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Commonly Overlooked Tax Incentives for Business Owners

Help entrepreneurial clients use government programs to lower tax bills while creating jobs and wealth

By Blake Christian

Key Takeaways:

  • With the more restrictive 2014 rules applicable to IRC §179 ($25,000) and elimination of bonus depreciation, taxpayers are looking for alternative ways to reduce taxable income and tax liabilities.
  • Taxpayers accessing these asset- and employee-based incentives can significantly reduce federal and state tax liabilities and provide the business with enhanced cash flow for expansion or debt reduction, thereby generating more investable cash.
  • Useful sites for federal and state credits include www.hud.gov and www.dsireusa.org. Googling “GoBiz” or “Enterprise Zone” will also provide information on state-level incentives.

Now is the time of year that many business owners are asking their financial advisors for help with tax planning for year-end 2014 and beyond. As many CPAs are aware, there are a wide variety of federal and state tax credits and other incentives that are readily available but often overlooked by businesses and their tax advisors.

Federal, state and local tax incentives

While the vast majority of tax planning efforts are focused on the timing of taxable income and tax-deductible items (temporary or timing differences), there are literally hundreds of federal tax incentives (permanent differences) that encourage taxpayers to invest in certain equipment, hire certain types of employees, operate in certain regions or invest in certain industries.

Most of the federal incentives are statutorily defined, so taxpayers can easily access these credits and other incentives without negotiating with the federal government before becoming eligible. However, there are also a variety of grants and exemptions that may require applications or negotiations with federal agencies.

State and local incentives, however, fall into two general categories—“Pre-Qualification” programs and “Non-Pre-Qualification” programs.

For example, of the approximately 40 State Enterprise Programs, which vary in specific incentives (but which typically have hiring and equipment credits as core program benefits), roughly two-thirds are in prequalification states.

Preqqual States typically require taxpayers to apply to state agencies in advance of starting a business or prior to expanding their operations. They must also obtain approval to participate in the state program. Examples of prequal states include New York (Empire Program), Texas (Enterprise Zone) and California (Enterprise Program). Again, the majority of states require advance approval for their larger incentive programs.

Non-prequal states simply require taxpayers to meet certain statutory criteria to be eligible for the tax incentives or other financial incentives. In many cases, simply hiring employees in certain geographic regions or purchasing designated equipment (e.g., manufacturing or environmental). Florida, Utah and Arizona are examples of states that offer certain incentives covering all or significant parts of their states. But many states do not.

In addition to these major state incentive programs, most states (and local jurisdictions) have a healthy variety of other statutory credits and exemptions. These benefits generally apply to corporations but occasionally extend to individual taxpayers via flow-through credits from LLCs, partnerships and S corps. In the current competitive environment for attracting and retaining businesses, states and municipalities are often open to negotiating short-term and long-term income/franchise tax holidays, property tax exemptions, sales tax rebates, low-interest loans, and even land and building transfers.

Since credits claimed often have an offsetting impact on depreciation or wage deductibility (to avoid double-dipping), the net, after-tax federal benefit can often be less than the after-tax benefit for similar credits at the state level.

The moral here is “A credit is a credit,” but don’t look down your nose at state- and local-level credits. Business owners and their advisors should explore all available federal, state and local incentives because they have significant value.

Federal business tax credits

Following are examples of various federal credits available for certain asset acquisitions and new hires.

Many credits expired at the end of 2013 or earlier; however, the federal statute of limitations is still open for at least three years, and there is federal refund potential via amending returns back to 2011, or earlier in some cases. Furthermore, Congress is still considering the extension of some of these provisions, primarily the Research and Experimentation Credit, the Empowerment Zone Credit and the Work Opportunity Tax Credit. In past years, extension of these credits has been retroactive to the beginning of the year. However, with a dysfunctional Congress and serious budget challenges, extensions are by no means ensured for 2014.

Research and Experimentation Credit

IRC Section 41 provides a relatively common credit, which is a general business tax credit for companies that are incurring R&D expenses in the United States. A taxpayer is entitled to a research credit for qualifying amounts (generally W-2 amounts paid to research-focused employees and/or for certain outsourced research) paid for or incurred before December 31, 2013. The credit is generally equal to 20 percent of the amount by which the qualified research expenses exceed a specific base amount unless a simplified method is elected. Many states also have a similar credit.

Empowerment Zone Employment Credit

IRC Section 1396 provides an incentive to businesses that are located in distressed urban and rural areas in need of economic revitalization, known as empowerment zones (EZ). The credit is available to businesses located in an EZ hiring and retaining employees who also live in an EZ. Businesses are eligible for a wage credit of up to $3,000 per eligible employee. The credit amount can be as high as $3,000 (20 percent of the first $15,000) of wages paid to the employee. This credit expired on December 31, 2013, but may be renewed.

Work Opportunity Tax Credit (WOTC)

WOTC is a federal tax credit available to employers who hire and retain veterans and individuals from other target groups with significant barriers to employment. Employers generally can earn tax credits ranging from $2,400 to $9,600, depending on the classification of the employee. This credit expired on December 31, 2013, but will likely be reinstated. Therefore, employers are advised to screen and pre-certify any new qualifying employees within 28 days of hiring by filing IRS Form 8850 and ETA 9061.

Alternative Motor Vehicle Credit—Qualified Fuel Cell Vehicles

A qualified fuel cell motor vehicle is a vehicle that is propelled by power derived from one or more cells that convert chemical energy directly into electricity.

For fuel cell vehicles that weigh not more than 8,500 pounds, the base credit amount is $4,000. The amount of the credit available for heavier commercial vehicles varies from $10,000 to $40,000, depending on the weight of the vehicle.

This credit may not apply to property purchased after December 31, 2014. Additional information and guidance for the Alternative Motor Vehicle Credit can be found under IRC Section 30B.

Plug-In Electric Drive Vehicle Tax Credit

Code Section 30D provides a credit for Qualified Plug-in Electric Drive Motor Vehicles, including passenger vehicles and light trucks. For vehicles acquired after December 31, 2009, the credit is $2,500 plus additional amounts for a vehicle that draws propulsion energy from a battery with at least 5 kilowatts. The total amount of the credit allowed for a vehicle is limited to $7,500. For qualified two- or three-wheeled plug-in electric drive vehicles, the cap is the lesser of $2,500 or 10 percent of its cost. Section 30D was modified by the American Taxpayer Relief Act (ATRA) 2013 for certain two- or three-wheeled vehicles acquired after December 31, 2011, and before January 1, 2014. Again, extension of this credit is likely.

Disabled Access Credit

IRC Section 44 provides a tax benefit for businesses that have employees with disabilities. This is a nonrefundable credit available for small businesses with earnings of $1 million or less and no more than 30 full-time employees that incur expenditures for the purpose of providing access for persons with disabilities into the taxpayers’ facilities. The credit is 50 percent of expenditures over $250, not to exceed $10,250, for a maximum benefit of $5,000. Refer to IRS Form 8826.

Barrier Removal Tax Deduction

The Architectural Barrier Removal Tax Deduction provided by IRC Section 190 encourages businesses of any size to remove architectural and transportation barriers to the mobility of persons with disabilities and the elderly. Businesses may claim a deduction of up to $15,000 a year for qualified expenses for items that normally must be capitalized.

The Medical Premium Tax Credit

As part of the Affordable Care Act (ACA), beginning in calendar 2014 companies that get their health insurance coverage through the Health Insurance Marketplace (through their state, not federal, exchange) may be eligible for the federal premium tax credit. This tax credit can help make purchasing health insurance coverage more affordable for low- and middle-income employees. The credit available is based on the lesser of (1) the premium for the qualified health plans in which a taxpayer or the taxpayer’s family member enrolls or (2) the excess of the adjusted monthly premium for the applicable benchmark plan over one-twelfth of the product of the taxpayer’s household income and the applicable percentage for the taxable year. See IRS Form IRC Section 36B.

The Building Rehabilitation Tax Credit

IRC Section 47(a)(1) provides the Rehabilitation Tax Credit, which offers a 10 percent credit for the rehabilitation of non-historic buildings, with an additional requirement that the building must originally have been constructed before 1936.

IRC Section 47(a)(2) provides a more valuable 20 Percent Historic Tax Credit, available for the rehabilitation of a Certified Historic Structure.

Most of these credits have their own reporting federal form; however, the credits end up flowing as a general business credit and are reported using IRS form 3800. The General Business Credit (Form 3800) is available at http://www.irs.gov/pub/irs-pdf/f3800.pdf.

Virtually all these state and federal credits require a reduction in the depreciable basis of the related assets. In addition, the credits generally can be used to reduce “regular” tax to zero, but these credits are normally not allowed to reduce Tentative Minimum Tax/ Alternative Minimum Tax.

Conclusion

Business owners and their advisors who take the time to dig into these incentives for their businesses will be pleasantly surprised by the wide variety of tax and economic benefits to which they are entitled.

About the Author

Blake Christian, CPA/ MBT is a Tax Partner in the Long Beach office of California-based Top 50 CPA firm HCVT LLP. Blake has over three decades of experience and specializes in corporate and high net-worth individual income, estate and gift tax planning. Blake is a frequent speaker and author and is a thought leader in best practices for professional service firms.