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If you’re looking for a good way to ease your tax burden, consider tax credits. In fact, tax credits let everyone win: you get to take a direct-dollar subtraction from your taxes and the federal government’s incentives help it jump-start its own goals. Among the 25 tax credit categories are those designed to increase investment in under-invested areas and markets, such as Enterprise Zones, Community Development Corporations and low-income areas. Credits are also offered for building and land rehabilitation, the creation and use of renewable energy sources, technology development and more.
Credits Support a Range of Business Activities
“Several credits offer small businesses, in particular, solid breaks,” says Fred Crooks, CPA, head of CPA Corporation. “Most often we see clients using the Credit for Qualified Electric Vehicles and Energy Investment Credit.” Here’s a brief round-up of the most popular business tax credit types:
- Energy-related tax incentives—On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008. The bill extended tax credits for renewable energy use. Companies that generate wind, geothermal, and “closed-loop” bioenergy (which is powered by dedicated energy crops) are eligible for the production tax credit (PTC), which provides a 2.1-cent per kilowatt-hour (kWh) benefit for the first ten years of a renewable energy facility’s operation. Other technologies, such as “open-loop” biomass, incremental hydropower, small irrigation systems, landfill gas, and municipal solid waste (MSW), receive a lesser value tax credit. Federal tax credits are also available for the use of solar energy, wind energy, fuel cells, energy efficiency in construction and more. For more information on energy credits related to both business and consumer uses, check out the U.S. Department of Energy (EnergyStar) Federal Tax Credits for Energy Efficiency page. (To learn more about energy tax credits available by state, check out the Database of State Incentives for Renewables & Efficiency (DSIRE).)
- Automobile tax credits—Individuals and businesses that buy or lease a new hybrid gas-electric car or truck are eligible for an income tax credit for vehicles “placed in service” after January 1, 2006 and purchased on or before December 31, 2010. The amount of the credit depends on the fuel economy, the weight of the vehicle, and whether the tax credit has been or is being phased out. Hybrid vehicles that use less gasoline than the average vehicle of similar weight and that meet an emissions standard qualify for the credit. There is a similar credit for alternative-fuel, diesel, and fuel-cell vehicles. The full credit applies even if you use your car for both personal and business purposes. Hybrid Cars and Alternative Fuel Vehicles, at the IRS site, can tell you more about the credit and the cars and trucks that qualify. In addition to a tax credit, you may also deduct the applicable deprecation based on your actual business use.
- In addition to hybrid cars, certain diesel cars will qualify for tax credits in 2009. These include:
- Volkswagen Jetta 2.0L TDI SportWagen ($1,300)
- Volkswagen Jetta 2.0L TDI sedan ($1,300)
- Mercedes R 320 Bluetec ($1,550)
- Mercedes ML 320 Bluetec ($900)
- Mercedes GL 320 Bluetec ($1,800)
- R&D Tax Credit—When the U.S. Congress passed the Emergency Economic Stabilization Act of 2008, the R&D Tax Credit (Research Credit) was extended through 2009. The R&D Tax Credit had been slated to expire at the end of 2007. Businesses that manufacture products, develop new or improved products, develop or improve manufacturing processes, design tools, jigs, dies and molds, design or integrate new equipment or fixtures or use new materials for product development may be eligible to claim the credit. There are two methods of accounting for R&D expenditures: You can deduct your R&D expenditures in the tax year during which you paid or incurred them, or you can amortize them over a period of not less than 60 months. To learn more about the R&D credit, check out the IRS’s Research and Development—Manufacturing Tax Tips page.
- Section 199 Domestic Production Activities Deduction—Small businesses in the manufacturing sector should evaluate this tax deduction. An overview of the deduction is as follows:
- A business engaged in a “qualifying production activity” is eligible to take a tax deduction of 6% in year 2007-2009, and 9% in year 2010.
- The deduction is limited to 50% of annual W-2 wages allocable to the domestic manufacturing activities.
- Determining the deduction is based on determining Qualified Production Activity Income (QPAI).
- Work Opportunity Tax Credit (WOTC)—The WOTC is a federal tax program designed to encourage employment of people who are disabled, have limited incomes, or face other challenges (the credit was scheduled to expire at the end of 2008, but the credit has been extended through August 31, 2011). Employers who hire individuals in specified target groups (such as summer youth, disabled veterans and long-term family assistance recipients) are eligible for a federal tax credit under the program. Businesses taking advantage of the WOTC may save as much as $2,400 per qualifying employee. In some cases, the savings may be as high as $9,000 per employee. For more information on the groups the credit targets and other details, see the U.S. Department of Labor’s Work Opportunity Tax Credit page.
- Small employer pension plan startup costs—You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE or qualified plan, including a 401(k). The credit is equal to 50% of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first three years of the plan. You can choose to start claiming the credit in the tax year prior to the tax year in which the plan becomes effective.
In addition to federal tax credits, a number are offered on the state level, often in tandem with federal credits. For example, many states offer credits for recycling, new equipment purchases, technology development, energy investment and more. “Planning is the key to making tax credits work,” advises Crooks. “They can be complex in terms of qualifying, so it helps to work with your CPA, accountant or financial advisor to ensure that you meet all the qualifications. But don’t leave money on the table. Go for the credits for which you qualify.” To learn more, check out Business Tax Credits at the IRS website. |
