One of the primary obstacles that prevents organizations of all kinds from growing is simply the financial challenge of doing so. More pressing demands—such as the need to initiate new processes to comply with changing regulations or simply an increased workload—can mean less time and fewer resources to put toward growth, whether you hope to hire more employees, open new locations, or expand your product line. One often overlooked approach, claiming tax credits and incentives, can free up enough cash to make the difference.
Let’s look at a few of the most widely claimed credits and incentives, what businesses and activities can qualify, and how you can pursue them.
Hiring and Zone-Based Credits and Incentives
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is a federal tax credit provided to businesses that hire individuals who receive government assistance in hopes of enabling those individuals to become more self-sufficient (and therefore less reliant on the government).
Depending on which target group the individual belongs to, the maximum credit per new hire can range from $2,400 to $9,600. The credit amount per new hire depends on the number of hours worked and the wages earned during the period of employment. Target groups include:
- Members of families that receive Supplemental Nutrition Assistance Program benefits (food stamps)
- Members of families that receive short- or long-term Temporary Assistance to Needy Families or Aid to Families with Dependent Children (welfare)
- Qualified (unemployed or disabled) veterans
- Qualified ex-felons or pardoned, paroled, or work-release individuals
- Individuals who have completed or are completing vocational rehabilitation programs
- Qualified summer youth, that is, individuals 16 or 17 years old living in an empowerment zone
- Individuals receiving Supplemental Security Income
- Designated community residents, such as individuals living within an empowerment zone
The WOTC has been extended to apply to the period through December 31, 2014, so employers will be able to claim it on their 2014 tax returns. However, because applications for the credit must be filed within 28 days of a qualifying new hire’s start date (unless other IRS guidance is provided, as it has been for 2014), it’s important to establish processes for applying for the credit right away if you plan to begin doing so. It’s also important to continue screening 2015 new hires within the 28-day statutory window so your company will be eligible to obtain the credit for these individuals upon the future extension of the WOTC.
Empowerment Zone Credits
These credits are available to businesses that hire individuals who live and work in federally designated empowerment zones. If an employee both lives and provides services to your business in one of these zones, you may qualify for a federal tax credit of 20 percent of the first $15,000 you paid the employee in wages in 2014. Many states also offer their own empowerment zone credits, which can be up to 50 percent of an employee’s hourly wage. And because taxpayers are allowed to claim both federal and state credits, the tax savings can add up quickly.
Like the WOTC, federal empowerment zone credits have been retroactively extended to apply to the period through December 31, 2014, making them available for employers to claim on their 2014 tax returns.
R&D Tax Credit
First, to dispel a common myth, the R&D tax credit isn’t available only to high-tech companies performing never-before-seen research. In fact, it’s available to businesses in a wide range of industries—from agriculture and food processing to medical devices and pharmaceuticals, manufacturing, software, and aerospace—often for work they’re already performing.
The goal of the federal R&D credit is to provide businesses with an incentive to increase their investment in designing and developing new or improved products or processes. Businesses that devote time to any of the following may qualify:
- Designing new products or processes
- Improving existing products or processes
- Engaging in patent development
- Developing software
- Engineering innovative solutions for structural, geological, or environmental projects
- Prototyping, modeling, and trial-and-error testing
- Designing tooling or fixtures
On top of the amounts you may be able to claim at the federal level, many states also offer credits for R&D. Combined, the tax savings can be significant, freeing up additional cash you can use for further investment in R&D or other growth opportunities.
The federal R&D tax credit has been renewed through December 31, 2014, making it available for taxpayers to claim in the 2014 filing season.
Fixed Asset Deductions and Deferrals
There are a variety of tangible asset incentives available to building owners and operators that are actively considering or already in the process of building a new facility, or that are acquiring, renovating, or expanding an existing one. By performing a cost segregation study, you can identify building assets with tax depreciation lives shorter than the building itself and classify them properly for tax purposes. Taking depreciation deductions on these items separately significantly increases near-term tax deductions, boosting cash flow.
The new tangible property regulations, which also impact these depreciation rules, are now mandatory for tax years 2014 and beyond, and they’ve changed the landscape regarding which improvements to tangible property may be expensed and which must be capitalized. In addition to allowing you to frontload your depreciation deductions, performing a cost segregation study is a great way to review and update your accounting for compliance with the new regulations.
Transferable Tax Credits
Many states offer transferable tax credits as a way to encourage economic growth, increase job creation, and enhance innovation. Depending on the state, businesses engaging in various activities including (but not limited to) film production, historic rehabilitation projects, and renewable energy projects can qualify for transferable state tax credits. If your business can’t use the transferable credits it has earned, you can sell them to another company and increase your cash flow. Companies across industries are eligible to purchase other businesses’ transferable tax credits to reduce their own tax burden.
Depending on the state, the type of credit, and the types of taxes that may be offset, the prices for these transferable tax credits can range from $0.67 to $0.95 per dollar of credit purchased. They have the potential to deliver a high rate of return, helping you:
- Reduce your total state income tax liability
- Lower your effective state tax rate
- Diversify your investment portfolio
- Support activities in the arts and film, renewable energy, historic rehabilitation, and other areas
Sellers of transferable tax credits often choose to sell because their organizations aren’t taxable or the amount of credits earned exceeds their tax liability. Rather than let the credits go to waste, selling them is an opportunity to turn them into cash you can reinvest in your business.
The recent introduction of online transferable tax credit exchanges has made the process of buying and selling these credits more transparent. With real-time visibility into your trading options, you’re better positioned to make strategic decisions on whether to buy or sell and from whom.
We're Here to Help
Businesses should expect to encounter some complexity when claiming tax credits and incentives, but the tax savings are far too valuable to bypass. By claiming them, you’ll be able to increase cash flow in the near term, providing your organization with the critical financial flexibility to seize new opportunities for growth. Furthermore, new tools have made the process of claiming credits much easier, bringing them within reach for more businesses.
Among the tools Moss Adams offers to help businesses take advantage of these credits is MaxCredits™, a Web-based tool that helps employers screen and qualify for the WOTC and empowerment zone credits. New hires enter relevant information via a secure Web site to determine whether they qualify your business for federal or certain state wage-based tax credits. Applications for the credit are then submitted automatically, turning a process that normally takes up to three weeks into one that takes a day. Then there’s the Moss Adams Tax Credit Exchange, an online platform that makes it easier to buy and sell transferable credits.
To learn more about credits and incentives your business may be able to claim, contact your Moss Adams professional. Or email email@example.com.