More Debits & Credits Posts

Deal Nearly Reached on Tax Extender Legislation

May 17, 2010

Congress is getting closer to agreeing on how to pay for extending many soon-to-expire or already expired tax breaks, but the answer is not likely to please either hedge fund managers, venture capitalists or multinational corporations.

That’s because the extensions for tax breaks such as the research and development credit, deduction of state and local sales taxes, and the additional standard deduction for real property taxes are likely to be paid for in part by raising the tax on carried interest. Right now, hedge fund managers, partners in private equity and venture capital firms, and many real estate investment trust partners pay capital gains taxes of just 15 percent.

Some Democrats in Congress argue that they should be paying the top income tax rate on ordinary income, which is currently 35 percent, and will rise to 39.6 percent next year. Advocates for VC firms and hedge funds have been lobbying furiously to prevent a hike in carried interest rates, but that increasingly appears to be a losing battle.

The tax extender legislation could come up for a vote this week in both the House and Senate, according to the Associated Press. The bill will also include provisions to extend unemployment benefits for up to 99 weeks and subsidize COBRA health premiums for the unemployed through the end of the year.

Multinational corporations that have been using foreign tax credits at their subsidiaries abroad to reduce their tax burden could also end up paying for the legislation. They have been fighting efforts to crack down on transfer pricing and tax deferral strategies for years, but as Congress searches for extra revenue to help make up for part of the ballooning budget deficit, the need to plug the various tax loopholes has taken on extra urgency.

Comments (2)
Even with the Research and Tax Credit extension, there are two significant issues with the existing R&D Credit regulations:
First, the regs are difficult to follow without a thorough understanding of the tax law. This often requires qualified US manufacturers to hire outside consultants to guide them through the details. Unfortunately, the cost of consultant support has made it prohibitive for many small to mid-sized manufacturers to benefit from these federal incentives. Today, tens of thousands of these manufacturers have historically bypassed this valuable tax credit.
Second, in 2008, the IRS elevated the R&D Credit to a Tier 1 Issue, which has put more emphasis on the need for contemporaneous documentation. To defend the R&D Credit in an audit, a taxpayer needs to qualify every R&D project under the regulations, AND identify costs associated with the project while the costs are being incurred (known as nexus). This documentation requirement is burdensome on engineers and production management staff, which makes capturing and defending the Credit a challenge for most manufacturers.
To address both these issues, we built Titan Armor - a low-cost software solution that helps manufacturers meet the current regulatory requirements for the R&D Tax Credit. You can get more information at
Posted by TITANarmor | Tuesday, May 18 2010 at 2:09PM ET
Perhaps we no longer will have "The Finest Congress Money Can Buy."

Here's hoping!
Posted by | Tuesday, May 18 2010 at 12:22PM ET
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