Tax Updates, Incentives and Planning to Consider in Tough Economic Times

1. Tax Updates, Incentives and Planning to Consider in Tough Economic Times Michael Hadjiloucas and Lori McMahon December 10, 2008

2. New Federal LegislationNine New Acts in Last 12 Months • The Emergency Economic Stabilization Act (10/3/08) • The Housing and Economic Recovery Act (7/30/08) • The Farm Act (6/18/08) • The Heroes Earnings Assistance and Relief Tax Act (6/17/08) • The Economic Stimulus Act (2/13/08) • The Technical Corrections Act (12/29/07) • The Tax Increase Prevention Act (12/26/07) • The Mortgage Forgiveness Debt Relief Act (12/20/07) • The Energy Independence and Security Act (12/19/07)

3. Economic Stimulus Act of 2008 • Enhanced Section 179 Expense • Expense deduction for certain taxpayers who elect to expense rather than capitalize qualifying 179 property • New or used tangible personal property, including computer software, used in a trade or business • Expense increased to $250,000 and threshold increased to $800,000 for tax years beginning in 2008 • Expense is $133,000 and threshold is $530,000 for 2009

4. Economic Stimulus Act of 2008 • Bonus Depreciation • Write Off 50% of cost in first year • Original use of property must commence with the taxpayer after 12/31/07 • Qualified Property: • MACRS property with recovery period of 20 years or less • Computer software not covered by Sec. 197 • Water utility property • Qualified leasehold improvement property • Binding written contract during 2008 • Construction must begin before year- end

5. Bonus Depreciation Example

6. Emergency Economic Stabilization Act of 2008 • Provides $700 Billion to Treasury for purchase of certain illiquid assets from troubled institutions • Also, one of the largest Tax Acts in recent years • Makes nearly 300 changes to the Internal Revenue Code at a cost of $150 billion including: • A one-year AMT patch; • An extension of a number of business and individual deductions, credits and incentives; • Several energy-related provisions; and • Disaster relief to those impacted by recent hurricanes & flooding

7. Emergency Economic Stabilization Act of 2008 • Business Extenders Through 12/31/09 • Research Tax Credit, including modification to the alternative simplified credit • 15 Year Life for Qualified Leasehold Improvements

8. Emergency Economic Stabilization Act of 2008 • Research Tax Credit Extended through 12/31/09 and Modified • R&E Credit increases cash flow through permanent tax savings that affects a Company’s Effective Tax Rate • Estimated federal benefit approximates 6.5% of qualified research expenses (“QRE’s) incurred plus, many states provide a benefit for R&E credit as well • Any unused credit may be carried back 1 year and carried forward 20 years • For tax years beginning after 12/31/08, taxpayers will no longer be able to elect the Alternative Incremental Credit (used a sliding scale of a lower fixed base % and lower credit rates) • Code Sec. 41 revised to increase the alternative simplified credit from 12% to 14% of QRE’s above 50% of average annual QRE’s in previous 3 years. • Increase applicable to tax years ending on or after 1/1/09 • Election to use this method must be made on a timely filed original return

9. Emergency Economic Stabilization Act of 2008 • 15 Year straight-line depreciation for qualified leasehold and restaurant improvement property • Extended through 2009 • Any improvement to an interior portion of nonresidential real property if various requirements are met • Definition of qualified restaurant property expanded to cover new restaurant buildings as well as improvements if placed in service after 12/31/08 and before 1/1/10 • For restaurant improvements, no longer must be made more than 3 years after the building was placed in service • Bonus depreciation is generally available for property acquired after 12/31/07 and placed in service (“PIS”) before 1/1/09. This PIS deadline was not extended

10. Emergency Economic Stabilization Act of 2008 • Expansion of 15-year Recovery Period for Qualified Retail Improvement Property (QRIP) • QRIP is 15-year property if placed in service after 12/31/08 and before 1/1/10 • Includes any improvement to an interior portion of a building which is nonresidential real property if: • Such portion is open to the general public and is used in the retail T/B of selling tangible personal property to the general public; and • Such improvement is placed in service more than 3 years after the building was first placed in service • Excludes expenses due to enlargement of the building, elevators, escalators, structural components benefiting a common area, or internal structural framework • Bonus depreciation does not apply

11. Emergency Economic Stabilization Act of 2008 • Energy Tax Incentives for Corporations • Section 179D is modified to extend the tax deduction for energy efficient commercial building property for property placed in service after 12/31/05 but before 01/01/2014 • Section 168(m) is added to allow a 50% depreciation deduction allowance for reuse and recycling property used to collect, distribute, or recycle certain materials including scrap, fibers, and metals • Applies to property placed in service after 8/31/08 and having a useful life of at least 5 years

12. Emergency Economic Stabilization Act of 2008 • Other • Modifications to Section 199-Manufacturing Deduction • Section 199(d) is amended to freeze the tax deduction at 6% (reduction of 3%) for gross receipts derived from the sale, exchange or other disposition of oil, gas or any primary products of oil or gas • Other taxpayers use 6% through 2009, and 9% thereafter • Extended the deduction allowable with respect to income attributable to domestic production activities in Puerto Rico • Amended to add definition of W-2 wages for a qualified film and attribution rules added for partnerships and S-Corps for purposes of the domestic production activities deduction

13. New Jersey Credits • Research and Development Credit • Corporate entities allowed a credit for qualified expenditures with respect to research conducted in New Jersey • Credit equals 10% of the excess of the qualified research expense for the fiscal or calendar year over a base amount and 10% of basic research payments • No deduction allowed for R&D expenditures unless those expenditures are also used to compute a federal credit claimed under IRC Sec. 41 • High-tech companies also allowed to sell unused R&D credits and net operating losses

14. New Jersey Credits • Credit for High Technology Companies • Corporate entities allowed a credit, for three successive tax years, equal to 10% of any qualified investment made in a small NJ-based high-technology business • Expenses qualifying for the small high-technology business credit cannot be used for the R&D tax credit • “Qualified investment” is defined as non-refundable at-risk cash investment made by an unrelated entity and transferred to a small NJ-based high-technology business in exchange for stock or interests

15. New Jersey Credits • Manufacturing equipment tax credit • Investments in qualified equipment • Credit equal to 2% of investment credit base of qualified equipment placed in service in the tax year, up to a maximum credit of $1 million • Credit equal to 4% of investment credit base, up to a maximum credit of $1 million, if the taxpayer has 50 or fewer employees and net income of less than $5 million for the year • Taxpayers qualifying for the credit also qualified for the “New Jobs Investment Credit”

16. New Jersey Credits • New Jobs Investment Tax Credit • Corporate entities entitled to a credit against the portion of their corporation business tax liability attributable to their qualified investments in buildings, equipment and capitalized start-up costs • Investment must • Be in any new or expanded business facility in NJ • Result in the creation of a specified number of new jobs • Credit is determined by multiplying the amount of a corporation's “qualified investment” by the its “new jobs factor.” • Large business taxpayers must create a minimum of 50 new jobs at or above the level established as the median compensation for that year to qualify for the minimum credit of 0.5% of their qualified investment

17. New Jersey Credits/NOL Carry Forward • Assorted other credits • Credit for film production expenses • Credit for employing the severely handicapped • Credit for remediation of contaminated sites • HMO Credit for payments to the New Jersey insolvent health maintenance organization assistance association • Ride share tax credit • Credit for purchase of equipment used in effluent treatment • Urban development project employee tax credit • Urban enterprise zone credits • Qualified businesses are entitled either to a one-time enterprise zone employee credit or an enterprise zone investment credit • Extension of NOL carry forward from 7 years to 20 years

18. Pennsylvania Credits • Credit for new jobs • Credit provided for companies that create a minimum of 25 new jobs, or increase number of employees by at least 25% within 3 years • A “new job” for purposes of credit is a full time job for which the average hourly rate (excluding benefits) is at least 150% of the federal minimum wage • Companies must demonstrate ability to create the jobs, development or deployment in leading technologies, financial stability (including the project's viability), and intent to maintain operations in the Commonwealth for 5 years • Credit is $1,000 for each new job created up to a maximum credit as specified in the commitment

19. Pennsylvania Credits • Keystone Opportunity Zone/Innovation Zones • To provide relief to economically distressed urban and rural areas, PA has authorized the creation of Keystone Opportunity Zones (KOZs), Keystone Opportunity Expansion Zones (KOEZs), and Keystone Opportunity Improvement Zones (KOIZs) • Development in the KOZs, KOEZs and KOIZs is enhanced through both state and local tax incentives, making the areas virtually tax-free zones • Qualifying taxpayers in designated KOZs entitled to exemptions, deductions and credits for up to 15 years, 1/1/1999-12/31/2013

20. Pennsylvania Credits • Research and Development Credit • Except for small businesses (see below), credit is equal to 10% of the amount by which the corporation's qualified R&D expenses exceed the taxpayer's PA base amount • The PA base amount is calculated using the same formula provided for calculating federal base amounts under IRC §41(c) • Qualified taxpayer that is a small business may apply for a R&D credit equal to 20% of the amount by which the corporation's qualified R&D expenses exceed taxpayer's PA base amount.

21. Pennsylvania Credits • Assorted other credits • Manufacturing credit • Coal removal and ultraclean fuels credit • Credit for contributions to qualified educational improvement organizations • Credit for contributions to the mortgage emergency assistance fund • Credit for providing leave for organ donation • Employment incentive payment credit • Film production credit • Neighborhood assistance credit • Resource enhancement and protection credit • Strategic development area credits • Waste tire recycling credit

22. Other Items to Consider • Take Advantage of Section 179 and Bonus Depreciation • Cost Segregation Study • Section 199 Study • Accounting Method Review/Changes in Accounting Method • Accelerate or defer income? • Accelerate or defer expenses? • Inventory accounting • Write Off Bad Debts/Sale of A/R • State and Local Nexus Review • Sales Tax Review • International Tax Review • Transfer Pricing Study

23. Other Items to Consider • If Corporation expects to report a net operating loss (“NOL”) for the year and taxes were paid in the past one or two years, consider carrying back the NOL • Losses not used in the carry-back years are permitted to be carried forward for 20 years • C Corps – Apply for a Quick Refund • Ability to quickly recover some or all estimated tax payments made during the year • Filed after close of tax year but before the earlier of unextended due date of corporate return (3/15 for calendar year Co’s) or date the Corporation files its return • Corporations expecting losses in a year originally thought to be profitable could consider triggering gains on appreciated assets that are no longer needed • Be careful of special treatment for capital losses

24. Potential Obama Tax Plan • Businesses • Establish $3,000 Credit for Each Full-Time Employee Added to the Workforce • 50% Health Tax Credit • Limit Use of Foreign Tax Credits for Businesses Who Move Jobs Outside U.S. • Extend $250,000 Section 179 Expense Through 2009 • Make R&D Credit Permanent

25. Questions? “The material contained in this presentation is for general information and should not be acted upon without prior professional consultation.”