Academic journal article Journal of Accountancy

Act 2 for Business Tax Incentives: With the 2010 Tax Relief Act, Congress Puts Businesses in the Spotlight for a Second Time in Three Months

Academic journal article Journal of Accountancy

Act 2 for Business Tax Incentives: With the 2010 Tax Relief Act, Congress Puts Businesses in the Spotlight for a Second Time in Three Months

Article excerpt

EXECUTIVE SUMMARY

* The Small Business Jobs Act and 2010 Tax Relief Act each enhanced and/or extended significant tax benefits for businesses, especially those that can combine certain provisions. These include an extension of the research credit (for 2010 and 2011), longer carryback of the general business credit arising in 2010 for eligible small businesses, and several measures for enhanced expensing and depreciation of business property.

* However, how these provisions are applied and their amount of benefit depend on the tax status of the business. For example, a loss company with a valuation allowance may benefit little from bonus depreciation and higher IRC [section] 179 expensing limits. A profitable company with NOL carryforwards and a valuation allowance can benefit in lower regular income tax and alternative minimum tax, and a profitable company without a valuation allowance will realize the greatest cash flow benefit from accelerating depreciation under the acts' provisions and carrying back general business credits, including the research credit.

* A procedure is available to claim a refund arising from carrybacks more quickly than by filing amended returns--Application for Tentative Refund (Form 1045) and Corporation Application for Tentative Refund (Form 1139).

* Companies that claim the research credit should maintain adequate documentation to support the claim. For tax years beginning in 2010, companies required to file Schedule UTP reporting uncertain tax positions (generally, C corporations with more than $100 million in assets) may be required to include in that reporting any such uncertainty associated with claiming a research credit.

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Enacted in the waning days of the 111th Congress, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act, PL 111-312) was a creature of political compromise.

But the act nonetheless built upon already attractive incentives that had been passed only a few months before in the Small Business Jobs Act of 2010 (PL 111-240). The jobs act, as explained in the JofA article "2010 Small Business Jobs Act: Good for Big Business" (Dec. 2010, page 30), authorized a host of business incentives that, although designated for "small businesses," statistically could apply to 99.9% of all U.S. businesses. The 2010 Tax Relief Act steps in where the Small Business Jobs Act ends, enhancing and extending business incentives, including IRC [section] 179 expensing, bonus depreciation and tax credits.

In this article, we compare the two acts' primary incentive provisions, then analyze the enhanced benefit produced by combining them. Finally, we provide guidance on how three typical company types (a loss company with a valuation allowance; profitable company with an NOL carryforward and valuation allowance; and a profitable company without a valuation allowance) will be affected by the acts from a cash flow and accounting perspective, along with their key financial statement and tax return considerations.

STRATEGICALLY APPLYING THE ACTS' PROVISIONS TOGETHER

The Small Business Jobs Act and the 2010 Tax Relief Act are each significant to businesses on their own merits, as shown in the chart summarizing their important business incentive provisions (see Exhibit 1).

When the provisions of the Small Business Jobs Act and the 2010 Tax Relief Act are strategically merged, the benefits to businesses may be lucrative.

Research credit and five-year carryback. Perhaps the greatest tax savings opportunity from the interplay of the two acts is that of the research credit and the general business credit five-year carryback. The Small Business Jobs Act in IRC [section] 39(a)(4) authorized eligible small businesses to carry back general business credits generated during 2010 to the prior five tax years (2005 to 2009). …

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