There’s no sense in paying more than you owe. That’s why savvy business owners seek out every tax credit and tax deduction their businesses qualify for. Both tax credits and tax deductions reduce your tax liability, but in different ways. A tax credit is a dollar-for-dollar tax offset, while a tax deduction reduces the amount of your income that is subject to taxes. Both can save your company a significant amount of money.
Following are a few popular tax credits and deductions worth considering:
Research & Development (R&D)
The R&D tax credit is available to businesses of all sizes, and not only those with major research initiatives. Indeed, if your company develops, designs, or enhances new products or processes or develops or improves upon existing prototypes and software, you may qualify for this credit. The credit requires a four-part test to determine that the research qualifies.
The research activities must:
- Eliminate uncertainty
- Use a process of experimentation
- Be technological in nature
- Have a qualified purpose.
The credit can be claimed for current and prior tax years and requires significant documentation. Also, startups and small businesses can qualify for up to $1.25 million in R&D tax credits over five years to offset the FICA portion of their annual payroll taxes.
Energy & Environment
If your company owns or invests in a renewable energy project, you may qualify for the IRS Section 48 energy investment tax credit. For solar, fiberoptic, wind, and other types of energy projects started before January 1, 2020 and placed into service before January 1, 2024, you can earn a credit of 30 percent of qualified expenditures. For geothermal projects, the credit is 10 percent.
If it is extended, companies may also be able to take advantage of the Energy-Efficient Commercial Building Deduction, also known as the Section 179D tax deduction. This incentive allows a deduction of up to $1.80 per square foot for the installation of energy-efficient improvements in lighting, HVAC, and building envelope systems.
As of this writing, the Section 179D tax deduction is expired and currently covers only improvements installed before the end of 2017. However, this deduction has been extended many times over the years, and recently, a U.S. Senate bipartisan task force was formed to consider solutions to provide longer-term certainty about this and other tax incentives.
The Work Opportunity Tax credit is available to companies hiring individuals from certain targeted groups that have traditionally faced significant barriers to employment. These groups include qualified veterans, those receiving specific types of government assistance, ex-felons, people living in specific Empowerment Zone communities, and more. In general, employers can earn a tax credit equal to 25 percent or 40 percent of a new employee’s first-year wages, up to $9,600 per employee.
Don’t leave money on the table. Talk to your tax advisor about how your company can benefit from these and other tax incentives.
State and local governments have tax incentives, too. Let’s talk about how your company might qualify.