Are you entitled to tax credits that you are not using? Or perhaps you are not even sure whether you qualify. Some people think that tax credits are designed to benefit only major corporations, but if that’s what you’ve been told, here are 5 points about tax credits for your consideration.
1. Tax credits are not just for big corporations.
Whether your company is large or small, you can’t afford to overlook the impact that tax credits can have on your bottom line. There are a number of tax credits that are directed at small businesses, but the same tax credits that larger companies use can also benefit small businesses. True, you may not get the same amount in credits that some larger corporations get, but if you hired just ten employees last year that qualified for a Work Opportunity Tax Credit, you could be eligible for tens of thousands of dollars in tax credits. How much would that add to your bottom line?
2. Tax credits are not the same as tax deductions.
Unlike tax deductions, which reduce the amount of money that you pay taxes on, tax credits are subtracted from the amount you owe. Tax credits are a dollar-for-dollar reduction in your tax liability, so they go straight to the bottom line.
$100K profit – $10K tax deduction = $90K balance to be taxed.
$90K x 21% tax rate = $18,900 in taxes.
$100K profit x 21% tax rate = $21K.
$21K tax – $10K credit = $11K in taxes.
Deductions reduce taxable income. While they are good, they are not as valuable as tax credits, which directly reduce tax liability. But since tax credits are based on income that is readjusted to claim the credit in place of the deduction, the net value of the tax credit is the reciprocal of the tax rate. With a current tax rate of 21%, this means that a credit is 79% more valuable than the deduction.
3. Governments give tax credits to promote policy goals.
Why do governments offer tax credits? Taxes and tax credits are really the opposite sides of the same policy coin. While most taxes are enacted to raise revenue for the government, in some cases punitive taxes are designed to discourage or limit behaviors determined to be detrimental. Tobacco, for example, is taxed heavily to discourage its usage because it has been determined that its effects are harmful for human beings.
On the other hand, the government creates tax credits to promote behaviors it thinks will benefit society. If certain high taxes are the ‘stick’, tax credits are the ‘carrot’ used by the government to promote its policy objectives.
For businesses, there are a range of credits. They are too numerous to list here but include R&D, energy, and various state and local credits as well as hiring credits that encourage business to hire the chronically unemployed or underemployed. Some tax credits are general and available to many businesses. Others are very specific and narrow in scope, applicable to only a very few businesses.
4. Tax cuts benefit not only businesses, but also the government and the taxpayer.
Who benefits from tax credits? The generally accepted wisdom is that we all do. In addition to encouraging certain government priorities, tax credits generally also help the government to save money. Some credits are used to bolster business income, increasing the amount of overall taxes that businesses can pay. States also use credits to attract new businesses and thus enhance their own revenue base, counting on a multiplier effect. Still other credits are actually designed to save the government money by reducing their expenditures on government entitlement programs. These credits may be expenditures from the government’s coffers but studies show that they actually save the government and taxpayers billions of dollars in other benefits that they would pay otherwise.
Labor Economist Peter Cappelli, Wharton School of Business calculates:
• The Federal Government saved on average $7,600 in TANF, SNAP Medicaid, and federal housing subsidies per certified candidate in Fiscal Year (FY) 2015.
• Based on 1.9 million certified hires, that means $14.4B for FY 2015
• The amount saved by the state governments from these assistance programs was $4B for FY 2015
The benefit for business owners is simple. Tax credits reduce the amount of tax owed to the federal and state governments. Depending on your business these credits can save you a lot of money. But you don’t need to be a huge company to benefit from tax credits. Tax credits are a win for everyone.
5. Your CPA will need some help to administer your tax credit
Many business tax credits are more than a calculation that a CPA puts on a return. Credits frequently involve compliance with regulations which requires both expertise beyond accounting and the implementation of non-accounting processes. Companies that claim incentives such as the R&D or New Markets Credit rely on highly skilled staff or outside consultants.
In the case of employment credits, such as the Work Opportunity Tax Credit (WOTC), there are strict regulations about time requirements for filing paperwork, and documentation requirements to determine which employees are eligible. Lastly, there are complex rules involved in the credit calculations.
You should not let these compliance burdens prevent you from utilizing these credits. Despite the complexities, WOTC is among the most widely used tax credits by literally thousands of companies. But unless you have in house tax credit experts, it is best to use a consultant like McKenzie Chase to maximize your credits while minimizing your time and risk. Once our simple processes are put into place, virtually all the burden is lifted off your company’s back. And, fees are contingent on actually gaining the credit. Companies only pay the equivalent of a small percentage of the money they save. Everyone should appreciate the value of reward without risk.