Fiscal Deal Preserves Tax Incentives for Entrepreneurs, Tech Companies

Early January 2nd, President Obama signed the American Taxpayer Relief Act of 2012 (AFTA) into law after it passed in the House by a 90-vote margin the previous evening. While the deal postponed difficult decisions concerning spending cuts and long-term debt reduction measures by delaying the FY13 sequester until March 1, 2013, AFTA averted steep, across-the-board spending cuts and tax hikes set to take place at the beginning of the year.

A number of tax credits due to expire were preserved in the fiscal deal. Of particular interest to the innovation community, the act extends the R&D tax credit through the end of 2013. A number of tech industry groups, including the Information Technology Industry Council, praised the extension of the credit as a beneficial and cost-effective way to increase research, although many would like to see it made permanent. Despite being one of the first countries to introduce such a credit in 1981, the U.S. is now 27th in the generosity of its credit out of 42 countries studied by the Information Technology & Innovation Foundation (ITIF).

Read the ITIF's survey on R&D Tax Incentives here...

Other extensions in the act most pertinent to entrepreneurs, companies, universities and others within the innovation economy include:

• the American Opportunity Tax Credit;
• Section 127 Employer Educational Assistance, including for graduate students— made permanent;
• the IRA Rollover;
• the tuition deduction;
• the existing tax deferral of taxes on foreign income;
• 50 percent bonus depreciation;
• the Production Tax Credit for wind power and a number of other forms of non-solar renewable energy;
• the Second Generation Biofuel Producer Credit;
• the 30 percent investment tax credit for alternative fuel vehicle refueling property credit;
• the tax credit under Section 25C of the Code for energy-efficient improvements to existing homes;
• Section 179 deduction permitting small businesses to deduct the cost of certain new and used property;
• the Work Opportunity Tax Credit; and,
• the New Markets Tax Credit awarded to businesses that invest in certain community development entities.

As part of the agreement, AFTA reduced the FY13 sequester from $109 billion to $85 billion. The $24 billion reduction will be covered by raising $12 billion in revenue by allowing the taxpayers to convert to Roth retirement plans, and absorbing $12 billion in cuts that will be allocated by Congress and the administration equally between defense and non-defense spending rather than across-the-board as in the sequester. Of this $12 billion in cuts, $4 billion will be absorbed in FY13 and $8 billion in FY14. Uncertainty remains as Congress and the Administration face the postponed $85 billion sequester in March around the same time they must come to a decision concerning the debt ceiling. Some warn that the crisis of confidence and apprehension about the debt ceiling is what threatens the innovation economy the most in the coming months and must be handled more effectively than the deal struck in August 2011, which resulted in a U.S. credit downgrade from the ratings agency Standard & Poor's.

Read the CCH Tax Briefing outlining the American Taxpayer Relief Act of 2012 here...