After months of negotiations, Congress passed the American Taxpayer Relief Act of 2012 on Jan. 1, putting off for now worries about a “fiscal cliff.” The bill, which was signed by President Obama on Jan. 2, raised rates for capital gains and estate taxes, while extending a number of tax credits, including those for college tuition, renewable energy, and research and development.
Here, a snapshot of local companies — ranging from venture capitalists to railroad operators — that stand to be affected by the new provisions.
Thanks to a one-year extension of the wind production tax credit, Silver Spring-based Clean Currents, which supplies wind power to establishments such as Honest Tea and Busboys and Poets, is continuing with plans to open offices in two more states and add a dozen employees to its current roster of 25 by the end of this year.
The tax credit provides a 2.2 cent credit for every kilowatt-hour of renewable energy generated during a facility’s first 10 years.
“Without the evening of the playing field that this represents, it would’ve been impossible to keep up with competitors’ prices,” said Gary Skulnik, the company’s president and co-founder.
Skulnik said it was too early to determine exactly how much money the company would save because of the tax credit.
“It’s really not a direct, immediate benefit to our bottom-line,” he said. “But long term, it definitely helps our profitability.”
The venture capital industry saw the top tax rate for capital gains climb to 20 percent from 15 percent as a result of the fiscal cliff agreement. And that’s not the only hit to investors’ wallets. An additional 3.8 percent tax on investment income, passed as part of health care reform, takes effect this year.
Many investors expected a tax hike to be part of the deal even before it was reached. Peter Barris, managing general partner at New Enterprise Associates, is one of them. Even still, the result will be that venture capital firms and their financial backers take in less money when they cash out of investments.
“I don’t know of anybody that says paying more taxes is a good thing,” Barris said. “We expected an increase and this is a manageable increase. I don’t think it’s a sizeable enough increase that it’s going to change behavior in any material way.”
It could have been worse. Congress could have changed tax law to deal with carried interest, or the profits left after investors are paid back for the money they put up. Carried interest is currently treated as capital gains, but some have called for it to be treated as ordinary income, and subject to higher rates.
Still, more important than tax rates is the health of the overall economy, Barris said, which can impact the ability of portfolio companies to pursue successful initial public offerings.
We worried “the sentiment on Wall Street would be such that it would shut down the market for new public offerings, and from that standpoint we were acutely aware of what was going on and sensitive to what was going on,” Barris said.
The fiscal cliff negotiations, among other factors, were weighing on the public markets at the end of last year. And with a new tussle over the federal deficit likely to take place in the not-too-distant future, uncertainty still looms.
“As long as there is uncertainty [the markets] will remain cautious,” Barris said. “So you can get companies public, but it’s a difficult task and it’s a high bar.”
The fiscal cliff deal included a flurry of last-minute revisions to tax law, prompting the Internal Revenue Service to update its systems and introduce new tax forms — all of which has been good for accountants such as Brian McQuade.
“We’re busier than anything I’ve seen in 25 years,” said McQuade, managing partner for McQuade Brennan in Northwest Washington. “Obviously there are the usual year-end things, but clients are looking for quicker closure on 2012. They want to see where they stand, and want to get ready for whatever the first half of this year brings.”
McQuade said he and his staff have been busy reading up on the new tax codes and resolutions — and figuring out exactly how they will impact clients. To complicate matters, the firm’s computer programs have yet to be updated to reflect changes from the Fiscal Cliff deal.
“We’re flying a little blind here,” he said. “We’re getting a lot of calls from clients with questions that we just can’t answer. Everyone wants to know ‘What does the future portend?’”
Bob Bryant, who owns Buckingham Branch Railroad in central Virginia, had been on the edge of his seat for months. He breathed a sigh of relief when Congress passed a one-year extension of the railroad track maintenance credit, which credits 50 cents on every dollar spent on improvements.
“We were down to the wire and started thinking, gee whiz, we would just have to abandon our whole program,” said Bryant, who bought the 275-mile railway in 1989. “This [tax credit] is very important for us. It’s a big part of our survival package.”
The company’s revenue has dropped significantly in recent years as the economic downturn took its toll. Bryant’s staff of more than 100 has dwindled to about 80, and he said he was bracing to lay off at least 15 more employees if the tax credit has not been passed.
“You’re talking about hundreds of thousands of dollars of work that we wouldn’t have been able to do,” he said. “It’s important that we have that support because otherwise we just couldn’t do it.”
A number of temporary tax breaks were extended as part of the year-end compromise, but one small adjustment to a permanent part of the tax code may actually prove most useful to a law practice in Washington.
The tax credit finance and syndication group at Nixon Peabody, which specializes in structuring deals between large banks and affordable housing developers, caught a break when lawmakers pushed back the project-completion deadline for the Low-Income Housing Tax Credit. Started in 1986, the provision helps subsidize 95 percent of low-income residential units in the United States.
Without the temporary deadline extension, the tax credit available for affordable housing projects that aren’t completed by the end of this year would have dropped by about 20 percent. The deal pushed that deadline back to the end of 2014 and in some cases 2015, giving developers more time to complete construction and still receive the full tax breaks, and giving banks an incentive to continue investing in those developments, according to Rick Goldstein, a partner in the division at Nixon Peabody.
“Had it not been extended, it would have severely cut back on production, it would have made some projects financially unfeasible, and it would have made other properties unable to reach out to low-income individuals,” Goldstein said in an interview.