Tax credits promote investment and stimulate economic growth. And while many businesses can benefit from claiming relevant tax credits, according to the General Accounting Office, only one in 800 businesses claim federal or state tax credits for which they’re eligible for.
In the small and medium-sized business market (businesses with revenues not exceeding $50 million), $4.2 billion in federal and state tax credits go unclaimed. By failing to detect and act on certain tax credits, businesses are passing up what can amount to thousands of dollars in savings.
A credit generally is more valuable to a taxpayer than a deduction. A tax credit is a dollar-for-dollar benefit, whereas a tax deduction reduces the taxpayer’s taxable income. For example, a C corporation with taxable income of $20 million and a tax burden of $500,000 may choose between taking a $50,000 deduction or a $50,000 credit. The deduction will lower the business’ taxable income to $19.95 million.
At the corporate 35 percent tax rate, this will lower the tax burden by $17,500. However, if the corporation elects to take the tax credit, that will produce a $50,000 benefit by lowering the company’s tax bill to $450,000.
Here are some commonly overlooked federal credits a business may claim:
Research and Development (R&D) Tax Credit is available to any taxpayer that pays or incurs “qualified research expenses” in carrying on its trade or business. A secondary part of the R&D credit is available to corporations that make basic research payments in their trade or business.
Work Opportunity Credit is a part of the general business credit. Employers who hire members of certain targeted groups may get this credit in the amount of a percentage of the employee’s first-year wages, depending on the employee.
Empowerment Zone Credit is available to all employers. The credit is equal to 20 percent of the first $15,000 of “qualified wages” paid to each employee who is a resident of certain empowerment zones and performs his or her services within the empowerment zone.
Disabled Access Credit is available only for “eligible small businesses.” These businesses may elect this credit for certain expenditures made to acquire or modify facilities to accommodate the disabled.
Small Employer Health Insurance Credit is available to “eligible small employers” that claim credits for their nonelective contributions to health insurance for their employees.
Alternative Fuel Credit is a credit in the amount of 50 cents per gallon of alternative fuel, sold or used by the taxpayer. This definition includes forklift trucks used to carry loads at plants or warehouses.
In Connecticut, a business’ claimed tax credits generally may not exceed 70 percent of its total taxes due. Some commonly overlooked state tax credits a business may claim include:
Neighborhood Assistance Credit can be earned by C corporations that make cash investments of at least $250 to certain community programs, up to 100 percent of the corporation’s investments. Non-corporate businesses may earn the credit, but only a corporate partner may utilize it.
Film Production Tax Credit is available to any “eligible production company” that produces entertainment within Connecticut and incurs qualified production expenses. This credit may be assigned to other taxpayers.
Electronic Data Processing Equipment Property Tax Credit is available to C corporations for 100 percent of the personal property tax owed and paid on electronic data processing equipment.
Hiring Incentive Tax Credit may be claimed by businesses that hire recipients of temporary family assistance.
Understanding and working with tax credits effectively can provide major financial benefits for Connecticut companies. Check with your tax advisor to see if you qualify for and can benefit from one or more of these or other credits for tax year 2013 and beyond.
Brian Newman, CPA, is a CohnReznick partner and leads the tax practice in the firm’s Farmington office. He can be reached at brian.newman@cohnreznick.com or 860-678-6009.
