Many different types of tax-saving opportunities and business tax credits are available — and some are more readily known than others. For example, many business owners know they can claim a deduction for business-related meals and travel. However, other types of tax incentives are used far less frequently even though eligible businesses could potentially shave thousands off their tax bill by taking advantage of them.
Though it's probably too late to take advantage of these opportunities on your 2016 tax return, businesses should explore their tax-saving opportunities for 2017. Here are three types of business tax credits that may be worth discussing with your tax advisor:
Work Opportunity Tax Credits
Companies that hire people from targeted groups that typically face significant barriers to employment can claim a federal tax credit ranging from $1,200 to $9,600 per new employee. Among the nine target groups: Unemployed and disabled veterans, food stamp recipients, ex-felons, people living in certain distressed communities, people receiving Supplemental Security Income, and the long-term unemployed.
The federal government has established eligibility criteria for each target group. For example, an ex-felon must be hired within 12 months of being released from prison, while a veteran must be hired within 12 months of serving active duty or have been unemployed at least six months. Family members of the business owner — even those that meet the target group criteria — do not count as eligible hires.
The amount of tax credit the employer receives depends on the wages paid to the new hire, his or her qualifying target group, and the number of hours worked during the first year of employment.
Keep in mind that some states (including California and Pennsylvania) offer additional tax credits for hiring workers similar to those covered by the Work Opportunity Tax Credit.
Research & Development Tax Credits
Companies may be eligible for a tax credit that helps compensate for expenses they incur doing research and development — also known as the Credit for Increasing Research Activities. In order to qualify, the research must be "for discovering information that is technological in nature, and its application must be intended for use in developing a new or improved business component of the taxpayer," according to IRS instructions. "In addition, substantially all of the activities of the research must be elements of a process of experimentation relating to a new or improved function, performance, reliability, or quality."
The credit will not cover research conducted after commercial production begins, in order to adapt an innovation to a particular customer's needs, or for surveys or studies — among other exemptions.
In 2015, the Protecting Americans from Tax Hikes (PATH) Act made the research tax credit a permanent part of the IRS tax code and starting in 2016, the research tax credit's eligibility was expanded in order to be more valuable and useful to startups and small businesses. Instead of having to claim the credit against income tax liability, businesses with gross receipts of less than $5 million that have generated gross receipts for five years or less can claim the credit against their payroll tax liability — up to a maximum $250,000. The credit can also be used to offset the alternative minimum tax (AMT) liability a qualified small business pays.
Location-Based Tax Credits, Grants, and Other Incentives
Businesses that invest in certain geographical areas either by opening new locations or by hiring individuals who live in certain areas, may be eligible to receive tax credits or other incentives. For example, states such as Colorado and Minnesota offer "enterprise zone" tax credits for businesses that invest in economically distressed parts of the state. Businesses may also be eligible for tax abatement programs that reduce their property tax obligations based on their investing or hiring people in a community. Often, these credits require the business to be certified to participate in the program, as well as including various reporting requirements on ongoing business/hiring activities.
Location-based tax incentives vary by state and locality, so you can find out about location-based tax credits by contacting your local economic development authority.
While these tax incentives could significantly reduce your company's tax obligations, it's important to consult your tax advisor or a tax credit service provider before claiming them. Your advisor can determine whether you qualify for a particular incentive and explain what documentation you need.