Is your business taking advantage of all the tax credits that are available?
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) which is designed to assist California companies achieve growth, thus spurring economic activity and the creation of new jobs. This programs allows you to request a tax credit based on the amount of money you plan to invest in creating new jobs. This includes not only the payroll investment but also 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 program 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. The appropriate qualification forms must be completed prior to the employee starting work, so 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 for tax credits (specifically, a partial exemption from Sales and Use taxes) for businesses that acquire equipment used for manufacturing or research and development. 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, though since not all have clients that engage in manufacturing or research, 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). Typically, the DGAs are areas of high unemployment, high poverty rates or both. The DGAs are identified by the state and while this program requires specific approval, 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 offered at the Federal level, as well as by most States. 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. The credits are typically 13% of qualifies expenses, 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. While it requires an application and approval process, it can be used to reimburse your business for the investments in 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.
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. While many require a specific application and approval process, it’s worth the time research what may be available to your company. Many tax credits can be identified and managed 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.
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