By Richard W. Lewis, CPA, CFE
On April 10, 2013, the Obama Administration released the General Explanations of the Administration’s Fiscal Year 2014 Revenue Proposals. These Revenue Proposals are part of the Administration’s comprehensive effort to strengthen economic growth, create new jobs, and make government more efficient and accountable. It should be expected that many of the provisions will not make it through the legislative process and become law; however, the Revenue Proposals can’t be ignored as some may become law and have an impact on your business.
The four Revenue Proposals that appear to have the biggest impact on manufacturers if they become law, are as follows:
- The last in, first out (LIFO) inventory method became part of the Internal Revenue Code as part of The Revenue Act of 1939. Over the last 74 years, there has been a great deal of controversy regarding the use of the LIFO inventory method due to the belief that its use allows companies to understate their taxable income, and thus pay less in tax. The Administration is proposing to repeal the LIFO inventory method; and, if repealed, companies using the LIFO inventory method would have to convert to the first in, first out (FIFO) inventory method as of the beginning of the year in which the change is made. The one-time increase in taxable income resulting from this change would be recognized ratably over a 10 year period.
- For a number of years, companies have enjoyed the benefit of expensing certain property under Section 179 of the Internal Revenue Code. That benefit is set to expire on December 31, 2013. The Administration is proposing to permanently extend the expensing of qualified property and to fix the limit at $500,000. Initially, the deduction limit will begin phasing out at $2,000,000.
- The research tax credit is for companies of any size that design, develop or improve products, processes, techniques, formulas or software. It is calculated on the basis of increases in research activities and expenditures; thus it is intended to reward, in general, those that pursue innovation with continually increasing investment. However, an alternative simplified method allows taxpayers to claim research credits if research costs remain the same or even decline when compared with prior years The research credit has been extended or renewed almost continually for the last 31 years and most recently a part of the “fiscal cliff” legislation passed on January l, 2013, which extended research tax credit through December 31, 2013. The Administration is proposing to make the research tax credit a permanent part of the Internal Revenue Code and increasing the rate of the alternative simplified research credit from 14% to 17%.
- For many companies, salaries and wages are the largest single expense and many workers have seen their wages stay the same or go down over the last several years. In order to reverse this trend, the Administration is proposing a 10% tax credit for small businesses (i e those with less than $20 million of total wages paid in 2012) that hire new employees or increase wages. This tax credit would be a one-time, temporary credit that would be limited to $5 million in increased wages for a maximum credit of $500,000.
The Administration’s Fiscal Year 2014 Revenue Proposals are designed to encourage a company’s behavior, specifically to drive the in-sourcing of jobs, further develop the renewable energy industry, and to invest in infrastructure or economically distressed areas. Those Revenue Proposals require a company to change in order to be impacted. The four Proposals detailed above will impact manufacturers regardless of growth and hiring plans, product focus, or performance. Through the normal bi-partisan negotiations in Washington some of these proposals may ultimately make it through the legislative process and become law. It will be important for business owners to remain ahead of the legislation and prepare for the tax impact on their company.
If you would like to discuss how these revenue proposals may impact your business or obtain additional information, please contact the Keiter Manufacturing and Distribution Industry team at (804) 747-0000.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.