Don’t get too excited. It’s not a huge tax break – but it’s not a bad one either. A bill that was rushed through recently passed in Congress, known as The Worker, Homeownership and Business Assistance Act of 2009, will allow businesses to apply losses retroactively.
The bill, which was tacked onto the homebuyer’s credit extension/expansion, would allow businesses which suffered losses in 2008 or 2009 to retroactively apply those losses to any five years prior to 2008. Known as a “net-operating loss carryback” or “NOL carryback”, those losses could previously only be carried back for two years. It’s an expansion of the NOL provisions under the American Recovery and Reinvestment Act (ARRA).
There are some restrictions. The one that’s been getting the most press bars businesses which have accepted TARP money from utilizing the expanded NOL carryback. That is, of course, so that Congress appears to be taking a hard-line against those businesses (all while allowing them to engage in the same kinds of risky behaviors as before).
The expansion is estimated to cost just over $10 billion over 10 years. The homebuyer’s credit is estimated to cost about $10 billion over 10 months.
Is it just me, or does this feel very “Old MacDonald” all of the sudden?
Here, $10 billion, there $10 billion, everywhere $10 billion…
If the news that US tax revenues have fallen was disturbing, then this may be even worse: China’s tax revenues are expected to grow by 10% in 2009. The increase comes on the heels of a successful 2008 year in China, where tax revenues climbed 18.8% to 5.42 trillion yuan ($792.68 billion).
The “global crisis” is not affecting all nations the same. While it’s true that Chinese tax revenues were not as strong as projected, they still far outpaced US revenues. And it’s a trend that is expected to continue. The Chinese expect to bring in nearly 5.98 trillion yuan ($875.4 billion) next year, an increase of nearly 10%.
Why the increase? For one, Chinese industry is booming again. Industrial sectors are seeing vigorous growth, especially in steel and metals. The Chinese are one of the largest export countries in the world.
As someone who lives near one of the former steel hotbeds of the US, I find this a little sad. AISI (American Iron and Steel Institute) reported earlier this month that the US steel industry was “operating at only 53% capacity utilization and with imports year-to-date taking a quarter of the U.S. market.”
As our steel mills and automotive companies shut down, we’ve become a country that doesn’t make things anymore. Arguably only four of the top ten companies in the US actually “make” things (GM, GE, Ford and Hewlett-Packard as ranked by Fortune). We depend heavily on imports. In my brief survey this morning on twitter, most were unable to think of more than a handful of manufacturers in the US – and the lion’s share of those named were technology companies like Apple and Microsoft, which may be based in the US but actually manufacturer in places like China. (Though, in an ironic turn, I was informed that the world’s largest manufacturer of fortune cookies is located in Brooklyn.)
I have to think that this change of direction from manufacturing and agricultural based to overwhelmingly service based businesses has affected our bottom line, not just in terms of our collective budgets but in terms of taxes. As in the US, taxes account for most of the revenue in China. Value-added (VAT), corporate income and business tax revenues contributed about 70% of the increased revenue, according to the Chinese government.
But how do you tax a shifting economy? As you’ve no doubt noted over the past year, questions in the US about how to tax internet services and sales have become increasingly important. It’s easy to tax a piece of steel made in Bethlehem, but how do you tax a sale of a book when the site of the server is in, say, Japan?
And in an economy heavily dependent on real estate transactions and technology providers, how do we tax? Do we tax on the cost of the transaction (like a VAT), the gain from the transaction (like we do for real estate) or the wages attributable to the transaction (like we largely do now)? If we can move those transactions “off shore”, how does that affect how we tax them?
The point is that our current tax system is based on our “old” economy. We’ve been slow to make changes, to react to differences in our outputs. And it shows.
More “old world” countries like China and Germany have been slow to change their tax systems, too. But interestingly, the backbones of those economies, while evolving, do not seem to have shifted as dramatically as those in the US. Those countries, while adapting to new technologies, are still heavily manufacturer-based, 50% and 30%, respectively. In the US, manufacturer-based businesses now account for less than 20% of the economy – and that number is rapidly shrinking. (Stats by CIA’s World Fact Book)
I’m not suggesting that returning to a manufacturing-based economy is the answer to our current woes. Nor am I suggesting that we model our economy after the Chinese or German economies. But the first thing you learn in business that if something isn’t working, you try something else. We can’t keep plugging along just hoping for change, we need a better plan. We’re wise to heed the words of Winston Churchill who said: There is nothing wrong with change, if it is in the right direction.
[Editor's note: I got an email that a better video clip for this post would have been "Shutting Detroit Down" by John Rich. Believe it or not, I've posted that one before. You can see it here:http://www.taxgirl.com/shutting-detroit-down/]
The IRS has issued some guidance on the “Consumer Assistance to Recycle and Save” (Cash for Clunkers program).
President Obama signed the bill into law on June 24, 2009 (you can download the bill here as a pdf). It’s basically a vehicle trade-in and purchase program (leases for more than 5 years work, too): you can receive up to $3500-$4500 in credits for trading in less fuel efficient vehicles. Different rules apply for different vehicles.
To qualify, your old vehicle must have been manufactured less than 25 years before the date you trade it in (that means it’s a ‘no’ for our Fiat Spyder – it turns 33 this year!); have a “new” combined city/highway fuel economy of 18 miles per gallon or less; be in drivable condition and be continuously insured and registered to the same owner for the full year preceding the trade-in. In other words, clunker or not, it must have been in use.
A new vehicle must, before any features, options, taxes, or destination charges are added to the price, have a MSRP or $45,000 or less. New cars must have a combined fuel economy value of at least 22 mpg; category 1 trucks must have a combined fuel economy value of at least 18 mpg; and category 2 trucks must have a combined fuel economy value of at least 15 mpg. There are no minimum mpg requirements for category 3 trucks but other restrictions apply. To get a feel for the mpg of various vehicles, you can check out the fuel economy web site (in case you’re wondering, when it comes to passenger cars, the Toyota Prius gets the best mileage overall, according to the site, and the Lamborghini Murcielago gets the worst mileage).
So, what does any of this have to do with tax? Well, on the individual tax side, nothing, since you can’t normally deduct the cost of your personal use vehicle (though don’t forget about the new car sales tax deduction). And the credit is like a discount, really, and doesn’t count as income to the buyer for tax purposes.
But on the corporate side, there was a lot of confusion. The credits for the vehicles are government funded: if the dealer meets all of the requirements, including crushing or disposing of the old cars, NHTSA will repay the dealer. The dealer must apply the credit amount to the customer. So it’s a wash really on the dealer’s side: it’s as if the credit never happened. Think about it: dealer sells $25,000 car to customer less $3,000 credit. NHTSA gives dealer $3,000. Dealer still walks away with $25,000.
So what does that mean when it comes to taxes on the dealer’s side? Normally, for tax purposes, gross receipts for the dealer include the full selling price of the vehicle. Since the credit is reimbursed to the dealer, it’s considered part of the selling price and is includible in the dealer’s gross receipts in the year that the vehicle is sold. With respect to expenses, if a dealer incurs any business expenses related to the disposal of the old vehicles, those expenses are deductible.
This is really a win-win for dealers. They are offering a “sale” to consumers for which they don’t take a hit. And since it doesn’t affect their bottom line, it doesn’t change their tax situation.
It’s a good idea for dealers to keep good records to back up claims for income and expenses… And do it quickly. It looks like, even with additional funding, this program won’t last long.
Tax attorneys for Amazon.com must be working overtime these days…
This week, Amazon.com learned that it faced another affiliate challenge: in Japan. This time, however, rather than its affiliate sales program, the focus is on corporate affiliates for Amazon.com. The two affiliates in question are Amazon Japan and Amazon Japan Logistics, which, exactly as they sound like they would be, are responsible for sales and operations inside Japan.
The Tokyo Regional Taxation Bureau claims that Amazon.com’s US companies have been improperly booking sales income in the US for Japanese sales in order to avoid taxes in Japan. The Bureau has put Amazon on notice that it intends to try and collect back taxes of $119 million as a result of what it perceives as underreporting inside Japan.
Here’s the confusion: US companies that do business in Japan but don’t have a physical presence/branch office inside the country are not required to file Japanese tax returns. Amazon.com claims this is the case. But the tax bureau has determined that Amazon Japan and Amazon Japan Logistics have been acting as branch offices. As a result, Japan is seeking back taxes from the company through December 2005.
Amazon and its affiliates are currently in talks with the authorities: in other words, expect a settlement.
Last year, New York decided to aggressively pursue a sales tax rule already on the books by expanding the definition of venue to include companies with affiliates physically present in the state. Many vendors, Amazon.com included, made a lot of noise about pulling their affiliate program; interestingly, Amazon.com didn’t go anywhere. They did, [...]
It’s Fix the Tax Code Friday!
Over the past few weeks, I’ve reported on a number of industry-specific tax credits offered to businesses, including tax credits for the tech industry and for the movie industry. Reports have been mixed as to whether these credits produce any results.
I’m interested to know what individual taxpayers think. [...]
Taxpayer asks:
I work for a small corporation. We routinely issue w9 forms whenever asked. However, a new customer asked me to send them a w9 form with our name and the address of our other manufacturing location. We have multiple manufacturing locations all covered under the same tax ID, name, etc. [...]
It’s Fix the Tax Code Friday! Yesterday, I blogged about NC’s efforts to woo Apple and Google to the Tarheel state by passing corporate tax breaks directed at each of them. This is nothing new. In my own state of Pennsylvania, a new film tax credit is being touted in an effort [...]
It’s rare that decisions regarding transfer pricing make big news. But this one is different. An IRS victory in the Ninth Circuit against chip company Xilinx Inc. earlier this week may change the way that companies allocate their costs for purposes of transfer pricing. The decision already has international tax practitioners abuzz.
The [...]
The Obama administration is planning to announce a steps towards his promised “massive overhaul” of international financial regulations this morning. Administration officials do not expect the announcement to be popular.
So, the good news first. Obama will announce plans to make permanent a research tax credit that was to expire at the end of [...]
