New Tax Law Packed with Obscure Business Tax Cuts

By: Stephen Ohlemacher, Associated Press
By: Stephen Ohlemacher, Associated Press

Washington, D.C. (AP) - The massive new tax bill signed into law by
President Barack Obama is filled with all kinds of holiday stocking
stuffers for businesses: tax breaks for producing TV shows, grants
for putting up windmills, rum subsidies for Puerto Rico and the
Virgin Islands.

There is even a tax break for people who buy race horses.

Millions of homeowners, however, might feel like they got a lump
of coal. Homeowners who don't itemize their deductions will lose a
tax break for paying local property taxes.

The business tax breaks are part of sweeping legislation that
extends Bush era tax cuts for families at every income level
through 2012. Obama signed the $858 billion measure a week ago. It
also provides a new payroll tax cut for wage earners and extends
jobless benefits to the long-term unemployed.

Most of the business tax breaks -- about 50 in all -- are part of
a package that expires each year, creating uncertainty for tax
planners but lots of business for lobbyists. Many of these tax
breaks have been around for years but expired at the end of 2009
because lawmakers couldn't agree how to pay for them.

The new law extends most of them through 2011, some through
2012. They will be paid for with borrowed money.

Nearly 1,300 businesses and trade groups formed a coalition
urging Congress to extend the business tax breaks. Others lobbied
for specific provisions, including a generous tax credit for
research and development and subsidies to produce alternative
energy.

There is a generous tax break for banks and insurance companies
that invest overseas, a tax credit for railroad track maintenance,
more generous write-offs for upgrading motorsport race tracks, and
increased deductions for businesses that donate books and computers
to public schools and libraries.

Many of the tax breaks are designed to encourage economic
activity. But passing them each year at the last minute, or
skipping a year and passing them retroactively, isn't terribly
efficient, said Clint Stretch, a tax expert at Deloitte Tax LLP.

"It gives it a lot of dignity to call it a `system,' " Stretch
said.

Every year, taxpayers risk losing their favorite tax breaks, if
they are not renewed. That's what happened to millions of
homeowners. For 2008 and 2009, homeowners who didn't itemize their
deductions were able to get an extra deduction -- on top of the
standard deduction -- for paying local property taxes. Individuals
could reduce their taxable income by as much as $500, couples could
cut theirs by $1,000.

The provision, which has saved homeowners about $1.6 billion a
year, expired for 2010 and was left out of the new tax law.

"A lot of Americans don't make so much money that they itemize
their tax returns. But those same Americans own property," said
Sen. Max Baucus, D-Mont., who sponsored the original tax break.
"It seems to me that they, too, should have the ability to deduct
it. It's a matter of equity."

Taxpayers who itemize will continue to be able to deduct local
property taxes. About two-thirds of tax filers don't itemize.

Among the provisions in the new law:

--A tax break that allows profitable companies to write off large
capital expenditures immediately -- rather than over time -- giving
some companies huge tax shelters.

The tax break, known as bonus depreciation, benefits automakers,
utilities, heavy equipment makers like Caterpillar Inc., and John
Deere, air freight companies like Fedex Corp., and wireless
companies like Verizon and AT&T, said Anne Mathias, director of
research for the Washington Research Group, which provides research
to institutional and corporate investors. It will save companies
nearly $21 billion over the next decade.

"It helps companies that use expensive capital equipment, that
spend a lot of money," Mathias said. "It also helps places where
the economy is growing, like wireless infrastructure, because there
is a pretty big wireless build out right now."

The tax break is also available to people who buy race horses
and farmers who buy cattle for breeding or dairy, according to a
depreciation list produced by the Internal Revenue Service.

--An exemption that allows banks, insurance companies and other
financial firms to shield foreign profits from being taxed by the
U.S. through 2011. Cost: $9.2 billion.

The tax break is important to major multinational banks and
financial firms, such as Citigroup, Bank of America, Goldman Sachs
and Morgan Stanley, and to the financing operations of other
international companies, Mathias said.

--A tax credit for research and development, benefiting a wide
range of industries, including pharmaceutical and high tech
companies. The law extends the tax credit through 2011, at a cost
of $13.3 billion.

"The House and the Senate are in the holiday spirit and giving
US companies a present of $13 billion in potential R&D Tax
Credits!" says a press release by Braithwaite Global Inc., a firm
that advises companies on applying for research tax credits.

--Increased tax rebates to Puerto Rico and the Virgin Islands
from a tax on rum imported into the United States. The U.S. imposes
a $13.50 per proof-gallon tax on imported rum, and sends most of
the proceeds to the two U.S. territories.

Previously, the rebate was $10.50 a gallon. The new law extends
a more generous rebate of $13.25 a gallon through 2011. Cost: $262
million.

--Extends a grant program for the production of wind, solar and
other renewable energy through 2011. Cost: $3 billion.

"This is a great holiday present for the 85,000 American
workers in the wind energy industry, tens of thousands of whom will
now be able to get back to work in a sector that has been a bright
spot in the recession so far," Denise Bode, CEO of the American
Wind Energy Association, said in a statement.

--Extends a 50 percent tax credit for expenses related to
railroad track maintenance through 2011. Cost $331 million.

--Enhanced deductions for companies that donate food to the
needy, books to public schools or computers to public libraries,
through 2011. Cost: $537 million.

--A tax break that allows TV and movie productions to more
quickly write off expenses, extended through 2011. Sexually
explicit productions are ineligible. Cost: $101 million.

(Copyright 2010 by The Associated Press. All Rights Reserved.)


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