Summary of Federal and PA Tax Credits To increase awareness and improve economic growth, we have summarized many tax credits available to Pennsylvania businesses.  Our research has shown that many Pennsylvania businesses do not take advantage of Federal and Pennsylvania tax credits.  These credits are not necessarily all-inclusive nor are they necessarily available to all businesses; we can help you determine your eligibility for some or all of them.  Where such credits were available but were not properly claimed, we will be glad to assist you in amending the tax returns to obtain the maximum refund possible.   Federal Business Tax Credits   The general business credit is composed of several different credits, the main one being the investment tax credit.  The investment tax credit, as it applies to tax years beginning after October 22, 2004, is comprised of the sum of 1) the rehabilitation credit, 2) the energy credit, and after August 8, 2005, 3) the qualifying advance coal project and qualifying gasification project credits.  For tax years ending on or prior to October 22, 2004, the investment tax credit also included the reforestation credit, which encouraged reforestation by planting and seeding trees in connection with the commercial harvesting of timber.  Specifics on these credits follow:   Rehabilitation credit – encourages the rehabilitation of old buildings and specifically-identified and certified historical structures; credit is 10% of qualified rehabilitation expenditures for old buildings, 20% for certified historical structures.  Claimed on IRS Form 3468; supporting statement must be attached. Energy credit - encourages the use of solar and geothermal power to produce energy. The credit is generally calculated at 10% to 30% of the basis of each property placed in service during 2006 and 2007, for 1) qualified fuel cell property; 2) equipment using solar energy property to generate electricity to heat or cool; and 3) equipment using fiber-optic distributed sunlight to illuminate a structure’s interior.  It does not apply to the portion of the basis of any property on which the rehabilitation credit was claimed.  Claimed on Form 3468.  For additional information, see the Summary of the $500 Energy Tax Credit available as part of the Energy Policy Act of 2005 (EPAct 2005), which is provided as a separate enclosure to this letter. Qualifying Advanced Coal Project credit – after August 8, 2005, available to integrated gasification combined cycle (IGCC) projects for 20% of qualified investments; reduced to 15% for other advanced coal-based projects. Qualifying Gasification Project credit – after August 8, 2005, available for 20% of qualified investments, which is a project using gasification technology, will be carried out by an eligible entity and is eligible for the credit.  Includes any process that converts a solid or liquid from coal, petroleum residue, biomass or other material that is recovered for energy or feedstock value into a synthesis gas for direct use or subsequent chemical or physical conversion. Reforestation credit – for expenditures before October 22, 2004, 10% of the amortizable basis of qualified timber property placed in service; has been replaced with an elective deduction of up to $10,000, and 84-month amortization of the remaining expenditures.   Other Federal tax credits that are part of the general business credit   Work Opportunity credit – encourages employers to hire individuals from targeted groups; 40% of up to $6,000 in qualified first-year wages paid to eligible individuals who begin work after 9/30/96 and before 1/1/06. Welfare-to-Work credit – incentive to employers to hire individuals who have been recipients of long-term family assistance; 35% of qualified first-year and 50% of qualified second-year wages, for work began after 12/31/97 and before 1/1/05.  Alcohol Fuels credit – comprises the sum of 1) the alcohol mixture credit, 2) the alcohol credit and, if applicable, 3) the small ethanol producer credit; 60 cents/gallon of alcohol, sold or produced by the taxpayer in a trade or business for the first 2 credits; 10 cents/gallon of qualified ethanol fuel production in a trade or business. Research credit – encourages yearly increases in research activities in carrying on a trade or business; 20% of amount of qualified research expenses in excess of that year’s base amount, or 20% of basic research payments to qualified organizations (e.g., universities and non-profit scientific research organizations); expired 12/31/05. Low-Income Housing credit – encourages the provision of housing for low-income individuals; based on the applicable percentage for the type of housing project multiplied by the qualified basis allocable to the low-income units in each qualified building; appropriate percentage issued by IRS each month as part of the Applicable Federal Rates (AFRs). Enhanced Oil Recovery credit – encourages recovery of crude oil; credit is 15% of costs that are an integral part of a qualified enhanced oil recovery project, including intangible drilling and development costs and qualified tertiary injectant expenses. Disabled Access credit – encourages small businesses (<$1 million in gross receipts or <30 full-time employees) to make their business accessible to disabled persons; credit is 50% of eligible access expenditures of at least $250 up to $10,250; typically amounts paid or incurred to comply with the American Disabilities Act (ADA). Renewable Electricity Production credit – encourages electricity conservation and renewal; credit is 1.5 cents/kilowatt hours of electricity produced by the taxpayer from qualified energy resources at a qualified facility during a 10-year period beginning on the in-service date, and sold to an unrelated person during the tax year. Empowerment Zone credit – encourages employment of “qualified zone employees” who perform services and live within an empowerment zone; credit is 20% of “qualified zone wages” up to $15,000, for wages that have not already been claimed for the Work Opportunity credit summarized above. Renewal Community Employment credit – similar to the Empowerment Zone credit with respect to wages paid or incurred after 12/31/01; credit is 15% of wages up to $10,000; qualified renewal community is treated as an empowerment zone. Employer Social Security Tax credit (relating to employees’ cash tips) – food and beverage industry employers may claim this credit for part of the social security taxes paid on their employees’ cash tips; this FICA tip credit is the excess employer social security tax paid or incurred by the taxpayer during the tax year. New Markets credit – encourages community development entities (CDEs) to service or provide investment capital for low-income communities or persons meeting accountability and certification criteria; credit allowed to investors in CDEs is 5% for the first 3 years during which a qualified equity interest is purchased and 6% for the following 4 years; credit is limited by availability of the low-income housing credit. Small Employer Pension Plan Start-up Costs credit – encourages small employers (<100 employees receiving compensation >$5,000 in the preceding year) to start retirement plans; credit is 50% of the first $1,000 in administrative and retirement-education expenses for newly-established plans for each of the first 3 years of the plan, limited to $500 each year; includes 401(k), SIMPLE and SEPs. Employer-Provided Child Care credit – encourages employer-provided child care facilities; credit is 25% of qualified child care expenditures and 10% of qualified child care resource and referral expenditures, limited to $150,000 each year; principal use of the facility must be to provide child care assistance and it must meet all state and local laws and regulations, including licensing requirements. Alternative Motor Vehicle credit – for qualifying vehicles placed in service after 2005; comprised of 4 component credits: 1) qualified fuel cell motor vehicle credit, 2) advanced lean burn technology motor vehicle credit, 3) qualified hybrid motor vehicle credit and 4) qualified alternative motor vehicle credit.  Credit is calculated based on various factors such as vehicle weight, fuel efficiency, lifetime fuel savings, etc.  Each component credit has distinct requirements; however, 3 requirements are common to each: 1) use of the vehicle must commence with the taxpayer; 2) it must be acquired for use or lease and not for resale; and 3) it must be made by a manufacturer.   Pennsylvania Business Tax Credits   Some of the more common tax credits available for businesses in Pennsylvania include:   Educational Improvement Tax credit – for eligible businesses contributing to a scholarship organization, education improvement organization or pre-kindergarten scholarship organization; applied against tax liability for tax year contribution was made; credit is 75% of contribution up to $200,000 maximum, increased to 90% of the contribution if business agrees to contribute for two consecutive years. Job Creation Tax credit – available to businesses that within 3 years of a negotiated start date create 25 or more jobs, or increase employment by 20%; each full-time job results in a $1,000 tax credit; must be claimed within 5 years of the effective date; can be used to offset 100% of the tax liability, including interest and penalties; can NOT be claimed, however, for business activities by qualified businesses within a Keystone Opportunity Zone or Expansion Subzone (KOZ/KOEZ); see following. Keystone Opportunity Zones – for qualified businesses owning or leasing real property within a KOZ or KOEZ, from which it conducts an active trade or business, and for which annual certification has been obtained from the Department of Community and Economic Development (DCED); exemptions from state and local sales and use taxes for property used, consumed and utilized in a KOZ/KOEZ; also tax reductions, exemptions, abatements or credits against most other business taxes.  Zones expire in 2008, 2010, 2013 and 2018; 12 regional KOZs administered by Zone Coordinators who have information on these deadlines. Research and Development Tax credit – for qualified research performed in PA (as defined in Section 41(B) of the Internal Revenue Code of 1986); can NOT be claimed for R&D expenditures incurred in a KOZ, and if not within a KOZ, the taxpayer must include a statement to that effect with the R&D Tax Credit application (Form REV-545); filing (postmark) date must be by September 15 each year.  Credit is 10% of the increase in research activities in PA over a base year (20% for “small businesses” – those with total assets of <$5,000,000 at beginning or end of the year).   An additional strategy that can provide significant tax savings is a cost segregation analysis.  This is a process whereby the purchase or construction of a commercial building, which is typically subject to straight-line depreciation over 39 years under the Modified Accelerated Cost Recovery System (MACRS), is segregated into its various component parts, (including, for example, fixtures, carpeting, land improvements, etc.) which are then “segregated” from the cost of the building shell and depreciated as separate assets that allow much shorter depreciable lives and accelerated depreciation deductions as a result.   Finally, the domestic production activities deduction is made available for tax years after 2004 under Internal Revenue Code Section 199.  This so-called Sec 199 deduction is 3% of the lesser of qualified production activities income of the taxpayer OR taxable income (determined without regard to this deduction) for tax years beginning in 2005 and 2006, 6% for tax years beginning in 2007, 2008 and 2009, and 9% thereafter.  The deduction is limited to 50% of Form W-2 wages paid by the taxpayer for the calendar year ending during the taxable year.  Qualified production activities income (QPAI) is defined as the excess of the taxpayer’s domestic production gross receipts (DPGR) over the sum of 1) the cost of goods sold directly allocable to such receipts and 2) other expenses, deductions or losses (except the Sec 199 deduction itself) that are properly allocable to such receipts.   Do you think your business may qualify for any of these tax credits or accelerated deduction strategies?  Call our office today and we will help to determine if the government owes you some money.