A host of government incentives to investment exists in the US on both the
federal and the state level in the form of subsidies to exports, loan
guarantees, and tax incentives, including tax-exempt financing.
Federal Tax Incentives
Foreign companies considering investment in the United States
are often confronted with a maze of legal, financial and
fiscal complications, including their first exposure to the
complex US tax system. Integrated with this system are many
tax incentives designed to encourage capital formation, attract
foreign investment, and reduce the federal tax burden of
those qualifying for the incentives. For maximum benefit,
the foreign investor should have advance knowledge of these
incentives to properly plan and execute his or her investment
strategy. Below we describe some of the more significant
federal tax incentives.
Depreciation
The federal Internal Revenue Code (IRC) provides an incentive
for domestic investment in business property by allowing
rapid depreciation under the accelerated cost recovery
system.
Depletion
The tax law permits two methods of computing a depletion
deduction for the exhaustion of a supply of a mineral:
cost depletion and percentage depletion. For tax purposes,
depletion is based on the sale of a mineral rather than
on production.
The basic
method of computing depletion is "cost depletion." This
cost or other adjusted basis of property that is allocable
to the depletable reserves is divided by the number of units
(tons, barrels, etc.) that comprise the deposit. This amount,
which is the “cost depletion per unit”, is multiplied
by the number of units extracted and sold during the year,
producing the cost depletion deduction for the year.
Percentage depletion applies to all property eligible for
depletion except timber and most oil and gas. Under this
method, a flat percentage of gross income from the property
is taken as the depletion deduction. Each year, the percentage
depletion may not exceed 50 percent of that year's taxable
income from the property, computed without regard to the
depletion allowance. In computing taxable income (for purposes
of the 50 percent limitation), certain deductible mining
expenses must be decreased by the amount of certain gains
allocable to the property.
Under both depletion methods, the basis of depletable property
is reduced by the amount of depletion currently deductible.
Under cost depletion, the remaining adjusted basis is used
to compute cost depletion for the next year. Cost depletion
will not apply once the basis of the property has been exhausted.
Percentage depletion deductions will not be denied simply
because the basis of the property has been reduced to zero.
Percentage depletion taken after the basis of the property
has been reduced to zero is an item of tax preference subject
to minimum tax. The percentage depletion deduction for
coal and iron ore is reduced by 20 percent of the excess
of the percentage depletion amount over the adjusted basis
of the property.
Percentage depletion for oil and gas is allowed only if
the taxpayer qualifies for one of the exemptions provided
in the repealing statute. Substantial percentage depletion
deductions can be obtained by investors if complex requirements
are satisfied.
Dividends-Received Deduction
To facilitate the flow of funds between controlled corporations
and to mitigate the potential for double taxation of corporate
earnings, a US corporation is entitled to a special deduction
from gross income for dividends received from a domestic
corporation subject to income tax. This deduction is 70
percent of the dividends received, 80 percent of qualifying
dividends from 20-percent-owned corporations, and 100 percent
of qualifying dividends received from affiliates. The deduction
is limited to 80 percent of the taxable income of the recipient,
computed without regard to the net operating loss deduction,
the dividends-received deduction, and the dividends-paid
deduction of a public utility.
Research Credit
To stimulate research activity in the United Sates, a non-refundable
income tax credit is available for 20 percent of certain
qualifying research and experimentation expenditures incurred
before June 30, 1995. This credit is available to taxpayers
in addition to provisions that allow for the expensing
or for the capitalization and amortization of research
expenses. The credit is generally applicable to the excess
of the current year's research expenses over average research
expenditures in earlier years. For the credit to apply,
the expenditures must be incurred in carrying on a trade
or business, and the research must be undertaken to discover
information that is technological in nature and intended
to be useful in the development of a new or improved business
component of the taxpayer. Expenditures incurred for research
outside the United States, for research in the social sciences
or humanities, and for research funded by a grant are ineligible
for the credit.
The research credit is subject to the general limitation
on business credits, which restricts allowable credits to
the excess of the sum of the regular tax plus the alternative
minimum tax, less all other non-refundable credit (except
the credit for prior-year minimum tax) over the greater of
the tentative minimum tax, or 25 percent of the net regular
tax liability above $25,000. Net regular tax liability is
the regular tax liability reduced by certain other nonrefundable
credits.
Targeted Jobs Tax Credit
A tax credit is allowed to an employer as an incentive to
hire persons from targeted groups of individuals that have
a particularly high unemployment rate or other special or
employment needs. The credit is available to employers for
wages paid to members of these disadvantaged groups hired
before January 1, 1995. The credit is equal to 40 percent
of the first $6,000 of wages paid to a target group individual
for the first year of employment. The eligibility of an individual
must be certified by a local agency before the employer may
claim the credit.
This credit is subject to the general limitation on business
credits, which restricts allowable credits to the excess
of the sum of the regular tax plus the alternative minimum
tax, less all other nonrefundable credit (except the credit
for prior year minimum tax) over the greater of the tentative
minimum tax, or 25 percent of the net regular tax liability
above $25,000. Net regular tax liability is the regular tax
liability reduced by certain other nonrefundable credits.
Employers should review their hiring procedures to maximize
the use of this credit.
State and Local Incentives
Industrial Plant Locations
Local commerce representatives, such as chambers of commerce,
often offer expert, factual and personalized industrial
location services. Included are site investigations,
conducted in the strictest confidence to avoid undue
speculation
or curiosity. Reports show acreage, soil characteristics,
ownership, access to transportation facilities, and other
required data. Scale drawings can be prepared, and ground
level or aerial photographs of potential sites may be
furnished.
Data on available industrial buildings that meet a prospect's
general requirements can also be provided, including
the type of building, condition, square footage, type
of heating,
electrical system, sprinkler protection, floor load capacities,
water, sewage and other waste facilities, rail sidings,
and other pertinent details. State and local governments also update manufacturers on
local regulations affecting a new enterprise and furnish
specific information on workers' compensation, unemployment
insurance, state tax laws, and other regulatory data, including
comparisons with other localities.
Plant Financing
State authorities generally cooperate with local financial
and lending institutions to provide financing to businesses
located within the state. In addition, many states have
available several sources of financing to attract industry.
Several states, through business development agencies,
provide loans for new plants and equipment where conventional
financing is unavailable. These loans, however, may involve
high rates of interest and may be heavily collateralized.
Loans may also be available from urban development agencies
to finance the redevelopment of blighted areas. Their objective
is to carry out programs that will increase development
of low- and moderate-income housing, help alleviate unemployment,
revitalize industry, and expand community facilities in
cooperation with local communities and private enterprise. Other Incentives
States may also provide many other incentives to attract
industry, including recreation projects, university-related
training and research and development, employment referral,
assistance in obtaining contracts, and science and technology
services to science-oriented industries. Within various states,
many infrastructure advantages already exist, including a
skilled labour supply, ready markets to sell products, available
transportation systems to import raw materials and distribute
finished products, and personal living facilities for employees.
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"The
information contained herein is of a general nature and
is not intended to address the circumstances of any particular individual
or entity. Although we endeavor to provide accurate and
timely information, there can be no guarantee that such information
is accurate as of the date it is received or that it
will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough
examination
of the particular situation.
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International, a Swiss cooperative.
© 2006 KPMG LLP, the
Canadian member firm of KPMG International,
a Swiss cooperative. All rights
reserved."
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