Are You Missing Out on Business Tax Credits and Incentives?
No business owner enjoys tax time, but maximizing potential tax credits and incentives can make it a little easier. However, many business owners miss out on tax savings because they aren’t aware of the credits or incentives available to them.
At Davie Kaplan, we specialize in helping business owners maximize tax savings. Consider our list of some of the most often overlooked tax incentives for businesses, and how they might be able to save you money.
Research & Development Credit
Technically known as the Credit for Increasing Research Activities, the R&D tax credit allows eligible businesses that perform activities qualifying as research and development to take a credit against their income taxes. The credit may be claimed by corporations, S corporations, partnerships and even self-employed taxpayers. Certain businesses that don’t have an income tax liability may instead apply the credit against up to $250,000 of social security taxes on employee wages instead. In many cases, business owners don’t realize they qualify for this credit—but the definition of R&D is likely broader than you expect.
For example, nearly all manufacturing companies are undertaking some efforts to improve their products or procedures. While that may seem like it’s just good business management, it actually qualifies as R&D for the IRS.
Manufacturers often need to alter their production processes to meet customer specs and demands, improve production to boost efficiency, or rework their processes due to labor shortages. Accomplishing all those objectives often requires a process of experimentation or “trial and error”, so it may qualify for the R&D credit. Software companies, food manufacturers and others that are regularly developing new products and adjusting processes are likely to qualify.
To get the credit, a business must maintain documentation of all the human and material resources that go into the research and development process. There are specific rules about the types of activities and expenses that can qualify as a credit and there have been many developments in the interpretation of the tax law in this area in recent years. Davie Kaplan advisors are available to answer questions and help you determine whether your R&D efforts might qualify.
Accelerated Real Estate Deduction
Typically, a business real estate purchase must be depreciated over 27½ to 39 years on a straight-line basis. The income taxes paid over the decades required to deduct the investment reduce the company’s cash flow. To accelerate the tax write-off, a business can undertake a Cost Segregation Study to recategorize a portion of the cost of the real estate property as five-year, 7-year and 15-year assets. That means you can write off the cost of the property more quickly, taking advantage of the tax savings in a shorter time frame, improving cash flow over the life of the asset.
To accelerate the deduction of a real estate purchase, the IRS requires a cost segregation study, which is a detailed analysis of the construction cost or purchase price. The study must identify all property-related costs that can be depreciated over five, seven and 15 years.
If your business spends more than $500,000 to purchase or improve a building, commissioning a Cost Segregation Study may be worthwhile. That’s because your tax savings over the next 15 years could be beneficial.
Employee Retention Credit
The Employee Retention Credit that became effective during the pandemic under the CARES Act requires amended filings by January 2024, but some business owners have not yet taken advantage of that credit. In 2021, this refundable credit was available equal to 70% of up to $10,000 in qualified wages per quarter paid by an employer whose business was fully or partially suspended because of COVID-19, or whose gross receipts declined by more than 20%. (A more restrictive credit was also available in 2020.)
If your business has not yet taken advantage of the Employee Retention Credit, consider talking to your tax advisor to find out whether you qualify.
Businesses that have a significant amount of sales to other countries can take advantage of tax savings by establishing an Interest Charge Domestic-International Sales Corporation (IC-DISC). If your business meets the requirements, establishing an IC-DISC allows you to defer recognizing export income to shareholders, and may also allow such income to be eventually recognized at a lower tax rate.
For example, if the business owners are individuals, they can shift the tax rate by creating an IC-DISC, which creates an ordinary commission expense for their business. Later, when the profits from the international sales are distributed to the owners from the IC-DISC, they come to the owners as qualified dividends. Essentially, the process converts ordinary income to dividends reducing the applicable tax rate.
Staying current on which tax credits and incentives you may qualify for based on the latest rules and policy changes can help you maximize tax savings. Davie Kaplan tax advisors can answer questions about these and other potential tax savings strategies for business owners.