will assist finishing shops add new staff and help increase employment for the country while bringing down the unemployment rate. n
Mark Lauber.VP of Marketing, Paradigm Partners, firstname.lastname@example.org or 281-558-7100, ext. 105