Would you be willing to change the
approach you take when building a
new facility, starting a pension plan for employees or researching a new product? If so, these efforts may be rewarded
come tax time through tax credits — direct
dollar-for-dollar reductions in tax liability.
“Tax credits are especially important to
small and mid-sized businesses,” says Mark
Anderson, director, Tax Strategies Group
for Kreischer Miller in Horsham, Pa. Some
credits are promoted by special interest
groups, others are created by the government to address a perceived need, and
cover a spectrum of expenses.
Most importantly, these credits can
impact a company’s effective tax rate. Business owners may choose to make certain
businesses decisions — where to build or
what type of vehicle to purchase — knowing that they will win back some of their
investment at year’s end, Anderson says.
Smart Business discussed tax credits
with Anderson and how business owners
can take advantage of credits designed to
pay them back at tax time.
Who can take advantage of tax credits?
There are tax credits that cover most
every arena, and as a business owner, you
likely do not have time to research this
information in detail. What’s more, these
credits tend to change over time. Some
credits have been allowed to expire by
Congress, whereas others have been created or amended to apply to broader or narrower audiences. For example, more business owners can take advantage of today’s
research credit since it isn’t strictly
reserved for laboratory research. Tax law
is complex, and the first step to take advantage of tax credits is to partner with an
accountant who knows your business so
he or she can suggest appropriate tax credits and determine whether you qualify.
There are limitations and business planning issues you’ll want to discuss with your
accountant as you explore potential tax
credits.
What types of tax credits are most common,
and what are some recent credits available
to business owners?
Tax credits may be industry specific, or
they may apply to a general population of
business owners. There are tax credits designed to promote the hiring of targeted
employment groups, credits that reward
companies for conducting research to create new processes, and credits that encourage small businesses to start pension plans
for their employees.
The tax credit most business owners are
familiar with is the Research Credit, which
is designed to help companies fund the
type of long-term development that contributes to a competitive market. Also
recently modified is the Empowerment
Zone and Renewal Community Employment Credit that promotes development in
distressed areas. If your business is profitable and located in an Empowerment
Zone, you may be eligible for the tax credit. And if you expand in one of these targeted areas, your employment efforts may
be rewarded with a dollar-for-dollar tax
credit. Also common are employment tax
credits, such as the Work Opportunity
Credit and the Welfare to Work Credit. If
you hire workers in certain targeted
groups, you may earn a credit for a portion
of the wages you pay them.
On the small-business front, the government hopes that a Small Employers
Pension Plan Startup Costs Credit will
inspire owners to provide retirement plans
for employees. Meanwhile, to encourage
companies to adopt energy efficient practices, there are credits that address non-conventional fuels, efficient energy homes
and appliances, alternative motor vehicles
and others. The list is quite extensive, and
your accountant can provide greater detail
if these credits apply to your company.
This brings to light the importance of sharing day-to-day business with your accountant.
How should business owners prepare their
records to take advantage of tax credits?
Most of the records required for these
credits may be compiled at the year’s end.
There are instances when tax credits may
require certification prior to employment.
In most cases, information necessary for
supporting eligibility for a tax credit can be
ascertained at year’s end when you are
preparing your tax return.
Are there limitations to the tax reduction a
business owner can realize from tax credits?
First, most tax credits are predicated
upon having taxable income and paying
income tax. Therefore, if your business
experienced a loss and you are not paying
tax, you are still eligible for the credit, but
you will have to wait until a year when you
have taxable income to utilize that credit.
That said, you must be sure to retain all
documentation and discuss planning
avenues with your accountant so you can
take advantage of the credit when the time
is right (and you’re paying taxes).
Another limitation is the percentage by
which you can reduce your tax. You can
reduce taxes up to 25 percent of your regular tax in excess of $25,000. So if your taxes
are $125,000 and you have $25,000 in credits, you can reduce your net tax to
$100,000. For more detailed information,
consult your tax professional.
How can a business owner study more about
tax credits?
Helpful information is as close by as the
Internal Revenue Service (IRS) Web site at
www.irs.gov. Search for ‘tax credits,’ and
you can order publications on particular
credits to learn more.
MARK ANDERSON is director of the Tax Strategies Group for
Kreischer Miller in Horsham, Pa. Reach him at (215) 441-4600 or
[email protected].
