It’s a challenging time to grow a business. So, any help you can get in the form of tax credits, tax exemptions, grants, low-cost financing and other incentives can make a big difference. Unfortunately, these incentives often go unclaimed. Why? In most cases, businesses have to ask for them — either by claiming benefits on a tax return or negotiating with a state or local government — and that means they have to know about them.
The credits and incentives available to businesses are too numerous to mention — plus, they vary from state to state, locality to locality and even year to year. But the work involved in identifying and claiming these incentives can pay off, especially in today’s competitive environment. Let’s examine two types of incentives available — statutory and discretionary — and outline some potential benefits.
1. Statutory incentives
Some incentives — such as federal or state tax credits or exemptions — are available “as of right.” In other words, if your business meets the requirements set forth in the statute or regulation, you just need to claim the benefits on a timely filed tax return to receive them.
State and federal tax credits and exemptions are usually designed to provide incentives for businesses to engage in certain activities or to invest in certain economically distressed areas. Examples include:
State and federal R&D tax credits. Too often, businesses don’t claim valuable R&D tax credits because they assume they’re not eligible. There’s a common misconception that these credits are only for scientific or technological research by large pharmaceutical, biotech, software and aerospace companies. In reality, these credits may be available to any business that invests in developing new products or techniques, improving processes, or even developing software for internal use. The potential benefits can be significant. The federal credit for “increasing research activities,” for example, is generally equal to 20% of the amount by which qualified research expenditures exceed a base amount derived from a business’s historical R&D expenditures.
Businesses may overlook the R&D credit because they’re small or unprofitable, and don’t think the credit would benefit them. But the credit is available to businesses of any size. And even companies with no income tax liability may benefit by claiming R&D credits. For one thing, these credits may be carried forward to offset taxable income in future years. Plus, eligible start-up companies can claim the federal R&D credit against up to $250,000 in employer-paid payroll taxes.
Work Opportunity Tax Credit (WOTC). The WOTC is a federal credit, ranging from $2,400 to $9,600 per eligible new hire from certain disadvantaged groups. Examples include convicted felons, welfare recipients, veterans and workers with disabilities. To qualify for the credit, you must complete certain paperwork and take additional other steps before extending a job offer. Many states offer similar credits.
Empowerment zone incentives. Certain incentives are available to companies that operate in federally designated, economically distressed “empowerment zones.” Tax credits may be worth up to $3,000 for each employee who works and resides within the zone.
Industry-based and investment credits. Many states and other jurisdictions offer tax credits and other incentives to attract certain types of businesses, such as manufacturing or film and television production. States and other jurisdictions may also offer investment tax credits for capital investments within their borders.
2. Discretionary incentives
Discretionary tax breaks, on the other hand, must be negotiated with government representatives. Typically, these incentives are intended to persuade a business to stay in, or relocate to, a certain state or locality.
To secure these incentives, therefore, a business must convince the government entity that it’ll create jobs, generate tax revenues, stimulate economic development or otherwise benefit the jurisdiction. Discretionary incentives may include income and payroll tax credits, property tax abatements, sales tax exemptions, and utility rate reductions.
Don’t leave money on the table
These are just a few examples of the many tax credits and other incentives available to businesses. Every year, billions of dollars go unclaimed because businesses are unaware of tax credits and incentives or erroneously believe they’re ineligible. Your tax advisors can help ensure that your business receives all the tax breaks it deserves.
Don’t lose out on sales tax exemptions
States with sales taxes (which is most of them) provide exemptions for certain purchases. Common exemptions include:
- Purchases by retailers (from a manufacturer or distributor, for example) for the purpose of resale,
- Purchases by manufacturers of equipment, raw materials or components used in the manufacturing process,
- Purchases by specific tax-exempt entities, such as nonprofit organizations, charitable or educational institutions, or government entities, and
- Certain purchases by agricultural businesses, such as farming equipment and fuel, feed, seeds, fertilizer, and chemical sprays.
Businesses should familiarize themselves with the exemptions available in the states where they do business, determine whether they qualify and satisfy any requirements for claiming an exemption. For example, they might need to present the seller with a resale or exemption certificate.