Business Incentive Provisions

2. 6 Chapter Business Incentive Provisions

3. Incentives • Exemption of certain types of income from tax • Increased or accelerated deductions • Credits • Preferential tax rates

4. Popular Tax Incentives • Limited expensing of depreciable assets • Additional first year depreciation • Research activities credit • Renewal Communities, empowerment zones and enterprise communities

5. Popular Tax Incentives • Low income housing credit • New markets credit • Disability access credit • Deduction and credit for alternative-burning fuel vehicles

6. General Business Credit • Encompasses all credits previously listed plus some additional • Limitation: Lesser of • Net regular tax liability minus tentative minimum tax • 25% of regular income tax in excess of $25,000 • Carryovers: • One year back • 20 years forward

7. Alternative Minimum Tax • Theory: Ensure that taxpayers with economic income do not excessively exploit “loopholes” and pay some tax

8. Taxable Income + Net operating loss deduction + AMT preferences ± AMT adjustments - AMT net operating loss deductions Alternative minimum taxable income AMT exemption AMT base X AMT rate Tentative minimum tax - Regular tax Alternative minimum tax AMT Formula

9. AMT Preferences • Interest from private activity municipal bonds • Excess percentage depletion from oil and gas wells • Excess intangible drilling costs • Accelerated depreciation from pre-1987 real property

10. AMT Adjustments • Depreciation • Amortization of mining and exploration costs • Gain or loss on depreciable property • Income from long term contracts • Installment sales • Adjusted current earnings

11. Adjusted Current Earnings Adjustment • 75% of difference between adjusted current earnings and taxable income after AMT adjustments and preferences • Theory: ensure that economic income is taxed • Adjustment can be negative up to the prior positive adjustments in previous years

12. Adjusted Current Earnings • Starting point: taxable income after AMT preferences and adjustments • Items that affect economic income but not taxable income added or subtracted • Includes both permanent and temporary differences

13. Items Affecting Adjusted Current Earnings • Tax exempt interest (other than from private activity bonds) • 70% dividends received deduction • Life insurance proceeds • Increase in cash surrender value of life insurance • Amortization or organization expenses • LIFO reserve • Nondeductible related party losses

14. AMT Net Operating Loss Deduction • Computed taking into account AMT preferences and adjustments • Limited to 90% of income before net operating loss

15. AMT Exemption • $40,000 • Phases out at a rate of 25% of alternative minimum tax base above $150,000 • Completely phased out at alternative minimum base of $310,000

16. AMT Rates and Credits • Flat 20% rate • Only credit is foreign tax credit • Limited to 90% of tentative minimum tax

17. Minimum Tax Credit • Created in any year taxpayer pays AMT • Credit against regular tax • Cannot reduce regular tax below tentative minimum tax • Can be carried forward indefinitely

18. Effect of AMT on Incentives • May reduce effect of accelerated deductions or income exclusions since these may generate preferences of adjustments