Tax Updates

1. Tax Updates

2. Current Legislation Small Business and Infrastructure Jobs Tax Act Stalled in Senate • The House passed HR 4849, the Small Business and Infrastructure Jobs Tax Act, on March 24. The bill is currently in committee in the Senate and will provide $19B in small business tax cuts. The biggest piece of the bill is an additional $7.46B in funding for infrastructure projects through a three-year extension of Build America Bonds. The largest offset is a $7.7B provision that would prevent foreign multinational corporations incorporated in tax haven countries from avoiding tax on income earned in the U.S. by routing their income through structures in which a U.S. subsidiary of the foreign multinational corporation makes a deductible payment to a country with which the U.S. has a tax treaty before ultimately sending these earnings to the tax haven country. This provision has been included in prior legislation so it is likely to appear in another bill if HR 4849 is not passed. The bill also includes a number of other provisions relevant to small business and corresponding revenue offsets, several of which would impact multinational corporations. Temporary Increase in IRC section 179 Expensing • On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act (H.R. 2847), which includes an extension of the temporary increase in IRC section 179 expensing. Specifically, the HIRE Act continues through Dec. 31, 2010 the temporary increase in the amount of property that can be expensed under IRC section 179 of $250,000, with the phase-out limit beginning at $800,000. Generally, IRC section 179 property includes tangible personal property, as well as off-the-shelf computer software (i.e., computer software that is not covered by IRC section 197) placed in service before 2011. The continued increase in the IRC section 179 limits of $250,000 and $800,000 is a temporary measure that currently only applies to 2010. Thus, unless additional legislation is enacted, the limits will fall back to $25,000 and $200,000 for 2011 and subsequent years.

3. Current Legislation Health Reform Legislation On March 21, the House passed the Patient Protection and Affordable Care Act (H.R. 3590) by a vote of 219-212. The bill was originally passed by the Senate on Dec. 24, 2009. President Obama  signed the bill into law on March 24. The House also passed the Health Care and Education Affordability Reconciliation Act (H.R. 4872), which modifies key provisions of H.R. 3590, by a vote of 220-211. H.R. 4872 modifies H.R. 3590 by raising additional revenues from high-income households and reducing the impact that new excise taxes on high-cost health insurance policies will have on middle-class households. After removing two provisions related to Pell Grants, and addressing several other proposed amendments, the Senate sent the reconciliation bill back to the House where it is expected to pass before the two-week Spring recess that begins on March 29. Together, the bills will significantly change the nation's health care system and will cost $940B. To pay for these changes, the bills impose $438B in new taxes and fees on insurers, businesses, and individuals. The remainder of the cost is paid for by cuts in Medicare funding. According to the Congressional Budget Office (CBO), the bills are expected to reduce federal deficits by $143B over the next 10 years. The bills are also expected to expand health insurance coverage to 32 million individuals.

4. Section 179d Requirements that enable taxpayers to claim the deductionThe energy efficient commercial buildings deduction is available for taxpayers who place qualifying property in service in an owned or leased commercial building after Dec. 31, 2005, and before Jan. 1, 2009. The property must be:Installed in any building located in the U.S. and is within the scope of The American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Standard 90.1-2001. Installed as part of the interior lighting systems, the heating, cooling, ventilation and hot water systems or the building envelope. Certified that installation of such property will reduce total annual energy and power costs by 50 percent or more as compared to a reference building that meets the minimum requirements of ASHRAE Standard 90.1-2001. The required 50 percent reduction must be accomplished solely through energy and power cost reductions for the heating, cooling, ventilation, hot water and interior lighting systems. The maximum deduction cannot exceed $1.80 times the square footage of the building, less the aggregate of any prior year deductions taken for the building under Section 179D. If multiple taxpayers install energy efficient commercial building property in the same building, the maximum deduction by all taxpayers cannot exceed the above amount. The square footage of the building includes all conditioned areas with headroom height of 7.5 feet or greater. To compute the percentage reduction in the total annual energy and power costs:Use the performance rating method (PRM). Under the PRM, a reference building is used as a standard to compare to the taxpayer’s building. The reference building must be located in the same climate zone as the taxpayer’s building and is otherwise comparable to the taxpayer?s building except that the interior lighting, heating, cooling, ventilation and hot water systems and building envelope must meet the minimum requirements of ASHRAE Standard 90.1-2001. Determine the percentage reduction in energy and power costs by subtracting the proposed building annual energy and power costs from the reference building annual energy and power costs. Divide the difference by the reference building annual energy and power costs to determine the percentage reduction.

5. Section 179d continued Section 179D requires the taxpayer to receive certification from a qualified individual to ensure compliance of the building with energy savings plans and targets. Section 5.05 of Notice 2006-52 states the qualified individual must meet the following requirements: Can’t be related to the taxpayer within the meaning of Section 45(e)(4). Must be an engineer or contractor who is properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located. Present in writing to the taxpayer that he or she has the requisite qualifications to provide the certification required under Section 4 of the notice or to perform the inspection and testing described in Section 4.05 of the notice. Section 4 of Notice 2006-52 details the items that must be included in the certification to satisfy the requirements of Section 179D(c)(1). A taxpayer isn’t required to attach the certification to the return on which the deduction is taken. However, he or she must maintain sufficient books and records to establish the entitlement to and amount of any deduction claimed. A partial deduction may be taken if the one of the systems allowed under Sec. 179D(c)(1)(C) (i.e., the interior lighting systems, the heating, cooling, ventilation, hot water systems or the building envelope) and subject to certification will reduce the total annual energy and power costs by 16 2/3 percent or more as compared to ASHRAE Standard 90.1-2001. The maximum partial deduction available is up to $0.60 per square footage of the building.

6. Cost Segregation: A Money Saving Opportunity What is Cost Segregation?Historically, construction costs are typically recorded for tax purposes as “building costs” and depreciated over 39 years (commercial property) or 27.5 years (residential rental property). Recent IRS rulings have allowed more flexible interpretations of the terms “building costs,” “land improvements” and “personal property,” presenting an opportunity for the owner to classify some of the costs of construction as land improvements or personal property (depreciated over 15 years or less), rather than building costs. A cost segregation analysis provides the means to identify and quantify assets for faster depreciation. “Land improvements” include costs for such items as parking lots, landscaping, sidewalks, curbs and gutters, which are depreciable over 15 years. “Personal property,” which is depreciable over five or seven years, is often defined by taxpayers as including only portable assets, such as furniture and equipment. However, through the course of several tax court rulings, the IRS now considers personal property to generally include assets that are intrinsic to the business or processes conducted by the business. Therefore, personal property can include carpeting, wall coverings, specialty lighting and custom-built cabinetry. It can also include electrical, mechanical and plumbing systems serving computers, kitchen and laundry equipment or security systems. The resulting accelerated depreciation schedule means greater near-term tax deductions and a substantial increase in near-term cash flow. The bottom line is: due to the time value of money, a company can save tens of thousands of dollars, depending on the size and type of project. 2009 Tax Law ChangesIndustry experts are predicting more favorable depreciation rules to be enacted by the new administration. Case in point, one of the key tax provisions in the recently signed American Recovery and Reinvestment Act of 2009 was the extension of the 50 percent first-year bonus depreciation that had been allowed under the 2008 Economic Stimulus Act. Until Dec. 31, 2009, personal property identified through a cost segregation analysis would qualify for bonus depreciation treatment.

7. Other Issues • Worker’s Classification • S-corporation distributions

8. Director’s Biography Cynthia D. Anderson, CPA Director Summary of Experience Cindy is the director of consulting services in the Raleigh office of RSM McGladrey. Cindy works directly with C-level executives in a variety of industries that include research and development, engineering, medical, architecture, law, construction and marketing where she focuses on financial services including: strategic planning, organizational strategies and financial management. With more than 18 years of diverse management experience, Cindy advises and develops targeted business strategies designed not only to add value, but to deliver positive, long term results to clients. Prior to joining RSM McGladrey, Cindy was the managing partner for CD Anderson, PA. Cindy prides herself on being a successful woman in business as well as her extensive community involvement. She frequently speaks to various organizations on the topics of leadership, strategy and management development. Community Involvement Awards Raleigh Chamber of Commerce Board of Directors Business Leader Magazine’s Top Ten Women Extraordinaire Commercial Real Estate Women, Board of Directors Business Advisory Council’s NC Business Woman of the Year Wake County Economic Development Board Member Triangle Business Journal’s 40 Under 40 North Carolina Women Against MS Committee Member Triangle Business Journal’s Women in Business Award Branch Banking & Trust , Triangle Advisory Board Member