In addition to being able to claim the federal research and development tax credit, companies conducting R&D activities in the state of Utah may be eligible for a state credit as well. Utah offers a nonrefundable R&D credit, ranging from 2.5-9 percent, for certain qualified activities and expenses. Qualifying activities follow the same definition as the federal credit and include:

• Creating new or improved products, processes, formulas, software, techniques
• Implementing cost reduction initiatives
• Automating or improving manufacturing processes
• Developing prototypes, first articles, models
• Designing tools, jigs, fixtures and molds
• New materials testing
• Testing new concepts

The Utah R&D credit does not expire, but does have a three-year statute of limitations for amending prior returns thereby allowing companies to take advantage of overpaid tax liability in the three prior years and also claiming a current year credit.

The credit may be computed using two alternative methods each with their own advantages, so some tax planning is necessary as you evaluate the credit opportunity. One method is more lucrative in that the credit percentages are higher but excess credits under this method cannot be carried forward. Under the second method, the credit calculated may be less, but any excess credits from one year may carry forward for up to 14 tax years.

In addition, a state credit is available for machinery and equipment that is dedicated to R&D. The credit is 6 percent of the cost of the machinery and equipment and is nonrefundable. If the credit is more than the tax liability, it may be carried forward for the next 14 taxable years as well.

May 19,2010 — In a meeting with Treasury on May 19, SourceCorp made recommendations on the §179D tax deduction with regard to how it can be taken by A&E firms. Current law states that the owners of an A&E firm structured as a pass through entity can only take advantage of the §179D tax deduction up to the amount of basis in the business. The IRS recognizes this hindrance and requested the recommendations that are now being considered.

SourceCorp confirmed that distributions in excess of basis are always treated as long-term capital gains (i.e. 15%) as long as the partner/shareholder holding period is greater than one year. This means that an A&E firm will still get the rate arbitrage benefit (i.e. 15% vs. 35%) even if they don’t have basis. The benefit that remains, assuming the taxpayer is in the highest tax bracket, is approximately 57% of the original benefit.

SourceCorp is a leading provider of §179D tax deduction consulting for A&E firms across the country. In addition, the company provides cost segregation studies, R&D tax credit studies and LIFO inventory solutions.

Legislative outlook:

Neither house or Congress has moved meaningfully on a Congressional Budget Resolution beyond the Senate Committee action which we last reported to you, and Speaker Pelosi indicated this week that the House is unlikely to consider a budget this year. If that proves to be the case, the Senate will not be able to consider tax legislation under the filibuster-proof Reconciliation procedures this year, thereby creating a 60-vote threshold for any tax legislation which has serious opposition. That would be very good news for us.

While major tax legislation is expected at some point this year, thus far both houses remain focused on passing the tax extenders bill, extending expiring (or expired) tax provisions like the R&D tax credit, deductibility of state sales taxes, etc. There are a lot of additional issues that are wrapped up in the ongoing discussion of the extenders legislation, but for our purposes the concern is the “pay-fors” or tax increases that might be considered to help offset the revenue loss caused by extending the expiring provisions. LIFO has not been discussed as one of the pay-fors at this point, and Coalition meetings on Capitol Hill have provided no concrete suggestion that we are at risk in the extenders bill. We continue to watch and monitor those discussions closely, and Hill meetings continue, but so far the news has all been reassuring.

Once the extenders bill is finally enacted, we expect Congress to turn to other tax measures, in effect forced to that discussion because of the expiration at the end of this year of most of the tax cuts enacted in 2001 and 2003, including marginal tax rates at all levels and reduced rates on dividends and capital gains. The expiration at the end of last year of the “death tax” is also driving dicussion of tax legislation later this year. With many in Congress intent on extending some of the exipriring tax rate reductions beyond their scheduled exipration at the end of this year, Congress will need huge “pay-fors” to offset those continued reduced rates, and it is very possible that LIFO repeal will be discussed in that context. We remain committed to protecting LIFO, but we are by no means out of danger yet.

Home state meetings with Finance and Ways and Means members:

To that end, we would again encourage all of you to request and/or ask your members to request meetings with members of the Senate Finance and House Ways and Means Committees (or their key staff) while they are at home during the Memorial Day recess (May 21-31). There is no doubt that the many meetings you all scheduled and attended in home state offices last summer were critical in persuading key members of the House and Senate not to pursue LIFO repeal. Those meetings could make the difference again this year. You can find the list of state and district offices of all the relevant committee members at the links below. Please help with this effort, and please provide any feedback you get from calls or meetings you schedule/attend.

Last month, Minnesota Governor Tim Pawlenty signed into law a jobs bill that includes enhancements to the state’s Research and Development tax credit.

The bill expanded Minnesota’s R&D tax credit, making it more attractive for small to large-sized companies that conduct R&D activities in the state.

Major changes to the MN R&D Credit:

1. Effective for taxable years beginning after December 31, 2009, partners in a partnership and shareholders in an S corporation may now take the R&D credit. Previously, only C corporations could take the credit.
2. The tax credit increased and now equals 10 percent of the first $2 million of excess qualified research expenses for the taxable year over the base amount. For excess expenses over $2 million, the credit equals 2.5 percent.
3. The credit for taxable years beginning after December 31, 2009, is now refundable.

ACTION ITEMS

All pass-through entities should seek to take advantage of the Minnesota R&D in 2010.

In addition, all companies that have had losses for several years, and have never taken the state credit, should take advantage of the credit in 2010 to obtain a refund.