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Wisconsin Special Tax District Creation Laws - PowerPoint

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Wisconsin Special Tax District Creation Laws - PowerPoint Powered By Docstoc
					Overview of the Domestic
Production Activities
Deduction (Section 199) &
Other 2007 Tax Planning
Issues

Presented By:
Jason A. Flattum, CPA, MBT
Minneapolis Manufacturing Group
Phone: (612) 376-4687
Email: jflattum@larsonallen.com




                                  1
Table of Contents
1. SECTION 199 INFORMATION:
  •   General Overview
  •   Wage Limitation
  •   Domestic Production Gross Receipts
  •   Costs Allocable to DPGR
  •   Application of 199 to pass-thru entities
  •   Expanded Affiliated Groups
  •   Example


2. OTHER 2007 TAX PLANNING ISSUES

                                                 2
Terms Used
• DPGR = Domestic Production Gross Receipts
• QPP = Qualified Production Property
• QPAD = Qualified Production Activities Deduction
• CGS = Cost of Goods Sold
• QPAI = Qualified Production Activities Income
• MPGE = Manufactured, Produced, Grown or Extracted
• EAG = Expanded Affiliated Group
• NOL = Net Operating Loss Carryover or Carryback
• POC = Percentage of Completion Method
• W-2 Wages = Special Definition of Amounts Paid to
  Shareholder/Employees and Common Law Employees
• NAICS = North American Industrial Classification
  System
• Item = Property offered for sale to customers meeting
  all the requirements of Sec. 199

                                                          3
Industries Benefiting
•   Aerospace & Defense
•   Agriculture
•   Automotive & Other Transport Manufacturing
•   Architectural and Engineering Services (real property)
•   Chemicals
•   Consumer Products
•   Construction
•   Electronics
•   Energy & Utility Production
•   Media (Film, Recording, Publishing)
•   Metals & Mining
•   Food & Beverage Processing
•   High-Technology
•   Industrial Manufacturing
•   Pharmaceutical/Health Care
•   Software Development


                                                             4
Section 199 History and Guidance

• American Jobs Creation Act
   – Incentive for U.S. job creation in manufacturing.
   – Signed into law October 22, 2004.
   – Includes a deduction for certain domestic production activities.
   – Effective for taxable years beginning after December 31, 2004.
   – Meant to replace the extraterritorial income (“ETI”) regime.
• Notice 2005-14
   – Treasury Department and IRS issued interim guidance on
     January 19, 2005 on which taxpayers can rely until proposed
     regulation are issued.
• Final Regulations were issued on May 25, 2006 (Effective for tax
  years beginning on and after June 1, 2006.



                                                                        5
Section 199 Calculation:

             Allowable Deduction
                     Equals
                 Lesser of:
          QPAI or Taxable Income*
                 (*T.I After NOLs)
                  Multiplied by
                Deduction Rate
Allowable deduction may not exceed 50% of W-2
                 Wages for EAG


                                                6
Phase-In of Deduction Rate
     Taxable Year            Deduction Rate

         2005                     3%

         2006                     3%

         2007                     6%

         2008                     6%

         2009                     6%

     2010 and later               9%

                                              7
Example – Deduction Calculation



                                          Taxable
                                          Income    QPAI

    Lower of:                               $250M    $200M

    X Deduction Rate (Rate for 07)                    * 6%

    Tentative Deduction                               $12M

    Total Wages                             $150M

    Wage Limitation – 50%                             $75M
    Deduction Amount (Not to exceed W.L
    amount)                                           $12M


                                                             8
Qualified Production Activity Income (“QPAI”)
• QPAI is defined as:
   – The taxpayer’s Domestic Production Gross Receipts over,
   – The sum of:
      ◊ The cost of goods sold that are allocable to such receipts,
      ◊ Other deductions, expenses, or losses directly allocable to
         such receipts, and,
           • Includes section 174 expenses, selling, marketing,
             advertising and warranty, policymaking costs, interest,
             losses and charitable contributions
      ◊ A ratable portion of other deductions, expense, and losses
         that are not directly allocable to such receipts or another
         class of income.
• Determined on an “item by item” basis.
• Calculation is made for the expanded affiliated group.



                                                                       9
Regulation Example: Item
• X manufactures leather and rubber shoe soles in
  the U.S. X imports shoe uppers, which are the
  parts above the sole. X manufactures shoes for
  sale by sewing or otherwise attaching the soles
  to the imported uppers. X must treat the sole as
  the item if the sole meets the requirements of
  Section199.




                                                     10
Example 2: Item
• Y manufactures toy cars in the U.S. Y also
  purchases cars that were manufactured by
  unrelated parties. In addition to packaging cars
  individually, Y also packages some in sets of
  three. The cars in the set of three may have
  been either manufactured or purchased. If the
  three-car package does not meet Sec. 199, Y
  must treat a toy car in the three-car package as
  the item. (Shrinkback Rule)




                                                     11
Domestic Production Gross Receipts (“DPGR”)
Under Section 199(c)(4)(A):
• The term domestic production gross receipts’ means the gross
  receipts of the taxpayer which are derived from any lease, rental,
  license, sale, exchange, or other disposition of –
    – Qualifying production property which was manufactured,
      produced, grown, or extracted by the taxpayer in whole or in
      significant part within the United States,
    – Any qualified film produced by the taxpayer, or
    – Electricity, natural gas, or potable water produced by the
      taxpayer in the United States,
    – Construction performed in the United States, or
    – Engineering or architectural services performed in the United
      States for construction projects in the United States.
• Gross receipts is defined under 1.448-1T(f)(2)(iv)(A)




                                                                       12
Allocation between DPGR and Non-DPGR
• Allocation may include single or group of sales.
• Allocation examples:
  – Embedded services in software maint. contract
  – Allocation of total G.R. between resale and production
  – Sales proceeds related to land
• De minimis exceptions (Less than 5% is non-
  DPGR)




                                                             13
Qualifying Production Property

• The term “Qualifying Production Property” (“QPP”)
  includes tangible personal property, software, and sound
  recordings (as that term is defined in Sec. 168(f)(4)).
   – Tangible personal property includes any property
     except land, buildings and structural components of
     buildings (as defined by Sec.1.48-1(c)).
   – Local laws do not control in determining whether an
     item is tangible personal property.




                                                             14
Example – QPAI Calculation

                                               QPAI

   DPGR                                    $      5,000

   Less: COGS                                    ($3,000)

   Less: Direct Expenses*                        ($1,000)

   Less: Allocable Indirects*                     ($800)

   QPAI                                    $          200
   (*Allocation based upon Simplified or
   Sect 861 reasonable method guidance)



                                                            15
Example: Benefit Calculation with NOL Carryforward:
• X, a US corporation, engages in production activities that
  generate QPAI and taxable income of $600 in 2010.
  During 2010, X incurs W-2 wages of $300. X has a NOL
  carryover to 2010 of $500. X’s deduction is $9 (.09 x
  (lesser of QPAI of $600 and taxable income of $100))
  subject to the wage limitation of $150 (50% x $300).

• Same as above, but the NOL carryover is $800. QPAI
  deduction is $0 (.09 x (lesser of QPAI of $600 and
  taxable income of $0)). X’s NOL carryover to 2011 is
  $200.




                                                               16
Understanding the TI/QPAI Gap

           • Profitable check-the-box entity
           • Profitable services
           • Profitable sales of QPP failing
             US content
           • Unfavorable Sec. 481(a)
           • Mismatch of revenue and
             related expense
           • Lack of “benefits and burdens”




                                               17
Manufactured, Produced, Grown, or Extracted
(“MPGE”)
MPGE includes activities relating to:
• “Manufacturing, producing, growing, extracting, installing, developing,
  improving, and creating….processing, manipulating, refining, or changing
  the form of an article”.
• “Assembling two or more articles”. Facts and circumstances assessment
  issues with “significant part” requirement and whether U.S. activities are
  “substantial in nature”.
• Developing computer software: “Means any program or routine or any
  sequence of machine-readable code that is designed to cause a computer
  to perform a desired function or set of functions.” However, must look to
  delivery mechanism (i.e., internet access or online services).
• “Storage, handling or other processing activities (other than transportation
  activities) within the United States related to the sale, exchange or other
  disposition of agricultural product,…”
• Consistency is required with 263A. A taxpayer that has MPGE QPP for the
  taxable year should treat itself as a producer under Section 263A with
  respect to the QPP for the taxable year unless the taxpayer is not subject to
  Section 263A.



                                                                                  18
“In Whole or In Significant Part”
• QPP must be MPGE for “in whole or significant part” by the taxpayer
  in the U.S.
    – Requirement may satisfied if the MPGE activity in the U.S. with respect
      to the QPP is substantial in nature.
    – Notice includes a safe harbor when the conversion costs (i.e., labor and
      overhead costs) related to the MPGE property are 20% or more of the
      property’s total cost of goods.
• Packaging, repackaging, labeling, and minor assembly operations
  are not taken into account when computing the in significant part
  test.
• Design and development activities do not constitute manufacturing
  activities for purposes of the “significant part” test for tangible
  personal property.
• Term U.S. only includes 50 states and the District of Columbia




                                                                                 19
MPGE

• Taxpayer must have the benefits and burdens of
  ownership of the QPP under Federal income tax
  principles during the period the MPGE activity occurs

• Taxpayer that has MPGE QPP for the taxable year
  should treat itself as a producer under section 263A with
  respect to the QPP for the taxable year unless the
  taxpayer is not subject to section 263A. (Change in
  Accounting Method)




                                                              20
MPGE
• Only one taxpayer may claim the deduction
  under Reg. Sec 1.199-1(a) with respect to any
  qualifying activity performed in connection with
  the same QPP.

• The taxpayer that has the benefits and burdens
  of ownership of the property is treated as
  engaging in the qualifying activity.




                                                     21
Example: Manufacturing Benefits and Burdens
• X designs and engineers machines that it sells
  to customers. X contracts with Y, an unrelated
  taxpayer, for the manufacture of the machines.
  X has the benefits and burdens of ownership of
  the machines under Federal income tax
  principles during the period the manufacturing
  occurs. X is treated as the manufacturer of the
  machines.




                                                    22
MPGE
• Safe Harbor:
   – Taxpayer will be treated as having MPGE QPP in
     whole or in significant part within the United States if,
     in connection with QPP, conversion costs (direct labor
     and related factory burden) of such taxpayer to MPGE
     the QPP within the United States account for 20
     percent or more of the taxpayer’s CGS of the QPP.

• United States does not include possessions and
  territories of the United States




                                                                 23
Basic Computational Rules
• QPAI is the sum of all qualifying activities, whether profitable or a
  loss

• All costs need to be allocated between revenue streams that are
  QPAI streams and those that are not

• The rules provides for three methods for allocating and apportioning
  deductions:
   – Two methods apply to small taxpayers
   – The third method applies the rules provided by Sec.1.861.

• All items imported shall be treated as being acquired by purchase at
  not less than value upon entering the US

• Members of a 50%** affiliated group shall make one Sec 199
  computation, and the deduction is then allocated in proportion to
  each member’s respective amount of QPAI (if any)

                                                                          24
Appropriate Allocation Methods
• Factors taken into consideration in determining a reasonable
  allocation method:
   – Whether the taxpayer is using the most accurate information
      available;
   – The relationship between the gross receipts and the base
      chosen;
   – The accuracy of the method chosen as compared with other
      possible methods;
   – Whether the method is used by the taxpayer for internal
      management or other business purposes;
   – Whether the method is used for other federal, state, or foreign
      income tax purposes;
   – The time, burden, and cost of using various methods; and
   – Whether the taxpayer applies the method consistently from year
      to year.




                                                                       25
Consistency with Sec 263A
• A taxpayer reporting QPP for the taxable year should
  treat itself as a producer under Sec 263A with respect to
  the QPP for the taxable year unless the taxpayer is not
  subject to Sec 263A under the IRC, regulations, or other
  published guidance.

• A taxpayer that is currently not properly accounting for its
  production activities may change its method of
  accounting to comply with the producer requirements of
  Sec 263A.




                                                                 26
“By the Taxpayer”
• Requirement that the property be MPGE “by the
  taxpayer” mean that only one party may claim
  the deduction under Section 199.
• Notice provides that only the taxpayer with the
  “benefits and burdens” of ownership of the
  tangible personal property during manufacturing
  is treated as the manufacturer.




                                                    27
“By the Taxpayer”
• If one taxpayer performs manufacturing activities
  for another taxpayer, only the taxpayer with the
  “benefits and burdens of ownership” of the
  manufactured property during the manufacturing
  process will be treated as the manufacturer.
  – Ownership of raw materials
  – Work in process




                                                      28
De Minimis rule
• All of a taxpayer’s gross receipts may be treated
  as DPGR if less than 5 percent of the taxpayer’s
  total gross receipts are non-DPGR
• In the case of an owner of a pass-thru entity, the
  de minimis rule is considered at the owner level




                                                       29
Timing Rules for QPAI
• If a taxpayer recognizes and reports gross receipts that
  the taxpayer identifies as DPGR, then the taxpayer must
  treat the CGS and deductions related to such receipts as
  relating to DPGR.
• If a taxpayer recognizes and reports CGS or deductions
  and identifies them as relating to DPGR, then the
  taxpayer must treat the gross receipts related to the
  CGS or deductions as relating to DPGR.




                                                             30
Embedded Services
• In the first four exceptions, the following must be
  met:
   – Must be in the normal course of taxpayer’s business
   – Price for service is not separately stated
   – Service is neither separately offered by the taxpayer
     nor separately bargained for with the customer.




                                                             31
Example: Online Services and DPGR
• X produces and prints a newspaper in the U.S. which it
  sells to customers. X also has an online version of the
  newspaper available only to subscribers. The gross
  receipts derived from the sale of the newspaper X
  produces and prints qualify as DPGR. Because the
  gross receipts from the online newspaper subscription
  are not derived from the lease, rental, license, sale,
  exchange, or other disposition of computer software, the
  gross receipts are non-DPGR.




                                                             32
Other Deductions Allocable
• Section 861 Method
• Simplified Deduction Method
• Small Business Simplified Overall Method




                                             33
Simplified Deduction Method
• Available to taxpayers with average annual
  gross receipts of $25,000,000 or less, or total
  assets at the end of the taxable year of
  $10,000,000 or less.
• Taxpayer’s deductions are ratably apportioned
  between DPGR and non-DPGR based on
  relative gross receipts.
• Does not apply to CGS.




                                                    34
Small Business Simplified Overall Method
• Available to “Qualifying Small Taxpayers”
  – Has both average annual gross receipts of
    $5,000,000 or less and total costs for the current
    taxable year of $5,000,000 or less;
  – Is engaged in the trade or business of farming that is
    not required to use the accrual method of accounting
  – Is eligible to use the cash method as provided in Rev.
    Proc. 2002-28.




                                                             35
Small Business Simplified Overall Method (con’t)
• Taxpayer’s total costs for the current taxable
  year are apportioned between DPGR and other
  receipts based on relative gross receipts.
• Includes CGS and other deductions.




                                                   36
Application of Sec199 to Pass-Thru Entities
• The deduction allowable under Sec199 is
  determined at the shareholder or partner level.
  As a result, each shareholder and partner must
  compute its deduction separately.
• QPAI is allocated to the shareholder or partner
  level even if it is negative.
• To determine the Sec199 deduction, the
  shareholder or partner must aggregate its pro
  rata share of items.
• Need to consider At-Risk, Passive Loss and any
  other provisions of the IRC.



                                                    37
Application of Sec199 to Pass-Thru Entities (con’t)
• For 2005 & 2006: Pass through wages were
  limited to 2 times the 3% of net qualifying
  income.

• For 2007: Effective for tax years beginning after
  5-17-06, only wages attributable to DPGR
  activities are eligible to pass-through.




                                                      38
              Expanded Affiliated Group:
                General Rules (“EAG”)
• All members of an EAG are treated as a single
  corporation

• Aggregate each member’s taxable income, or loss,
  QPAI, and W-2 wages.

• A single QPAD is computed for members of the EAG

• EAG QPAD is allocated to group members based on
  each member’s QPAI.

• In addition, attribution of “activity” treats group members
  as a single corporation when determining whether a
  member is engaged in qualified activities.
                                                                39
Expanded Affiliated Group (“EAG”)
• No joint ventures or partnership are included in
  EAG. However special rule for partnerships
  which are 100% owned by members of EAG.




                                                     40
A. EXPANDED AFFILIATED GROUP
   (EAG) SEC. 199 (d)(4)
FOR THIS APPORTIONMENT PURPOSES, IF A
 MEMBER HAS NEGATIVE QPAI, THE
 ALLOCATION IS 0 TO THE MEMBER.
     EXAMPLE: ALLOCATION OF $300 NET @ 3% = $9


     MEMBER A      QPAI          200 X %50 =     4.5
     MEMBER B      QPAI          200 X %50 =     4.5
     MEMBER C      QPAI          (100)     =       0
                                 300 @ 3% = 9




                                                       41
A. EXPANDED AFFILIATED GROUP
   (EAG) SEC. 199 (d)(4)
1.   UNDER SOME CIRCUMSTANCES THE ALLOCATION COULD
     EXCEED TAXABLE INCOME IF A NET OPERATIONG LOSS
     DEDUCTION IS CREATED.

     MEMBER A        QPAI   200   TAXABLE 200
     MEMBER B        QPAI   200   TAXABLE 200
     MEMBER C        QPAI   100   TAXABLE 0

     APPORTIONMENT: 400 QUALIFYING QPAI:

     A 200/500 X     400    =     160
     B 200/500 X     400    =     160
     C 100/500 X     400    =     80




                                                      42
Impact on State Filings
•   State tax treatment is varied.
•   Minnesota does not allow the deduction
•   Wisconsin allows the deduction
•   North Dakota does not allow the deduction.
•   Illinois allows the deduction.
•   Michigan allows the deduction.




                                                 43
Impact on financial statements
•   Permanent tax adjustment item
•   Reduced effective tax rate (1%- 3%)
•   Increased earnings per share.
•   Increased cash flow.




                                          44
EXAMPLE- STEPS TO COMPUTE PRODUCTION
DEDUCTION
STEP 1:
DETERMINE COMPANY DPGR:

•   COMPANY AS TOTAL SALES OF $14,000,000.
•   DETERMINED THAT $4,000,000 OF SALES RELATED TO CHINA
    PRODUCED PARTS.
•   COMPANY HAS SERVICE REVENUE RELATED TO WARRANTY.
        -WARRANTY REVENUE IS <5% OF TOATAL SALES.
        -OTHER EMBEDDED SERVICE REQUIREMENTS ARE
         SATISFIED
    NO CONTRACTED GOODS, SO COMPANY HAS BENEFITS AND
    BURDENS OF OWNERSHIP.
•   NO GR DERIVED FROM DISPOSITION OF PROPERTY OUTSIDE
    OF NORMAL COURSE OF BUSINESS.
    DPGR=$10,000,000




                                                           45
EXAMPLE- STEPS TO COMPUTE PRODUCTION
DEDUCTION
STEP 2:
    ◊ COMPANY’S PRIOR THREE-YEAR AVERAGE GROSS
      RECEIPTS ARE >$5M; THUS, CANNOT USE SIMPLIFIED
      METHOD FOR ALLOCATED COGS.
    ◊ COMPANY DETERMINED DOMESTIS PRODUCTION
      COST ALLOCATION BASED ON SECTION 263(A) UNICAP
      METHODOLOGY.
    ◊ COST FOR CHINA PRODUCTS ARE $1.8M
    DPCOG = $5.2M




                                                       46
EXAMPLE- STEPS TO COMPUTE PRODUCTION
DEDUCTION

 STEP 3:
 DETERMINE COMPANY ALLOCATION OF OTHER COST
      ◊ COMPANY’S PRIOR THREE-YEAR ARE <$25M; THUS, COMPANY
        CAN USE SIMPLIFIED METHOD FOR ALLOCATING OTHER COSTS.
      ◊ COMPANY MAY USE SECTION 861 METHOD.
      ◊ SECTION 861 MEHOD PROVIDES LOWER EXPENSE ALLOCATION.
           • SIMPLIFIED METHOD (71% OF TOTAL OTHER COST) = $2,840,000.
           SECTION 861 METHOD ($100,000 OF DIRECT OTHER COSTS + 69% OF
             REMAINING SG&A COSTS) = $2,791,000.
           US ALLOCATION OF OTHER COSTS = $2,791,000




                                                                         47
EXAMPLE- STEPS TO COMPUTE PRODUCTION
DEDUCTION

STEP 4:
DETERMINE IF LIMITATIONS APPLY
    ◊ TAXABLE INCOME LIMITATION
       - TAXABLE INCOME AFTER NOL>DPAI
       - $3,050,000>$2,049,000
       NO LIMITATION
    •W-2 LIMITATION
       -50% OF W-2 > DPAD
       -$2,250,000 > $61,470
       NO LIMITATION
       DPAD = $61,470 WILL REDUCE TAXABLE INCOME
                                                   48
                                                                                                          For taxable year beginning 01/01/05
                                                                                         All Activities                                     U.S. Production
                                                                                          Together                                          Activities Only


Gross Receipts (GR):                                                                         14,000,000

             Domestic Production Gross Recipts (DPGR)                                                                 10,000,000                 10,000,000
             GR attributable to non domestic production                                                                4,000,000

Cost of Goods Sold (COGS):                                                                    7,000,000
                                                                                                                                                  5,200,000
             COGS attributable to domestic production                                                                   5,200,000
             COGS attributable to non domestic production                                                               1,800,000

Gross Margin                                                                                  7,000,000                                           4,800,000


Selling, General & Administrative (SG&A) Expenses                                             4,000,000

             SG&A expenses directly allocable to U.S. production                                                         100,000                    100,000

             Remaining SG&A expenses                                                          3,900,000                      69%                  2,691,000

             Allocation percentage - Based On
             Relative gross receipts (DPGR/Total GR)                                                                         71%
             Relative cost of goods sold (Actual COGS to U.S./total actual COGS)                                             74%
             Relative gross margin (Actual U.S. gross margin/total gross margin)                                             69%
             Any other reasonable method                                                                                      N/A
             Allocation percentage (for indirect SG&A expenses)                                     69%
             Total allocable SG&A expenses                                                                                                        2,791,000

Unadjusted Net Income                                                                         3,000,000                                           2,009,000

Book to Tax Differences                                                                           50,000                                             40,000


Taxable Income/Qualified Production Activities Income (QPAI)                       (A)        3,050,000                               (B)         2,049,000

Smallest of (A) or (B)                                                                                                                            2,049,000

Qualified Production Activities Deduction (QPAD) before W-2 Limitation (3% of 2,049,000)                                              (C)            61,470

Total W-2 Wages Per Payroll Tax Returns                                                                                 4,500,000     (D)         2,250,000

QPAD Equals the Lesser of (C) or (D)                                                                                                                 61,470

                                                                                                                                                       49
          Other Tax Planning Opportunities:
               Section 179 Expensing

Tax Yr.      Sec. 179     Asset Addition
Beginning In    Limit      Phaseout Range
    2006      $108,000      $430,000 - 538,000
    2007      $125,000      $500,000 - 625,000
• Other Section 179 Issues:
   –   Extended revocation period
   –   Revoking to avoid wasted Sec. 179 allocations
   –   Late or amended Sec. 179 election
   –   Amended return to change Sec. 179 deduction on a
       particular asset

                                                          50
  Other Tax Planning Opportunities: Alternative
       Simplified Research Credit Method


Excess current R&D                    Credit %
• Current R&D > 50% of ave.
• R&D of prior 3 yrs.                  12%
• No R&D for prior 3 yrs.               6%
  – Eff. as an elective method for FYE > 12-31-06
  – Pro-rate old & new FYE ’06-’07




                                                    51
Other Tax Planning Opportunities: Alternative
     Simplified Research Credit Method



                                        Research
                                        credit at
                                        12%

      Three-year average


                           50%
                                        No research
                                        credit

             QREs                QREs
      Year   Year   Year         Year
       1      2       3           4




                                                      52
Other Tax Planning Opportunities: Jobs Tax Credit
& Work Opportunity Credits (WOTC)
• Work Opportunity Tax Credit (WOTC) extended
  thru ’07
• Welfare-to-work credit becomes part of WOTC
  after ’06
  – Long-term family assistance recipients now $9,000
    credit, not $8,500 (40% of < $10,000 1st yr. wages +
    50% of < $10,000 2nd yr. wages)




                                                           53
Other Tax Planning Opportunities: Jobs Tax Credit
& Work Opportunity Credits (WOTC)
Other modifications eff. in ’07:
• Qualified food stamp recipients must be under
  age 40 (not under age 25)
• Ex-felons no longer must be members of a low-
  income family
• Post-hire Form 8850 submission permitted up to
  28 days after start of work, not 21 days
• Veterans and vocational rehab groups expanded
• High risk youth category now includes:
  – Employees age 18 < 40
  – Includes rural renewal county residents (based on
    location of residence, not employment location)
                                                        54
 Other Tax Planning Opportunities: Tax Credit for
            Propane Used in Forklifts

• New 50¢ per gallon tax credit for propane used
  in a motor vehicle by a business, effective 10-1-
  06
  – Applies to forklifts used in plants & warehouses
  – Forklift operator, not propane vendor, receives credit
• Taxpayer must register on Form 637
  – Credit claimed on Form 4136 attached to income tax
    return




                                                             55
Other Tax Planning Opportunities: LIFO
• Currently Manufacturing companies with high inventory
  balances of steel, iron and other metals and petroleum
  and petroleum based chemicals will see largest short
  term benefits

• Earliest goods purchased remain in ending inventory

• Goods deemed sold are those acquired last.

• LIFO arguably matches current costs with current
  revenue

• lPlC (inventory price index computation) uses the widely
  published CPI and PPI indexes to determine inflation
  adjustment for LIFO

                                                             56
Other Tax Planning Opportunities: LIFO
• Benefits of LIFO:
  – Tax savings are achieved if costs are rising
     ◊ LIFO Reserve
  – Matches current (higher cost) to COGS
  – Tax deferral continues if inventory is not depleted
  – For many businesses, the published indexes provide
    more tax benefit and simplicity than internally
    developed indexes




                                                          57
Other Tax Planning Opportunities: LIFO
• Disadvantages of LIFO
   – Complexity of calculation
       ◊ Although IPIC Method relieved some of the complexities
   – Financial Statement and Tax Reporting Consistency
     Requirement
       ◊ Usually resulting in lower profits on the income statement and lower
         inventory value on balance sheet
   – Distorts profits if LIFO layer is invaded
• LIFO Methods:
   – Specific Goods
   – Dollar Value (Double Extension & Link-Chain)
   – Inventory Price Index Computation (IPIC) Method


• Automatic change to convert to LIFO or change from one
  LIFO method to another
                                                                                58
Other Tax Planning Opportunities: Unicap
• Automatic Changes under Rev Proc 2002-9
  –   Simplified Production
  –   Simplified Resale
  –   Burden Rate
  –   Simplified Service Cost /Mixed Service Cost Alloc.
      Ratio Method
• Historic Absorption Ratio Election
• LCM and Subnormal Goods Exclusions
• Specific Cost Allocation Opportunities
  – Pick, Pack and Ship Exemptions
  – Idle Capacity Exemptions
  – 90/10 and 1/3 and 2/3 Allocation for Purchasing Costs

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                               Questions

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This notice is required by IRS Circular 230, which regulates written communications
about federal tax matters between tax advisors and their clients. To the extent the
preceding correspondence and or any attachment is a written tax advice communication,
it is not a full "covered opinion." Accordingly, this advice is not intended and cannot be
used for the purpose of avoiding penalties that may be imposed by the IRS.


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Description: Wisconsin Special Tax District Creation Laws document sample