Tax Principal Kim Lawrence of Decosimo presented this PowerPoint at the InfoSystems Technology Convergence Showcase on Aug. 28 at The Sheraton Read House in Chattanooga, Tenn.

1. INCENTIVES FOR TECHNOLOGY
INVESTMENTS
 Kimberly A. Lawrence, CPA

2. TAXES ARE FUN WHEN YOU REDUCE, DEFER,
OR ELIMINATE THEM!

3. TECHNOLOGY IS FUN WHEN IT EXPANDS,
ENHANCES, OR EMPOWERS WHAT WE DO

4. SO HOW DO WE REDUCE, DEFER,
ELIMINATE, EXPAND, ENHANCE AND
ENPOWER ALL AT THE SAME TIME?

5. LETS TALK TAXES
 2010 TAX RELIEF ACT HIGHLIGHTS-
 Extended Bush-era individual rates at 10, 15,
25, 28, 33, and 35% to 2012
 An extension of the capital gains/dividends tax
rate at 15% to 2012

6. 2012 INDIVIDUAL TAX RATES
Single Married Filing Jointly
Income Range Tax Of the amount Income Range Tax Of the
over amount over
$0 - $8,500 10% 0 $0 - $17,000 10% 0
$8,501 – 34,500 850 + 15% 8,500 $17,001 – 1,700. + 15% 17,000
69,000
$34,501 – 83,600 4,,750 + 25% 34,500 $69,001 – 9,500. + 25% 69,000
139,350
$83,601 – 17,025 + 28% 83,600
174,400 $139,351 – 27,087.50 + 139,350
212,300 28%
$174,401 – 42,449 + 33% 174,400
379,150 $212,301 – 47.513.50 + 212,301
379,150 33%
379,151 and over 110,016.50 + 379,150
35% 379,150 and 102,574 + 379,150
over 35%
6

7. 2012 CORPORATE TAX RATES
Income Range Tax Rate Of the amount
over
$0 - $50,000 15% 0
$50,000 – $7,500 + 25% $50,000
$75,000
$75,000 – $13,750 + $75.000
$100,000 34%
$100,000 – $22,250 + $100,000
$335,000 39%
$335,000 – $113,900 + $335,000
$10,000,000 34%
$10,000,000- $3,400,000 + $10,000,000
$15,000,000 35%
$15,000,000- $5,150,000 + $15,000,000
$18,333,333 38%
$18,333,333- $6,416,667 + $18,333,333
35%
7

8. SO HOW CAN INVESTING TECHNOLOGY
CHANGE THE TAX TABLE?
 2010 TAX RELIEF ACT ALSO –
 Extended the 50% bonus depreciation for business
property acquired and placed in service after 1/1/12
and before 1/1/13
 Set the expensing limitation under IRC §179 at
$139,000 and the phase-out threshold amount at
$560,000 for 2012.

9. WELL THAT IS GREEK TO ME

10. SO WHAT IS BONUS DEPRECIATION?
 Depreciation allows businesses to recover the cost of
capital expenditures over time. Bonus depreciation
allows businesses to recover these costs faster.
 Allows 50% expensing
 Plus regular depreciation
 Tangible personal property
 Off the shelf software
 Must be brand new
 Can elect out of
 No taxable income limitations
 Many states have decoupled
 No AMT preference

11. BONUS DEPRECIATION EXAMPLE #1
 GIGCO PURCHASES AND PLACES IN SERVICE 50
BRAND NEW COMPUTERS ON 6/30/12 FOR A TOTAL
COST OF $200,000. GIGCO ELECTS TO TAKE BONUS
DEPRECIATION AND IS IN A 35% TAX BRACKET.
 BONUS DEPRECIATION $100,000
 REGULAR DEPRECIATON $20,000
 TOTAL DEPRECIATION $120,000
 TAX SAVINGS $42,000
 NET COST OF INVESTMENT $158,000

12. BONUS DEPRECIATION EXAMPLE #2
 GIGCO PURCHASES AND PLACES IN SERVICE 50
BRAND NEW COMPUTERS ON 6/30/12 FOR A TOTAL
COST OF $200,000. GIGCO ELECTS NOT TO TAKE
BONUS DEPRECIATION AND IS IN A 35% TAX
BRACKET.
 REGULAR DEPRECIATON $40,000
 TAX SAVINGS $14,000
 NET COST OF INVESTMENT $186,000

13. LETS TALK CODE! CODE SECTION 179
 Allows 100% expensing up to $139,000
 Plus regular depreciation on remaining basis
 Tangible personal property
 Off the shelf software
 Can be new or used property
 Must have taxable income
 More state conformity
 No AMT preference
 Phase out starts at $560,001

14. SECTION 179 EXAMPLE #1
 CLOUDCO PURCHASES AND PLACES IN SERVICE 50
VOICE OVER IP PHONES ON 6/30/12 FOR A TOTAL
COST OF $200,000. CLOUDCO ELECTS TO TAKE
SECTION 179 AND IS IN A 35% TAX BRACKET.
 SECTION 179 $139,000
 REGULAR DEPRECIATION $12,200
 TOTAL DEPRECIATION $151,200
 TAX SAVINGS $52,920
 NET COST OF INVESTMENT $147,080

15. SECTION 179 EXAMPLE #2
 CLOUDCO PURCHASES AND PLACES IN SERVICE 50
VOICE OVER IP PHONES ON 6/30/12 FOR A TOTAL
COST OF $200,000. CLOUDCO ELECTS NOT TO TAKE
SECTION 179 AND IS IN A 35% TAX BRACKET.
 REGULAR DEPRECIATION $40,000
 TAX SAVINGS $14,000
 NET COST OF INVESTMENT $186,000

16. BONUS DEPRECIATION AND SECTION 179
EXAMPLE #1
 VIRTUALCO PURCHASES AND PLACES IN SERVICE
200 BRAND NEW ULTRABOOKS 6/30/12 FOR A TOTAL
COST OF $300,000. VIRTUALCO ELECTS TO TAKE
BONUS DEPRECIATION AND SECTION 179 AND IS IN A
35% TAX BRACKET.
 BONUS DEPRECIATION $150,000
 SECTION 179 $139,000
 REGULAR DEPRECIATION $ 2,200
 TOTAL DEPRECIATION $291,200
 TAX SAVINGS $101,920
 NET COST OF INVESTMENT $198,080

17. BONUS DEPRECIATION AND SECTION 179
EXAMPLE #2
 VIRTUALCO PURCHASES AND PLACES IN SERVICE
200 BRAND NEW ULTRABOOKS 6/30/12 FOR A TOTAL
COST OF $300,000. VIRTUALCO ELECTS TO NOT TO
TAKE BONUS DEPRECIATION AND SECTION 179 AND
IS IN A 35% TAX BRACKET.
 REGULAR DEPRECIATION $60,000
 TAX SAVINGS $21,000
 NET COST OF INVESTMENT $279,000

18. CREDIT FOR INCREASING
RESEARCHING ACTIVITIES
 New or improved business component
 Technological in nature
 Elimination of uncertainty
 Process of experimentation

19. RESEARCH AND DEVELOPMENT CREDIT
 New or improved business component
 Function, performance, reliability, quality, durability
 Technological in nature
 E.g. Computer sciences
 Elimination of uncertainty
 Discover information
 Can we? How? What will it look like?
 Process of experimentation
 Evaluate processes and alternatives, design to achieve a
result uncertain at outset. Involves testing, analyzing,
refining, modeling, simulation, systematic trial and error

20. QUALIFIED R & D EXPENSES
ELIGIBLE FOR CREDIT
 Wages paid to an employee for qualified services
performed by such employee,
 Amounts paid for supplies used in the conduct of
qualified research, and
 65% of qualified contract research
 Depreciation not an eligible cost

21. SOFTWARE DEVELOPMENTAL ACTIVITIES
ELIGIBLE FOR CREDIT
 Conducting requirements, domain, software elements, or
scope analysis for a new functional software
enhancement
 Evaluating and establishing functional specifications
 Designing and developing the structural software
architecture
 Establishing electronic interfaces and functional
relationships between various software modules
 Programming software source code
 Compiling and testing source code
 Conducting unit, integration, functional, performance, and
regression testing

22. SOFTWARE APPLICATIONS THAT MAY BE
ELIGIBLE FOR CREDIT
 Accounting and Financial  CRM Software
Software  Content Management Software
 Enterprise Infrastructure  Database Management Systems
Software  Analytical Software
 ERP Software  Distribution Management
 Digital Asset Management Software
Systems  Video Games and Game Creation
 Logistics Management Software Software
 Document Management Systems  Food Software
 Claims Processing Software  Software Drivers
 Geographic Information System  Marketing Software
 Educational Software  Firmware
 Time and Resource Management  Medical and Healthcare
Software Management Software

23. IRS ASSESSMENT ON THE CREDIT
 These activities rarely fail to constitute qualified research under
I.R.C. § 41(d).
 The initial release of an application software product may require
new constructs such as, new architectures, new algorithms, or new
database management techniques. The design of these new
constructs often requires a process of experimentation to resolve
specific software development uncertainties.
 The development of system software, such as operating systems
and compilers, frequently entails the resolution of software
development uncertainties related to process scheduling and
memory management designs, and instruction execution
optimization.
 New constructs and software development uncertainties are
typically resolved through identifying and conducting a
process designed to evaluate technical alternatives which
fundamentally relies on the principles of computer science.

24. IRS ASSESSMENT ON THE CREDIT
 These activities rarely fail to constitute qualified
research under I.R.C. § 41(d).
 The development of specialized technologies,
such as image processing, artificial
intelligence, or speech recognition.
 Software developed as part of a hardware
product wherein the software interacts directly
with that hardware in order to make the
hardware/software package function as a unit.

25. CALCULATING THE CREDIT
 The regular research credit is an incremental credit that
equals 20% of a taxpayer’s current year qualified research
expenses(QREs) that exceed a base amount.
 Base amount is the taxpayer’s historical % of gross
receipts spent on QREs (the fixed-base %) to the four
most recent years’ average gross receipts.
 For taxpayers that had QREs in calendar years
1984-1988, that is the historical period for determining the
fixed-base %.
 For those that had fewer than three tax years with QREs
and gross receipts during that period or began having
them subsequently, the fixed-base % starts at 3% during
the first five years beginning after 1993 and over each of
the next five years successively approximates the actual
% by an increasing fraction.
 Fixed base cannot exceed 16% and the base amount
cannot be less that half of current year QREs.

26. REGULAR RESEARCH CREDIT
ILLUSTRATION #1
For non start up company existed prior to 1993:
 Current year QREs = $125,000
 1984–1988 aggregate QREs = $250,000
 Divided by 1984–1988 gross receipts = $1,000,000
 Fixed-base percentage = 25%
 Lesser of FBP or 16% = 16%
 Multiplied by average annual gross receipts previous four
years of $700,000
 Equals base amount = $112,000
 Greater of base amount or 50% current QREs = $112,000
 Excess of current QREs over minimum base amount
= $13,000
 Multiplied by 20% equals credit $2,600

27. REGULAR RESEARCH CREDIT
ILLUSTRATION #2
 For startup (first five years):
 Current year QREs = $125,000
 Fixed base percentage = 3%
 Lesser of FBP or 16% = 3%
 Multiplied by average annual gross receipts previous four
years of $700,000
 Equals base amount = $21,000
 Greater of base amount or 50% current QREs = $62,500
 Excess of current QREs over minimum base amount
= $62,500
 Multiplied by 20% equals credit $12,500

28. REGULAR RESEARCH CREDIT
ILLUSTRATION #3
 For startup in sixth year:
 Current year QREs = $125,000
 Aggregate QREs for years 4 and 5 = $100,000
 Years 4 and 5 aggregate gross receipts = $400,000
 Percentage of QREs/AGRs x 1/6 = 4.17%
 Lesser of FBP or 16% = 4.17%
 Multiplied by average annual gross receipts previous four
years of $700,000
 Equals base amount = $29,190
 Greater of base amount or 50% current QREs = $62,500
 Excess of current QREs over minimum base amount
= $62,500
 Multiplied by 20% equals credit $12,500

29. ALTERNATIVE SIMPLIFIED CREDIT
 For tax years beginning on or after Jan. 1, 2009
the credit equals 14% of the current year QREs that
exceed 50% of the average QREs for the three
preceding taxable years.
 If there are no QREs in any one of the three
preceding tax years, the ASC rate equals 6% of the
QREs for the credit determination year.
 The election to claim the ASC must be made on the
original tax return and cannot be made retroactively.

30. ALTERNATIVE SIMPLIFIED CREDIT
ILLUSTRATION
 Current year QREs = $125,000
 Less average QREs previous three years $100,000 x
50% = $50,000
 Difference = $75,000
 Multiplied by 14% equals credit = $10,500

31. CREDIT MECHANICS
 The credit is subject to limitations of the general
business credit.
 Limited to 25% of the taxpayer’s net tax liability
over $25,000.
 To the extent that a research credit is not available
for use in the current year or immediate prior year,
unused credits have a 20-year carry forward.

32. CHA CHING! ARE YOU MAKING THE MOST
OF YOUR BUCK NOW?

33. WHAT CHANGES IN 2013?
 SECTION 179 DEPRECIATION LIMIT DROPS TO
$25,000 and PHASE OUT THRESHOLD TO $200,000
IN 2013.
 BONUS DEPRECIATION IS ELIMINATED
 RESEARCH AND DEVELOPMENT CREDIT EXPIRES

34. ARE YOU THROWING MONEY AWAY?
2012 COULD BE YOUR YEAR 

35. CONTACT ME
Kim Lawrence, CPA
Tax Principal in Charge
423.756.7100
kimlawrence@decosimo.com
On LinkedIn:
http://www.linkedin.com/pub/kim-%20lawrence/
1/5aa/5aa
DISCLAIMER: The contents and opinions contained in this presentation are for informational purposes
only. The information is not intended to be a substitute for professional accounting counsel. Always seek
the advice of your accountant or other financial planner with any questions you may have regarding your
financial goals.

36. ABOUT THE SPEAKER
Kim Lawrence is the Tax Principal in Charge for Decosimo’s Chattanooga office. She has 23
years experience in tax practice and is actively involved in the firm’s tax compliance practice,
which includes review of partnership, corporate, state, consolidated, and individual tax returns,
tax planning and tax consultation. Areas of emphasis include state taxation, financial
institutions, real estate development and closely held businesses.
Kim is licensed to practice in Tennessee and Rhode Island, and holds a Bachelor of Science
degree with a major in Accounting from Rhode Island College. As part of her continuing
professional education, she attends banking seminars, real estate seminars, and state taxation
courses.
She is a member of several professional organizations including the American Institute of
Certified Public Accountants (AICPA), Chattanooga Tax Practitioners and the Tennessee
Society of Certified Public Accountants (TSCPA), where she served as the 2010-2011
president of the Chattanooga Chapter. Kim is a also a member of the Chattanooga Women’s
Leadership Institute, the Rotary Club and is a graduate of Leadership Chattanooga. Currently,
she serves as the Board Chair of Girls, Inc. and has been appointed Chair of TSCPA Women
Initiative Committee, which is an emerging committee focused on encouraging female
leadership across Tennessee's accounting sector. She previously served as a Campaign
Cabinet volunteer with United Way of Greater Chattanooga.