Is your business taking advantage of all available tax credits?
Tax planning is important to every business. Tax credits are an integral part of that planning and often can make an enormous impact on your bottom line. Unfortunately, many businesses and CPAs alike are not aware of the plethora of tax credit programs that are available.
Some business tax credits are Federal, some are State-specific and some are both. Below you will find some, though certainly not all, of the tax credits that are available to businesses in California. If you operate a business in another state, be sure to check directly with your state government, in addition to your CPA, to find out what may be available to you.
California Competes Tax Credit
The California Competes Tax Credit is a program through the Governor’s Office of Business and Economic Development (GO-Biz). Its purpose is to assist California companies achieve growth, thus spurring economic activity and job creation.
This programs allows you to request a tax credit based on the amount of money you plan to invest in creating new jobs. In addition to the payroll investment, this includes investments in property, machinery, vehicles or anything else with a direct impact on the successful creation of new jobs.
Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit (pronounced “wot-see” for short) is a Federal tax credit program. WOTC is designed to promote the hiring of individuals in groups that face potential barriers to employment.
This includes recipients of Temporary Assistance to Needy Families (TANF), Food Stamps or Social Security, Qualified Veterans, Designated Community Residents, Summer Youth Employees, Vocational Rehabilitation Referrals and Qualified ex-felons.
The employer benefit is based on the number of hours worked by the employee and can result in tax credits of up to $9,600 per qualified worker. To claim the credits, you must complete the appropriate qualification forms prior to the employee starting work. As such, it’s important to make sure that you have the necessary process in place to claim these tax credits.
Manufacturing and Research & Development Sales Tax Exemption
The State of California provides tax credits for businesses that acquire equipment used for manufacturing or research and development. Specifically, these tax credits take the form of partial exemptions from Sales and Use taxes. This reduces the use tax from the current base rate of 7.25% to 3.3125%, a reduction of over half.
Many CPAs are aware of this, but not all have clients that engage in manufacturing or research. As a result, be sure to ask your CPA if he/she is making sure you receive this exemption for all applicable investments.
New Employment Credit (NEC)
The NEC offers tax credits for hiring new employees in a Designated Geographic Area (DGA). In most cases, they are areas of high unemployment, high poverty rates or both. The State identifies these DGAs and this program requires specific approval. However, it can be a source of significant tax credits if you have a location that lies within a DGA.
Research & Development Tax Credit (R&D)
The Research & Development Tax Credit is a Federal program. In addition, most States offer some form of it as well. A result of the Economic Recovery Act of 1981, the program provides tax credits for businesses of any size that design, develop or improve products, processes, techniques, formulas or software. Typically, the credits are 13% of qualified expenses.
In addition, credits can be carried forward for up to 20 years and were recently made permanent through the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The tax credits can also offset the dreaded Alternative Minimum Tax (AMT) and can be used to offset payroll taxes for startups with no tax liability.
Employment Training Panel (ETP)
The Employment Training Panel provides tax credits to offset the cost of training your staff. Like most of these programs, you must submit an application for approval. Then, the resulting credits can be used to reimburse your business for the investments in training. This includes all training, whether provided using internal resources or using an outside company. In many cases, the tax credits can offset most if not all of the money you spend to improve your people and company.
Claiming Your Tax Credits
There many more tax credits that are made available at all levels to assist businesses in being successful. The programs mentioned here are just a few of them but represent some of the most common. Many require a specific application and approval process. However, it’s worth the time research what may be available to your company.
You can identify many credits using your in-house staff but don’t discount the programs that will require you bringing in outside help. Yes, it can be expensive but in many cases, the benefits far outweigh the rewards.
Please feel feel to contact me if I can help you identify specific tax credits from which your business may be able to benefit.