Understanding your eligibility for tax credits is an essential facet of income tax planning. Unlike deductions, which reduce your tax owed as a percentage of the deduction multiplied by your marginal tax rate, tax credits reduce your tax owed on a dollar for dollar basis. Given the choice between a tax deduction and a tax credit, the credit is more valuable to you. Typically business tax credits are non-refundable which means you have to owe tax in order to take advantage of the tax credit.
- The Rehabilitation, Energy, and Reforestation Investment Credit covers 10% of your expenditures, capped at $10,000 per year. These credits are available to qualified businesses that spent money renovating an old building, restocking existing forest and woodlands, or investing in alternative energy sources. Companies that either use or sell biodiesel, biofuel, or low sulfur diesel can claim Alternative Fuel Credits.
- If your business purchased and used a qualified plug-in electric vehicle or a vehicle that runs on alternative fuel, you could claim one or both vehicle credits. The Qualified Plug-in Electric and Electric Vehicle Credit is worth up to $7,500, while the Alternative Motor Vehicle Credit is worth up to $8,000. This credit is scheduled to phase out after manufacturers sell 60,000 qualifying vehicles. If you want to take advantage of this credit, keep in mind that this credit must be taken last and is subject to availability.
Improvement Tax Credits
- The Work Opportunity Tax Credit (WOTC) is a federal, employment-based tax credit that is available to employers who hire individuals to begin work before January 1, 2020, from select target groups that might otherwise go untapped. For employees that face significant barriers to employment and work at least 120 hours in a year, businesses can claim 25% of the employee’s first-year wages, up to the maximum credit ($9,000 over two years). For employees who work at least 400 hours in a year, that percentage goes up to 40% of the employee’s first-year wages, up to the maximum credit.
- The Empowerment Zone and Renewal Community Employment Credit nets businesses a credit of up to $3,000 for each full or part-time employee who lives and works in an Empowerment Zone. The credit is capped at 20% of the first $15,000 in wages.
Research and Development Tax Credit
- Businesses that engage in research to either improve a product or their business performance may be eligible for the federal Research and Development (R&D) Tax Credit. We find that many manufacturing companies are eligible for the credit because of the type of work they do. This credit allows businesses to take a credit of up to 13 percent of Contract Research Expenses for new and improved products and processes, including payroll. Qualified research must meet specific criteria and must satisfy three tests. (This may be an option for owners looking to advance technology in their businesses.)
You don’t have to be an expert in the credits, that’s our job. We can help you determine which credit(s) benefits your business. Give us a call. We would love to help.
Treasury Circular 230 Disclosure
Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.