07242017

2 Tax Credits All Business Owners Should Know

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One key to keep your bottom line as high as possible is keeping your taxes as low as possible. Here are two specialized tax credits you should know about.

“We’ve got to find a way to get our costs of doing business down.” Sound familiar?

It’s no secret that a key to maximizing your company’s bottom line is decreasing business costs, and it’s also no secret that one way to decrease business costs is to minimize your exposure to taxation. There’s a long list of standard strategies for this, such as reviewing your business structure or the way you depreciate machinery and real estate, taking advantage of carryovers, sheltering profits in retirement plans, employing a family member, or timing large purchases differently. 

Most CPAs and business tax preparers are excellent at suggesting and maximizing strategies for tax mitigation. However, there are a couple of ideas that are underused and better than a tax deduction on a dollar-for-dollar basis. But first, you need to understand the difference between a tax deduction and a tax credit.

Tax deduction vs. tax credit

A tax deduction is created by a tax-deductible expense or exemption that reduces your taxable income. Simply put, your taxable income is then multiplied by your tax rate to calculate your tax exposure, your bill. For example, let’s say your gross income is $3 million. Your deductible expenses total $1 million, leaving a taxable income of $2 million. If your tax rate is 35 percent, you’ll owe about $700,000.

A tax credit is different. The amount of your tax credit is subtracted after your tax exposure has been calculated, on a dollar-for-dollar basis. Let’s go back to the above example: Your gross income is $3 million and you have $1 million in deductions, leaving your taxable income at $2 million and your tax bill at $700,000. But if you also have $300,000 in tax credits, that drops your tax bill, dollar for dollar, down to $400,000. 

That makes a big difference. That’s why $1 in tax credits is usually significantly better than $1 in tax deductions, and that’s why we love tax credits.

WOTC

The first tax credit you should know about is WOTC, the Work Opportunity Tax Credit. Knowledge of this credit could alter the way you hire. Depending on the position for which the employee is hired and their anticipated work schedule, you could receive a tax credit of $1,200 to $9,600 for every person you hire under WOTC. This credit currently extends through 2019 and may very well be extended after that.

Here’s how it works. WOTC is available to private-sector employers who hire individuals from several target groups, and to tax-exempt organizations that hire veterans. Here are the target groups:

  • Qualified veterans
  • Qualified disabled veterans
  • Qualified unemployed veterans
  • Qualified designated community residents (people who live in certain designated areas)
  • Qualified ex-felons
  • Qualified SNAP (food stamps) recipients
  • Qualified TANF (Temporary Assistance to Needy Families) recipients
  • Long-term unemployed individuals
  • Qualified vocational rehabilitation recipients
  • Qualified Supplemental Security Income (SSI) recipients
  • Qualified summer youth

The process is relatively simple, but it is also specific and time-sensitive. The clock starts ticking immediately upon hire, and there is a 28-day deadline for submission of the required document (IRS Form 584). This will include a questionnaire that the new hire must complete, and we have found this to be a potential bottleneck.

However, there are ways to streamline and automate this process to make it more efficient. And in case you’re wondering if it would be in some way discriminatory to favor potential employees who qualify during the hiring process, the answer is no. Incentivizing the hiring of people from certain challenged groups is the whole point of the law.

Do you have your WOTC? Go to IRS – WOTC to learn more.

R&D

Next is the Research & Experimentation Tax Credit, also known as the R&D Tax Credit. While the credit itself is targeted to industries such as manufacturing, engineering, software, chemical and pharmaceutical, we have found that more businesses of all sizes are qualifying for it than ever before.

This program provides credits for companies involved in one or more of the following:

  • Development and improvement of quality and cost-efficient solutions and processes
  • Quality assurance and testing
  • Engineering and design
  • Manufacturing
  • Prototyping or modeling
  • Process improvement resulting in better productivity and turnaround cycle
  • Specialized assembly processes using technology
  • Development of tooling applications and solutions
  • Product development and improvement

As it turns out, we have found that not only do a wide swath of companies outside of the target industries engage in those functions, but that it’s also possible to examine individual tasks within job descriptions and responsibilities to find qualified employees and businesses.

And it gets better. Newer rules now allow eligible employers to include prior years (generally two to five) and add to their tax credits, plus (as with WOTC) enjoy the credit in future years.

This is a specialized Federal Tax Credit under Section 41 of the Internal Revenue Code, and a study must be completed to both maximize its benefits and provide backup documentation and reasoning “just in case.” There are companies that can provide that service, and Cornell Law provides a detailed description of this credit here

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