A number of tax credits and incentives have increased eligibility for businesses of all sizes and across industries, providing an excellent opportunity for these businesses to save tax dollars.
With the time sensitivity of some incentives, now is the time to add these items to your tax planning checklist. However, many businesses aren’t getting the benefits they’re eligible for, leaving large sums of money on the table. By claiming these benefits, a company can increase cash flow in the near term, providing critical financial flexibility to seize new opportunities for growth.
There are three main trends dominating tax credits and incentives:
- More businesses are saving money with the expanded R&D tax credit.
- Taxpayers are acting before phaseout periods to utilize tax savings for tangible assets.
- Employers are benefiting from expanding tax incentive eligibility for new hires.
Trend 1: More businesses are saving money with the expanded R&D tax credit.
More companies than ever are eligible to claim the R&D credit. With the federal R&D tax credit now permanent, companies of all sizes and industries can quantify the value of the R&D tax credit in their long-range budgeting and forecasts. Many companies that have underutilized the R&D credit can benefit.
New and Small Businesses
For new and small businesses in particular, the credit is much more accessible. The tax credit can be utilized by:
- Small businesses to fully offset alternative minimum tax (AMT)
- New businesses to offset up to $1.25 million in payroll tax
Eligible businesses can now use the R&D credit to fully offset AMT without regard to tentative minimum tax. Credits that were previously carried forward can now immediately reduce a company’s tax liability—freeing up cash that can be reinvested in the business. Eligible small businesses are sole proprietorships, partnerships, and nonpublicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.
The new payroll tax offset allows companies to receive a benefit for their research activities regardless of whether they’re profitable. The new payroll tax offset is available to a new business if:
- Activities meet the tax definition of R&D
- Gross receipts have been generated for five years or less
- Gross receipts are less than $5 million in the current year
Companies with qualifying activities can claim up to $250,000 against certain payroll taxes each year for up to five years.
Businesses with Software Development Activities
A final clarification to the definition of internal use software (IUS) in 2016 means more software development activities may be eligible for the R&D tax credit. (IUS development is still subject to additional eligibility rules, referred to as the “higher threshold of innovation” tests, beyond the rules for non-IUS R&D activities.) The changes aim to make the tax credit more readily available to businesses whose software development activities may not previously have been eligible for the credit.
Amounts claimed are based on qualified expenses. To be eligible for the credit, a company’s activities must meet the four-part test.
Trend 2: Taxpayers are acting before phaseout periods to utilize tax savings for tangible assets.
Like the R&D tax credit, tax incentives for tangible assets continue to increase in scope. Businesses that have recently made significant property improvements can utilize valuable tax incentives to reduce their tax liability. Businesses planning to expand a property may want to act soon. Following are some incentives to begin the process.
Bonus depreciation enables businesses to recover the costs of depreciable property more quickly in the first year and enhances cash flow, a key advantage for businesses in investment mode. Businesses can more effectively utilize bonus depreciation if they act sooner rather than later.
Qualified improvement property (QIP) is a newly added 39-year property classification subject to bonus. Improvements that don’t meet the requirements for qualified leasehold improvement property (QLIP), qualified retail improvement property (QRIP), and qualified restaurant property (QRP), may be able to take advantage of QIP’s broader requirements. QIP is similar to QLIP; however, there isn’t a three-year waiting period, it can include common area components, and it’s irrelevant of improvements pursuant to a lease. QIP is currently set to expire when bonus depreciation is phased out at the end of 2019.
Energy-efficiency credits and deductions provide an excellent opportunity for companies to reduce their tax liability. Taxpayers can generally utilize a 30 percent federal income tax credit for certain energy property—predominantly wind and solar equipment—placed in service through 2019, with a gradual phaseout of the credit through 2022 for select technologies.
For energy-efficient new buildings and remodels, property owners should consider the lucrative Energy-Efficient Commercial Buildings Tax Deduction, known as Section 179D. This deduction is valued as highly as $1.80 per square foot—for property placed in service between January 1, 2006, and December 31, 2016. In the case where the building is owned by a government entity, that government entity may elect to allocate the deduction to the designer or contractor of the project. The possibility of an extension is uncertain.
Trend 3: Employers are benefiting from expanding tax incentive eligibility for new hires.
Federal credit incentives have boosted hiring eligibility while programs are expanding at the state level as well.
Work Opportunity Tax Credit (WOTC)
The WOTC provides a tax incentive for hiring individuals who face barriers to employment. Depending on which target group an individual belongs to, the maximum credit per new hire can range from $2,400 to $9,600.
The 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)
- Individuals unemployed for at least 27 consecutive weeks who received unemployment compensation under state or federal law during that period
The last target group listed was added to the WOTC in 2016, and there’s potential for additional target groups to be added in the future.
Hiring credits for employers are also being expanded at the state level. For example, businesses in Washington State that hire qualified veterans are now eligible for a new state tax credit in addition to the existing federal WOTC. This is a first-come-first-serve credit with a statewide fiscal cap of $500,000 per year. Multiple states are looking to adopt state-level hiring credits over the next few years but will likely watch to see if a bill passes in Texas before moving forward with their own draft bills.
Empowerment Zone Tax Credit (EZTC)
This credit provides businesses with an incentive to hire individuals who live and work in a federally designated empowerment zone. The credit is equal to 20 percent of the first $15,000 in wages earned in a taxable year if the employee both lives and works in an empowerment zone. Subject to the statute of limitations, businesses can retroactively claim this credit on their federal income tax return. Look for a possible extension of the EZTC, which is set to expire December 31, 2016.
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Many companies have utilized these tax credits and incentives to reduce their tax burden in sums that have made a vital difference to their business. If you’d like to better understand how any of these opportunities might benefit your company, contact your Moss Adams professional.