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WOTC Amendment to the Hire More Heroes Act

The Senate Finance Committee will consider today H.R. 22, the Hire More Heroes Act. H.R. 22 was passed by the House to exempt veterans from being taken into account for purposes of determining the employers to which the employer mandate applies under the Patient Protection and Affordable Care Act.

In the Senate Finance Committee Senators Portman and Cardin have submitted the following amendment to extend WOTC and add a new category:

Short Title: Extend and Expand the Work Opportunity Tax Credit

Description of Amendment: The Work Opportunity Tax Credit (WOTC) provides a tax credit between $1,200 and $9,600 per employee for hiring and retaining members of vulnerable groups.

Eligible groups currently include: veterans, TANF, SNAP, and SSI recipients, ex-felons, the disabled, and summer youth employees. WOTC expired on December 31, 2014. This amendment would extend WOTC through December 31, 2015 and would allow an employer hiring someone who has exhausted their 26 weeks of regular unemployment benefits to be eligible for a 40 percent credit on the first $6,000 of wages paid that first year, or a maximum credit of $2,400 per employee.


Reps Pascrell and Reed Reintroduce Bill to Add Long-Term Unemployed Category to WOTC

PolitickerNJ.com reports:

U.S. Reps. Bill Pascrell, Jr. (D-NJ) and Tom Reed (R-NY), both members of the House Ways and Means Committee, today announced the reintroduction of H.R.481, the Long-term Unemployed Hiring Incentive Act, legislation that would extend the successful Work Opportunity Tax Credit program to make companies that hire long-term unemployed individuals eligible for a tax credit of up to $2400. Similar legislation was introduced in the last Congress, and the legislation was approved by the Senate Finance Committee in S. 2260, the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act.
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Did the State of the Union Make Tax Reform Less Likely?

Politico’s “Morning Tax” has an interesting collection of links indicating that the consensus is that the President’s State of the Union address hurt the possibility of getting tax reform done:

SOTU DAY TWO FLY-AROUND: GLASS IS HALF EMPTY ON TAX REFORM. The day after Obama gave his State of the Union address, most tax wonks, reporters and newspaper editorials said the president’s speech — specifically his calls for tax hikes on the rich to make new cuts for the middle class — only crippled the prospects of tax reform. Read: 1.) MarketWatch: “The prospects for an overhaul of the tax code just got dimmer.” (http://on.mktw.net/1xzVhn2) 2.) “The tax reform gap between Obama and the GOP is widening,” Howard Gleckman for TaxVox (http://bit.ly/1yI9PW1). 3.) The Hill: “Obama’s decision to pitch tax changes for individuals in his [SOTU] address has only complicated the chances for tax reform.” (http://bit.ly/1yJStXg.) 4.) “Obama Tax Agenda Widens Partisan Gulf as He Seeks Redistribution,” Bloomberg (http://bloom.bg/1L1vzAT).


FTB To Hold Interested Parties Meeting On California Competes Credit

The California FTB will hold an interested parties meeting on February 19, 2015 to discuss the requirement in the new California Competes Tax Credit that FTB review the books of taxpayers awarded the credit. From the announcement:

Topic

On November 7, 2014, the Franchise Tax Board issued FTB Notice 2014-02 to inform taxpayers of the procedures the department will use as guidelines to review the books and records of those taxpayers that are awarded a California Competes Tax Credit by the Governor’s Office of Business and Economic Development (GO-Biz) in accordance with Revenue and Taxation Code sections 17059.2 and 23689.

Purpose:

To explain the review procedures and open a dialogue as to what types of information and records may be available and used to show compliance with the contract milestones. Discussion topics include:

1. An overview of the review procedures and key features
2. Discussion of contract milestones and record keeping
a. Increase in employment and compensation levels/Employment Records Available
b. Project Investment/Records Available
3. Timing for first reviews
4. Wrap up and Q & A


Obama Administration Calling For Closing “Loopholes” and Making R&D Tax Credit Permanent

While President Obama did not specifically address tax policy in his State of the Union address on Tuesday night, on Wednesday morning, Treasury Secretary Jack Lew presented the administration’s outlook at the Brookings Institution. Among his remarks, he said:

Let me now turn to the specific components of the President’s framework for reform. The President’s proposal for a new business tax system has five pillars that represent an attempt to chart a bipartisan path forward.

First, we need to lower rates and close wasteful loopholes. This will make our business tax system competitive, fundamentally fair, and fiscally responsible. The President’s plan eliminates dozens of tax breaks and loopholes, and without adding to our deficits, reduces the current top corporate tax rate from 35 percent to 28 percent. This rate is in line with our trading partners, and it will help encourage investment in the United States. As we broaden the tax base, we can also create more certainty and make the system simpler and more efficient. And, we believe there is bipartisan support to move forward on this.

Second, we need to build on the resurgence of manufacturing in the United States. A vibrant U.S. manufacturing sector is fundamental to our capacity to remain innovative and competitive, and it is an important source of good-paying jobs for America’s workers. That is why the President’s plan makes it even more attractive for manufacturers to build and expand here rather than overseas. It lowers tax rates for domestic manufacturing to 25 percent. And it takes manufacturing incentives — including the Research and Experimentation Tax Credit — and makes them permanent. The Research and Experimentation Tax Credit jumpstarts private investment in research and technology, and it propels innovations that spark new jobs, new industries, and new breakthroughs in engineering and production. And this is another area of broad bipartisan support.

Here is the video of the speech and discussion:


R&D Update – Software – New Proposed Regulations Released

On Friday, January 16, 2015, the Treasury and IRS released proposed regulations (REG-153656-03) governing the R&D tax credit as it regards the development of computer software.

The proposed regulations:

1. Clarify the definition of internal use software (IUS);

2. Retain and modify the single product and production process exceptions to IUS;

3. Modify the significant economic risk prong of the high threshold of innovation test applicable to IUS;

4. Provide examples illustrating the process of experimentation requirement as it pertains to software development; and

5. Withdraw Announcement 2004-9.

I. IUS DEFINITION

1. General and Administrative Software: IUS is defined as software developed for use in general or administrative functions that facilitates or supports the conduct of the taxpayer’s trade or business. General and administrative functions include financial management/recordkeeping, HR management, and support services (such as data processing or facilities services) intended to cover back office functions that a taxpayer would have regardless of industry.

2. Computer and Noncomputer Distinction Eliminated: The proposed regulations eliminate the distinction between software developed to deliver computer and noncomputer services.

3. IUS Presumption Eliminated: Software developed for sale, lease or license is still presumed to be external use software. However, software that is not held for sale, lease or license is no longer automatically presumed to be IUS.

4. Dual Function Software Presumed to be IUS: Dual function software (i.e., used by the taxpayer and third parties) is presumed to be IUS. The burden of proof is on the taxpayer to identify the external use portion (and the associated QREs). If the taxpayer cannot identify the non-IUS portion, there is a safe harbor provision allowing the taxpayer to claim 25% of the costs if the external use portion is reasonably anticipated to constitute 10% of the system’s total use.

5. Software Enabling Third Party Interaction: Software that enables a taxpayer to interact with third parties or allows third parties to interact with the taxpayer’s systems does not solely benefit the taxpayer, and thus should not be considered IUS. However, third parties do not include any persons that use the software to support a taxpayer’s general and administrative functions that facilitate or support the conduct of the taxpayer’s trade or business.

6. Taxpayer Intent Controls: Whether software is developed for internal use depends on the intent of the taxpayer and the facts and circumstances at the beginning of software development. For example, if a taxpayer initially develops software for internal use but later makes improvements to the software with the intent to sell, lease or license the improved software or to allow third parties to initiate functions or review data, the improvements can be considered separate and will not be deemed IUS. Alternatively, if a taxpayer originally develops software to sell, lease or license or to interact with third parties, but later makes improvements for internal use, the former activities will be considered non-IUS while the latter will be considered separate and deemed IUS.

II. IUS EXCEPTIONS: SINGLE PRODUCT AND PRODUCTION PROCESS

1. Single Product Exception Retained: The proposed regulations retain the exception that computer software and hardware developed as a single product used directly by the taxpayer in providing services in the taxpayer’s trade or business is not considered IUS.

2. Production Process Exception Clarified: Software that is developed for use in a production process is not IUS. However, computer software supporting the delivery of goods or services to third parties is not part of a production process and would not fall within this exception. Nonetheless, such software development would not be IUS to the extent that the software enables a taxpayer to interact with third parties or allows third parties to initiate functions or review data.

III. HIGH THRESHOLD OF INNOVATION TEST

1. Elimination of Unique or Novel Requirement: Under the proposed regulations, the high threshold of innovation test requires the following:

(i) Innovative: Software is considered innovative if it would result in a reduction in cost, improvement in speed, or other measurable improvement, that is substantial and economically significant. (The innovative requirement no longer requires that the software be (1) unique or novel, and (2) intended to differ in a significant and inventive way from prior software implementations or methods.)

(ii) Significant Economic Risk: The taxpayer commits substantial resources to the project, and there is substantial technical uncertainty. Substantial technical uncertainty is defined as uncertainty of capability or uncertainty of methodology. Appropriateness of design uncertainty is not sufficient to meet this requirement. Thus, the level of risk required is higher than that required to meet uncertainty under I.R.C. § 174 and the four-part test.

(iii) Commercial Availability: No commercially available software provides the necessary functionality without modification that would satisfy the first two requirements.

IV. PROCESS OF EXPERIMENTATION

1. Examples under Treas. Regs. § 1.41-4(a): The proposed regulations add six examples to Treas. Regs. § 1.41-4(a) to illustrate what constitutes a process of experimentation for software development.

V. EFFECTIVE DATES

1. The proposed regulations will be prospective only, applicable for tax years ending on or after the date final regulations are published in the Federal Register.

2. The IRS will not challenge return positions consistent with the proposed regulations for tax years ending on or after January 20, 2015.

3. Consistent with FedEx Corporation v. United States of America, 108 AFTR 2d 2011-5669 (W.D.Tenn. Mar 28, 2011), denying reconsideration of 103 AFTR 2d 2009-2722, 2009-1 USTC paragraph 50,435 (W.D.Tenn. 2009), for tax years ending before January 20, 2015, taxpayers may choose to follow all of the internal-use software provisions in the 2001 final regulations (without applying the “discovery test”) or the 2001 proposed regulations. The IRS has withdrawn its advance notice of proposed rulemaking issued on January 2, 2004.

The proposed regulations are generally taxpayer favorable and may afford new opportunities for taxpayers to reevaluate their software development expenses for eligibility under I.R.C. § 41.


GO-Biz Approved 56 Out Of 56 Cal Competes Credit Applications

On January 15, the California Competes Tax Credit Committee met to make final determinations on the second ever round of California Competes applications. All 56 agreements considered were awarded for a total of about $31 million. A 57th applicant who had made it through the first round and was originally on the agenda for consideration removed themselves before the meeting. The final list of approved agreements can be found here.

GO-Biz is authorized to award $151 million in California Competes tax credits for fiscal year 2014/2015. This amount has been broken down into three rounds with $45 million available for the round decided yesterday. Since only $31 million was awarded in this first round, the remaining $14 million will roll to the third round later this year, according to a GO-Biz representative. Applications are being accepted now through Feb. 2, 2015 for the second round with $75 million available.


H.R. 145: Permanent WOTC

Representative David Jolly (R-FL) has introduced H.R. 145 to make WOTC permanent.

We don’t have any expectation that this bill will go anywhere, but it is positive to see legislators focus on the program.


Senate Finance Committee Establishes Working Groups Toward Tax Reform

The Senate Finance Committee announced today the formation of five working groups to examine the tax code with the goal of achieving tax reform. According to the press release:

Each of the bipartisan groups will work directly with the nonpartisan Joint Committee on Taxation (JCT) to produce an in-depth analysis of options and potential legislative solutions within its assigned area, with the goal of having one final comprehensive report featuring recommendations from each of the five categories completed by the end of May. The report recommendations, which will be delivered to Chairman Hatch and Ranking Member Wyden, will serve as a foundation for the development of bipartisan tax reform legislation.

This end of May deadline may be the first indicator that we are unlikely to see tax extender legislation for 2015 before the summer.


DOL Authorizing States to Issue WOTC Certificates for 2014 Applications

While Congress passed, and the President signed, the extension to expired tax provisions several weeks ago, states do not typically start start issuing WOTC certificates that were submitted during a hiatus until they hear from the Department of Labor. The DOL, in turn, does not issue final guidance until they hear from the IRS. Nevertheless, I received the following email response to my inquiry of DOL on January 8:

Dear Mr. Shenker:

We thank you for your interest in the Work Opportunity Tax Credit (WOTC) program, and in the guidance issued to state workforce agencies (SWAs), who carry out the certification process.

In view of the tax extension bill being passed, and the program being reauthorized for 2014, ETA had already begun its consultation with the Internal Revenue Service (IRS) to clear policy for states, with the intent of having the Training and Employment Guidance Letter (TEGL) for the reauthorization released in a shorter time period than the usual one to two months in clearance.

Apart from that inter-agency process, however, ETA also is issuing its own interim instructions to SWAs this week. The interim instructions issued will provide directions for SWAs until the TEGL is issued. Upon receipt of the interim instructions, states will be able to proceed with further processing of 2014 requests for certification. We should be able to post the interim instructions on the www.doleta.gov/WOTC website by sometime next week. And those interim instructions can be shared with you, once they have been issued to all the states.

Several states across the nation were able to automate their WOTC processes over the last year, and many were able to perform substantial amounts of preliminary processing, or verification and source documentation. So, most states should be well prepared to issue certifications and denials on a timely basis, once the guidance is issued to them.

The National WOTC Team


New Round of California Competes Opens Today

The largest ever California Competes tax credit application round starts today with $75 million available. This is the second of three rounds anticipated for the 2014/2015 fiscal year.

GO-Biz recently updated their FAQ with updated information about the “ratio” threshold for applications to make it into the second round:

Gobiz_ratio_150102

The ratio measures the amount of tax credit requested in relation to the amount of investments committed.


Senate Passes H.R. 5771

The Senate has passed H.R. 5771 extending a collection of tax breaks retroactively for 2014. Tax credits such as WOTC, Empowerment Zones and the Research credit are included in the legislation. All of the provisions will now expire again on 12/31/2014.


Paul Ryan Says Expenditures Must Be Cut in Order to Lower Rates

Future Ways and Means Chairman Paul Ryan, speaking at the Wall Street Journal’s CEO council meeting, said:

There is one inescapable conclusion, no matter how you slice it, which is: if we’re going to lower our tax rates, and we’re going to have to lower our tax rates in this country to be competitive for faster economic growth, there will have to be base broadening in that. That means you will see closure of loopholes and tax expenditures in order to get that base broadening. Using better score-keeping, using more accurate revenue targets may change the nature and scope of that, but nevertheless it is something that has to happen in order to have lower tax rates.

Here is a video of the interview in which he made that statement:


Chairman Camp Introduces Bill to Extend Tax Extenders For 2014 Only

Congressional Republicans are proposing a new tax extender bill which would simply extend all tax provisions that expired on 12/31/2013 through 12/31/2014. The bill, H.R. 5771 introduced by Ways and Means Chairman Dave Camp, can be found here.

Here is the Politico.com article on this development.

And from TheHill.com.


FTB Notice Regarding Procedures for Reviewing Books of California Competes Recipients

The FTB has posted a notice explaining its procedures for reviewing the books of taxpayers who are awarded California Competes Credits.


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