Tax Relief: 2006 Tax Relief & Health Care Act highlights favorable to taxpayers.

The following are selected highlights of the 2006 Tax Relief & Health Care Act (P.L. 109-432), signed into law Dec. 20, 2006.

RESEARCH CREDIT

This credit is extended for amounts paid or incurred after 2005 and before 2008. The new law also modifies the research credit for tax years ending after 2006 by increasing the rates of the alternative incremental credit and providing a new alternative simplified credit.

Increased Rates for Alternative Incremental Credit: A 3 percent credit rate (rather than 2.65 percent) applies to the extent that a taxpayer's current-year research expenses exceed a base amount computed by using a 1 percent fixed-base percentage (i.e., the base amount equals 1 percent of the taxpayer's average gross receipts for the four preceding tax years), but do not exceed a base amount computed by using a 1.5 percent fixed-based percentage.

A 4 percent credit rate (instead of 3.2 percent) applies to the extent that the current-year research expenses exceed a base amount computed by using a 1.5 percent fixed-base percentage, but do not exceed a base amount computed by using a 2 percent fixed-base percentage.

A 5 percent credit rate (rather than 3.75 percent) applies to the extent that the current-year research expenses exceed a base amount computed by using a 2 percent fixed-base percentage.

Special transitional rules apply to fiscal year 2006-07 taxpayers.

Alternative Simplified Credit: At a taxpayer's election, this new alternative credit equals 12 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding tax years. The rate is reduced to 6 percent if the taxpayer has no qualified research expenses in any one of these preceding years. This election applies to all succeeding tax years unless revoked with IRS consent.

The election cannot be made for any tax year for which an election to use the alternative incremental credit is in effect. However, an election of the alternative incremental credit for a tax year that includes Jan. 1, 2007 will be treated as revoked with IRS consent if the taxpayer elects the new alternative simplified credit for that year.

But elections of both the alternative incremental and simplified credits are allowed for the "specified transitional tax year," which is any tax year ending after Dec. 31, 2006 that includes such date (i.e., fiscal 2006-07 tax years). In this event, the alternative incremental credit is treated as revoked for the following tax year.

The alternative simplified credit is prorated for the specified transitional tax year under a formula set forth in Act Section 104(c)(4)(A).

NEW REFUNDABLE CREDIT FOR UNUSED AMT CREDIT

For tax years beginning after Dec. 20, 2006, an individual's minimum tax credit that is allowable for any tax year beginning before 2013 cannot be less than the "AMT refundable credit amount," which is the greater of:

(1) The lesser of:

* $5,000, or

* The long-term unused minimum tax credit; or

(2) 20 percent of the long-term unused minimum tax credit.

The long-term unused minimum tax credit for any tax year is the portion of the minimum tax credit attributable to the adjusted net minimum tax (ANMT) for tax years before the third tax year immediately preceding the current tax year. For this determination, credits are treated as allowed on a first-in, first-out basis.

The minimum tax credit for any tax year is the excess (if any) of the ANMT for all prior tax years beginning after 1986 over the minimum tax credit allowable for those years.

The ANMT generally is the net minimum tax reduced by the amount that would have been the net minimum tax if only exclusion-type preferences and adjustments were considered.

The new refundable credit is reduced by the percentage reduction in the personal exemption deduction if an individual's adjusted gross income (AGI) for any tax year exceeds the threshold for phasing-out that deduction.

Example: In 2010, T's AGI causes a 50 percent reduction in his personal exemption deduction. T's regular tax is $45,000 and his tentative minimum tax is $40,000. His minimum tax credit for 2010, before the IRC Sec. 53(c) limitation, is $1.1 million, of which $1 million is a long-term unused minimum tax credit. (The Sec. 53(c) limitation is the excess, if any, of the regular tax, less certain credits, over the tentative minimum tax for the tax year.)

The 2010 AMT refundable credit is $100,000 (20 percent of the $1 million long-term unused minimum tax credit less the 50 percent reduction mentioned at the beginning of this example). The 2010 minimum tax credit allowable also is $100,000 (the greater of the AMT refundable credit or the credit otherwise allowable).

The $5,000 credit allowable without regard to this new law is not refundable. However, the additional $95,000 credit allowable under the new law is refundable. Thus, T has a $55,000 overpayment. The remaining $1 million minimum tax credit is carried forward.

Stuart R. Josephs, CPA has a San Diego-based Tax Assistance Practice (TAP) that specializes in assisting practitioners in resolving their clients' tax questions and problems. Josephs, chair of the Federal Subcommittee of CalCPA's Committee on Taxation, can be reached at [phone] or [e-mail].

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By Stuart R. Josephs, CPA