The recent financial rescue package signed into law by President Bush on Oct. 3 contains not just $700 billion in federal assistance, but also a number of tax measures that are significant for Arizona businesses.
Renewable energy tax incentives
The renewable energy tax incentives extension was widely anticipated by the industry. Many states, including Arizona, are adopting or expanding their renewable energy standards, and these provisions are designed to make the conversion to renewable energy more tax-efficient.
The 30 percent investment tax credit, particularly the eight-year extension of the Section 48 credit for solar energy, is especially important given Arizona’s potential for solar and alternative energy-related businesses. These incentives are expected to not only continue current investment levels, but also to attract new business investment in Arizona’s alternative energy efforts.
It’s key to note that the energy tax incentives apply to businesses that use them — not to solar energy manufacturers. For example, mixed-use developments adding solar panels to parking garages, construction firms building LEED (Leadership in Energy Efficient Design)-certified structures, and retail centers adding solar roof panels will benefit from the incentive.
Another aspect of the energy credit changes is the elimination of the public utility exception. Two years ago, the Arizona Corporation Commission ruled that regulated electric utilities must generate 15 percent of their energy from renewable resources by 2025. However, utilities have been unable to benefit from this incentive. Regulated utilities may now obtain a 30 percent investment tax credit from their investment in qualifying property.
For instance, if APS purchases solar panels and installs them on your property to provide your electricity, APS will be allowed to take the credit. This provision allows public utilities to own and operate solar and other energy tax credit facilities and include them in their rate base for rate-making purposes.
Research and development credit
The bill extends the research and development tax credit through the end of 2009, increases the alternative simplified research credit from 12 percent to 14 percent for the 2009 tax year, and repeals the alternative incremental research credit for the 2009 tax year.
Given the current economic conditions, this retroactive extension potentially creates both cash benefits and earnings-per-share benefits. Businesses will need to consider the financial statement effect of the research credit now available for 2008, as well as the effect of the retroactive extension on their estimated tax payments for the 2008 tax year. Fiscal-year taxpayers who have already filed their 2007 tax year returns should consider filing amended returns to claim research credits for the period for which the credit had expired. In light of increasing IRS scrutiny, consider your approach and your documentation for the research credits you take. This retroactive extension also provides the opportunity to consider a pre-filing agreement with the IRS for the research credit for the 2008 tax year and beyond.
Alternative minimum tax (AMT)
The AMT is a separately computed tax that eliminates many deductions and credits that are allowed in computing regular tax liability for individuals, estates and trusts. In recent years, Congress has repeatedly enacted a temporary “patch” that significantly raised the applicable AMT exemption amounts. The AMT exemption amounts are phased out for higher-income taxpayers.
The AMT patch for 2008, without which more than 20 million taxpayers would have been hit with AMT liability early next year when filing their 2008 returns, was included in the financial rescue legislation. The legislation also increases the AMT refundable credit amount for individuals with long-term unused credits for prior year minimum tax liability, eliminates the income phase-out, and abates any underpayment of tax (including interest) outstanding on Oct. 3 related to AMT that was generated from the exercise of incentive stock options.
Changing tax law, increased IRS audits and the direct negative ramifications that follow from financial statement restatements mean that achieving certainty in tax positions is more important than ever. Many taxpayers are planning upfront and substantiating all their positions. As companies experience flat or negative results, tax considerations become more important to the bottom line. Tax departments are being asked to find efficient ways to maximize cash and strengthen balance sheets. The new legislation can benefit businesses in this challenging time.
Wayne Hoeing is a partner with Ernst & Young LLP in the firm’s Phoenix office.